While federal legislation to impose renewable energy standards is currently pending in Congress, the New York Times reports that the higher cost of renewable energy is impeding its widespread use:
Even as many politicians, environmentalists and consumers want renewable energy and reduced dependence on fossil fuels, a growing number of projects are being canceled or delayed because governments are unwilling to add even small amounts to consumers’ electricity bills.
Deals to buy renewable power have been scuttled or slowed in states including Florida, Idaho and Kentucky as well as Virginia. By the end of the third quarter, year-to-date installations of new wind power dropped 72 percent from 2009 levels, according to the American Wind Energy Association, a trade group.
Electricity generated from wind or sun still generally costs more – and sometimes a lot more – than the power squeezed from coal or natural gas. Prices for fossil fuels have dropped in part because the recession has reduced demand. In the case of natural gas, newer drilling techniques have opened the possibility of vast new supplies for years to come.
The gap in price can pit regulators, who see their job as protecting consumers from unreasonable rates, against renewable energy developers and utility companies, many of which are willing to pay higher prices now to ensure a broader energy portfolio in the future.
I disagree that utility companies want to buy renewable energy at higher prices solely to broaden their energy portfolio. The important distinction is that we are talking about “public utilities” that are regulated by their respective states. As a regulated entity, public utilities’ allowable rates of return are based on operating and capital depreciation costs. An increase in those costs justifies an increase in rates, thereby potentially increasing the public utilities’ profits. Higher rates would increase the cost of energy to consumers, which is what state legislatures are opposing.
The example of Germany, whose energy market was set free to competition in 1998, provides evidence that in a freer energy market, most companies are unwilling to buy higher-cost renewable energy. The reason is that relatively few consumers are willing and able to pay higher prices for renewable energy for the fuzzy, warm feeling of making a positive contribution to the preservation of the environment. Private energy companies would render themselves less competitive by increasing their costs without recouping such costs through higher prices.
If companies are unwilling to buy renewable energy of their own accord, how did Germany’s consumption of renewable energy rise to 16 percent in 2009? Federal legislation. The German government passed a legislative Act in 2000 obliging electricity companies to buy renewable energy at a government set fixed rate, referred to as feed-in-tariff. There is a similar Act currently pending in the U.S. Senate, called the Renewable Electricity Promotion Act of 2010, which would mandate that 15 percent of the nation’s electricity come from renewable sources.
State legislatures are opposed to the widespread use of renewable energy because they respond to their constituency which objects to higher energy costs. States’ power in that matter may soon be overruled by federal action which would mandate the use of renewable energy at all cost.