Eliminating Renewable Energy Subsidies is Key to Boosting Prosperity

Residential electricity prices have steadily increased for years, up more than 15 percent in the United States (not including Texas) since 2004. A newly released U.S. Department of Energy report on electricity markets and reliability makes it clear that renewable energy subsidies are contributing significantly to the increasing cost—and the decreasing reliability—of the national electric grid.

Yet the report stops short of making the most obvious recommendations to address this challenge—eliminating the subsidies and forcing renewable energy generators to pay for the costs they impose on the grid because of their intermittency and unreliability.

Unless the federal government and the states eliminates these policies, we will find ourselves suffering through energy poverty—a sharply reduced standard of living caused by high energy costs—in the future.

While wind and solar generation of electricity has rapidly grown over the last 20 years, it hasn’t happened by itself. The DOE study points to economists who cite “state-level RPS and Federal tax credits for [renewable energy] as examples of wholesale market impacts and distortions.”

These distortions have affected taxpayers and consumers for years. While the costs are hard to calculate, a study by the Texas Public Policy Foundation estimated that the costs of renewable energy subsidies in Texas alone were more than $13 billion from 2006 to 2015. The cost of a proposed extension of the federal Production Tax Credit in 2014 was estimated at another $13 billion.

As much as the subsidies cost directly, they may be dwarfed by the costs of compensating for the unreliability imposed on the electric grid by renewable energy. Much of this cost come from the requirement to have backup generation in place for when the wind stops blowing or the sun stops shining.

Another significant cost of subsidies comes from how they affect traditional sources of energy—coal, natural gas, and nuclear. Because of the subsidies, renewable energy generators usually can offer lower prices than traditional generators and still make a profit. They have even “sold” their electricity at negative prices, paying customers to take the electricity off their hands. Generators like coal and nuclear that can provide electricity consistently throughout the day are particularly vulnerable to this. As a result, many plants are being retired while many that remain are struggling financially. And the reliability of the grid is being threatened.

Yet because of the many beneficiaries of renewable energy subsidies, few are willing to advocate their elimination. Instead, a new class of subsidies—capacity payments—has been invented for traditional generators.

New Federal Energy Regulatory Commission (FERC) Chairman Neil Chatterjee highlighted this approach when he recently said that “generation, including our existing coal and nuclear fleet, need to be properly compensated to recognize the value they provide to the system.” Many states have already adopted capacity markets where prices are going up because consumers are now paying for capacity on top of what they pay for electricity.

One state has taken a different approach. Texas is the only state to adopt an energy-only market, where consumers don’t pay generators to sit there just in case they are needed—they only pay for the electricity they use. This commons-sense approach pays great dividends. Residential prices in Texas have dropped since 2006, and are now 12 percent below U.S. prices.

Yet even Texas has its problems. It leads the nation in wind generation and reliability is a growing concern. Generators are pushing for subsidies to boost their profits, and regulators are too often happy to help. A few years ago, Texans narrowly missed having a $4 billion electricity tax imposed on them by the state’s Public Utility Commission. Now, the commission is back again trying to figure out ways to raise electricity prices to increase generator profits.

The DOE study recommends doing something similar. It proposes the creation of “regulatory mechanisms that compensate grid participants for services that are necessary to support reliable grid operations.”

The nation generally has plenty of electricity to keep the lights on and the factories running. But a reliability challenge lays ahead. The solution, though, is not to raise electricity prices to boost generator profits. If Americans want to improve the reliability of the electric grid, lower electricity costs, and increase prosperity, renewable energy subsidies must be eliminated.