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A Call for Cost Comparisons: How Can the US Achieve a Renewable Energy Transformation?

Carnige Melon University’s Climate and Energy Decision Making Center’s recent study, “Regional variations in the health, environmental, and climate benefits of wind and solar generation,” is a testimony to the difficulty of cost justifying renewable energy development.

The core finding of the study is that federal renewable energy tax credit policy may not yield the best return on the nation’s tax credit investment.

The study concentrates on tax policy that sets a fixed credit rate per each kilowatt-hour produced via renewable energy.  The allowable tax credit is determined by multiplying the fixed credit rate by the total number of kilowatt-hours produced at a renewable energy generation site.  Naturally, renewable power generation projects in areas with more sun and wind exposure will generate a greater tax credit than those with less exposure.   Thus, this type of tax policy favors installation of renewable energy projects in areas rich in renewable energy resources.   But, generating tax credits based on power production may not be the best way to achieve the goal of the renewable energy tax credit policy.

Regions rich in renewable energy resources don’t burn much coal for power production.   Coal consumption is the greatest source of environmental, health and greenhouse gas pollutants.  Replacing coal-produced power with renewable energy power sources in Ohio creates a greater reduction in pollutants than replacing natural gas-produced power with renewable power sources in California.

If, the study’s authors ask, the rationale for promoting renewable energy power production is to reduce environmental, health and greenhouse pollutants; shouldn’t tax credit policy be aimed at increasing renewable energy power production in areas that burn the most coal?  

The study answers this question by assigning a dollar amount to the health, environmental and climate impact of fossil fuel pollutants in various regions.   These “external cost” calculations led the authors to two conclusions:

  1. Renewable energy tax credit policy yields a net positive return on taxpayer investment due to reduction of external costs when fossil fuel power production is replaced.
  2. The taxpayer investment return would increase if renewable energy production tax credit amounts were based on the amount of pollutants reduced instead of the amount of power produced. 

The study’s arguments and findings are based upon some pretty restrictive assumptions, such as:

  • Transmittal of power between renewable energy resource-rich regions and less renewable energy resource-rich regions is not available.
  • Transmission and distribution grid remain relatively unchanged for the foreseeable future.
  • Renewable energy produced power penetration remains limited in the national power market.
  • U.S. Energy policy remains the same.

“Our findings” says Kyle Siler-Evans PhD., the study’s lead author, “are based on the history of U.S. renewable energy development to date.  Grid improvements necessary to increase renewable energy’s expansion on a nationwide basis are slow in coming.   There is no clear government policy supporting a rapid conversion from fossil fuels to renewable energy.   The study’s conclusions reflect a realistic appraisal of what can be done to improve the return on tax credit investment in renewable energy under existing conditions.”

One of the Climate and Energy Decision Making Center’s stated values is “to assist key stakeholders in addressing important decisions regarding climate change and the necessary transformation of the world's energy system.”   Given this value, it’s surprising that the scope of this particular study is so limited.   It’s hard to see how tweaking an existing energy tax credit policy comes near to transforming the U.S. energy system, let alone the world’s.

Long-Term Focus and Citizen Support

An energy system transformation requires answering a question of much larger scope, a question like this:

“Over the long term, regardless of external costs, is it more expensive to maintain and upgrade the current U.S. fossil fuel based energy system or to design and implement a national renewable sourced energy system?”

The information discovered in answering this question lets policy makers and their financiers know:

  • The combination of renewable energy production, storage and transmission technologies providing the best option to meet the nation’s energy needs.
  • The cost, phases and time frames to implement the selected technologies for a national renewable energy transformation.
  • The regulatory and policy changes necessary to enable the transformation.
  • The cost and time frame to maintain and provide the necessary upgrades for fossil fuel energy production to meet U.S. needs if a renewable energy transformation does not occur.

Here’s the point.   No one really knows what it will cost to transform U.S. energy systems to one based on renewable energy over the long term.   Long term in this case can be defined as 40 years, the average life span of a power production plant.  Also unknown is the cost to upgrade, maintain and fuel the existing fossil fuel based system over that same 40-year period.  Without that information, business and individual power consumers ultimately paying for the transformation can’t compare the long-term cost differential between the two energy production methods.  It’s hard to make an investment decision on a change this huge without comparing the cost and benefits between renewable and fossil fuel options.

What is known for sure is that the high upfront cost of renewable energy transformation is the biggest deterrent to replacing fossil fuel as the nation’s primary energy source.   Ultimately, the money to fund the transformation must come from income generated by business activity.  This means American business owners and wage earners must contribute massive amounts of money for renewable energy transformation.   The contributions will come from direct investment, taxes and/or increased power costs.  But nobody knows the total amount or length of time of the contributions.  How can we ask citizen investors to pay for an energy system transformation without knowing the costs and benefits of their investment?

How Do We Get There?

So, what’s the best way of discovering the necessary cost comparison to gain support for an energy system transformation?   The National Renewable Energy Lab’s (NREL) 2012 “Renewable Energy Futures Study” has already outlined a feasible mix of technologies for a 40-year transformation of the U.S. electrical system to one 90 percent powered by renewable energy.  Our national power systems accounts for about half of our energy usage.   If energy policy institutions would concentrate on gathering teams of renewable energy, power transmission, finance and government regulatory experts, those teams could create and cost a U.S. renewable energy power system transformation plan using the NREL-suggested technology mix.  This plan will provide the starting point for long-term cost comparisons between U.S. power system options. 

Reviewing cost comparisons is how business decisions are made.  A U.S. national energy system transformation is, to say the least, a major business decision.   If energy policy institutions wish to impact that decision in a meaningful way, they must develop national fossil fuel phase out options that outline the method, location, time frame, cost and financial return of each transformation option.   No investment of this size will be supported by a nation of business leaders and wage earner investors without a clearly defined financial impact of each option.  And, without business or wage earner support, the transformation simply will not occur.

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