Wrong Headline?

by Art Woolf

The media are full of stories about how amazing it is that the state received a lot more proposals for alternative energy than it had anticipated.  The Rutland Herald titles its story Renewable Energy Firms Dash for Vt. Incentives, noting that

The program capped the amount of energy to be produced under the program at 50 megawatts. There were proposals to develop plants that would produce more than 200 megawatts.

Vermont Public Radio notes that

The response was so overwhelming that some biomass and solar projects will be decided by lottery..When the bids were opened this week, officials saw that the program had far exceeded expectations...One-hundred-ninety-six applications were received for solar electricity projects - for a total of almost 172 megawatts of proposed new generation. That's more than 14 times the maximum for solar power allowed under the program.

The Free Press titles its story Vermont Renewable Energy Proposals Overflow.  

As any principles of economics student knows, when the supply of something exceeds the price needed to bring a certain quantity to market, it means that the price is higher than it needed to be.  

And the price that the state set for renewables was so high that according to one person involved in the program

We were getting calls from all over the world, Germany, other places that have large solar programs, with foreign investors, developers trying to find out about the Vermont program

If the state of Vermont said it would pay $20 a pound for tomatoes, they'd have the same response.   What none of the headlines, or stories, mention, is that what this means is that the state overpaid for the 50 megawatts of power it wants to buy. 

The headline that should have been written, but wasn't, is

State Overpays for Electricity:  Customers' Rates to Be Higher Than Needed to Attract Renewable Investment

It's kind of like a reverse stimulus program:  Take money out of people's pockets and give it to a favored group of businesses.  Some Vermont politicians would call that "corporate welfare."  But not in this case.

The legislation that enabled this program was badly conceived and ignored basic economic principles.  The state should have had an auction for renewables so that it would pay as low a price as possible for a fixed quantity of electricity generated by renewables.  That would have given the state the same amount of renewable power at the lowest possible cost, instead of at the high price set in the legislation. 

This is not rocket science.  Economists have a good idea how to design auctions to accomplish goals like this.  In 2007 the Nobel Prize in Economics went to Leonard Hurwicz, Eric Maskin, and Roger Myerson  precisely for their work on this subject.   Maybe next time the state won't be so gullible.

UPDATE:  I neglected to mention that Vermont's consumer watchdog agency, the Vermont Department of Public Service, had the same take as I did.  The Free Press article quotes Deputy Commissioner Stephen Wark as saying that the

prices guaranteed to be paid to developers -- up to 30 cents per kilowatt-hour for solar -- are too generous, and consumers will end up paying higher electric bills...We can infer from this that we may have paid too much, given that there are four times more projects than were needed. Fortunately we've met our goals under this program, but at a high cost to the consumer.

Comments

[Steve Thurston]

Add to the Vermont subsidies the federal production tax credits, renewable energy credits, accelerated depreciation allowance, plus the cost of 100% capacity transmission lines for a generator that only produces about 25% of its capacity, and the cost to taxpayers for the sporadic electricity from mountain top turbines is more than double the value of the same electricity in today's real time ISO New England market. If these tax dollars were directed instead to conservation and efficiency projects, real reductions in the consumption of heating oil would occur. As it is, wind power is getting 90% of available subsidies for renewables, and C and E is getting almost nothing by comparison.

[Charlie Smith]

In spite of all the excitment among prospective solar developers, I would predict that few projects will actually be completed under this program. Since sun is a limited commodity in Vermont, the economics of any project will be heavily dependent on finding a Vermont investor with substantial cash and substantial qualifying income tax appetite. A project will also typically need a 25 year loan with a low and stable interest rate. Even at $.30/kwh, my prediction is that not many projects will get done.

[Dennis Lukas]

I am not against solar or wind, their major draw back is the storage of electric not immediately used.There lies the hidden cost, the storge system has a expected life of ten years, then has to be replaced. The majoir problem is that solar and wind are not producing all the electric, so we are back to having utilities that have to budget there expences and provide a profit to share holders,they can not poject sunny days or windy days.They are not going to reduce rates based on a good windy or sunny year.Their emloyees get there salaries and benefits regardless of which way the wind is blowing.Combining all these electric sources just increases costs.To keep costs down you need one source that is capable of meeting all the demands the area it serves needs.