by Dave Rutledge
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On August 3, President Obama declared that “under the Clean Power Plan, by 2030, renewables will account for 28% of our capacity,” and “will save the average American family nearly $85 on their annual energy bill in 2030.”
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In the accompanying EPA rule, the word renewables is not used consistently. Sometimes it includes hydroelectric power, sometimes not. Sometimes the focus is on wind and solar power, sometimes it is broader. As the readers are aware, capacity is not the same thing as generation, and for generation, prices vary widely during the day. This makes it unclear how we get from a 28% capacity to $85 in annual savings. It is common for energy analysts to use levelized costs to compare different sources, but a residential consumer is paying for 24/7 access to a working grid, not for electricity from individual sources.
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Without any enabling legislation, President Obama plans to force the United States to make an enormous capital investment, of the order of a trillion dollars, in wind and solar power and the associated grid infrastructure. Politicians often talk about investments when they mean forced transfers, but this really would be an investment, and the goal of this post is to estimate the return for the consumer. The post was inspired by a post by Willis Eschenbach at What’s Up With That. I will not consider the health and climate impacts of the plan. Judy Curry started the discussion of these in her August 3 post.
If the residential electricity bills actually do go down $85 a year as President Obama promised, then that $85 would be the return on our investment. To evaluate an investment, we divide it by the annual return to get a payback time. The situation is different if the electricity bills go up. The return is negative. We are never paid back and we have also lost our investment. One can still calculate a payback time using the same formula but we get a negative payback time, which is worse than any investment with a positive payback time. The readers who are scientists and engineers may appreciate the analogy to negative-temperature systems that are hotter than any system with a positive temperature. Among those awful investments with negative payback times, the smaller the negative payback time the worse the investment.
One complication in assessing a return on wind and solar investments is that the primary subsidies for renewables in the United States are the 30% federal tax credit and the 2.2¢/kWh producer tax credit for wind. These subsidies are effectively paid for by the people who pay income taxes. The toll falls heavily on the upper 1% in income who pay 46% of net US income taxes. Another problem in assessing a possible return is that the US has not gotten very far in wind and solar power. They accounted for only 4% of the electricity generation in 2013.
Europe is a better place to evaluate an investment in wind and solar power. The primary subsidy in Europe is a feed-in-tariff. Who pays in the end is different from the US. The people who are well off enough to buy solar arrays effectively are paid by the people who are not well off enough to buy solar arrays. I will leave the question of whether this is good social policy or not to the Europeans, but for this post it is useful because it means that the residential electricity bills reflect the wind and solar installation costs. It also helps that Europe has installed more than twice as much wind and solar capacity as the US.
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Our starting point is Figure 1, which shows a plot of residential electricity prices compared with the residential component of wind and solar capacity for OECD-Europe countries. The data and the figures for this post are available as an Excel file. Willis Eschenbach and Jonathan Drake also made price plots for EU countries. Our emphasis will be on the higher-income European countries that are members of the OECD. Some countries, like Norway and Switzerland, are in OECD Europe but not the EU, while Romania is in the EU, but not the OECD. BP deems that Estonia, Iceland, Luxembourg, and Slovenia are not significant enough to include in their electricity spreadsheets, and I omitted them also.
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The residential component of the wind and solar capacity is calculated from the residential share of the final consumption reported by the IEA. At 15¢/kWh, Norway is an outlier, well below the other countries. It has a very large per-person residential consumption of electricity generated by hydroelectric power. Norway also provides profitable balancing services to the continent, consuming wind and solar electricity when the price is low and providing hydroelectric power when the price is high. Roger Andrews has an excellent post on this balancing. The trend line is calculated without Norway. Incidentally, the US residential price is 12¢/kWh, even lower than Norway. The US has low-cost natural gas and coal and the US emphasizes tax credits rather than feed-in-tariffs to subsidize wind and solar power. As Willis noted, higher wind and solar capacities are associated with higher prices. For European consumers the return on their wind and solar investment is negative.
Figure 1. Residential electricity prices vs the residential component of the per-person wind and solar capacity for OECD Europe Countries. The electricity prices are taken from the IEA, the capacities from BP, and the populations from the UN. Data are for 2013, except for the Spanish price, where I filled from 2011. The IEA prices are converted at the market exchange rates.
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How negative is the return? I propose that we interpret the y-intercept of the trend line, 18.8¢/kWh, as the price of electricity without any wind or solar capacity. As a check, in Germany in 2000, when the wind and solar capacity were negligible, the price was 16.3¢/kWh, expressed in 2013 dollars with BP’s deflator. The difference between the actual price and the zero-wind-and-solar price becomes a per kWh surcharge for the wind and solar capacity.
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If we multiply this by the annual residential consumption we get an annual per-person wind and solar surcharge. These are shown in Figure 2. Again there is a clear trend. More capacity is associated with a greater surcharge. The slope of the trend line in the figure is $1.14/y/W. If we divide this by the average cost of the cumulative wind and solar capacity, we get the return on the investment, which will be negative. I will take the average cost to be $4/W. Expressed as a negative payback time, this is 3.5 years. Expressed as a negative return, it is 29% per year.
Figure 2. Calculated annual per-person wind and solar surcharge vs the residential component of per-person wind and solar capacity for OECD Europe Countries. Hungary (11W/p, –$7/p/y) is omitted from the graph, but included in the trend calculation. The trend is constrained to go through the origin.
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As investments, these are inconceivably bad and we would expect large opportunity costs at the national level. It is interesting that if we start on the right in our graphs and move left past Denmark and Germany, the big spenders are the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) that have been in the financial doghouse in recent years.
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For consumers, the high electricity prices discourage the use of electricity for increasing safety. During the great European Heat Wave of 2003, 70,000 people died, most of them indoors. This is a horrible way to die. The people who were indoors could have been saved by a $140 Frigidaire window unit, but only if they could afford to pay for the electricity.
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Biosketch: Dave Rutledge is the Tomayasu Professor of Electrical Engineering at the California Institute of Technology.
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JC note: As with all guest posts, please keep your comments civil and relevant.Filed under: Economics, Energy
