Thursday, May 28, 2009

Does Green Energy Cost Jobs?

Dave Anderson found a study by a Spanish economist that concludes that government programs to promote green energy end up costing jobs:
Spain’s touted program cost 9 jobs for every 4 it created. I will await Tommy’s response to the study.
This conclusion is from
a draft study by Gabriel Calzada Alvarez of King Juan Carlos University. Alvarez presents the familiar argument that renewable energy costs more than conventional energy, and the difference can be measured in jobs lost:
When we spend money to build a fast food restaurant instead of solar panels, the cost of this course of action is all of the panels that were never built and all of the jobs in that industry that were never created. Similarly, if the government decides to spend taxpayer money on windmills or solar panels, their unseen cost would be all the hamburgers not cooked or any other productive activity that would no longer take place as a result of the state directing resources to windmills or solar panels.
I heard the same argument during Delaware's wind power debate. Opponents called it the green premium, which came with some often wildly exaggerated numbers. The crux of Professor Alvarez's argument is that wind power in Spain costs 59 percent more than the overall market price. Based on that figure, Alvarez comes up with a suitably scary number of $10 billion of wasted investment.
I could not find the source data behind the 59 percent premium, though I learned in the wind power debate that such calculations depend on the assumptions and data used. I was able to do some homework on Spain's electricity market, which I found is much different than ours.
It turns out that Spain's electric grid is almost entirely isolated from the rest of Europe; the interconnection with France can carry no more than 3.5 percent of Spain's peak demand. Inside this isolated market, two companies, Endesa and Iberdrola, control about 45 percent of the generating capacity and 75 percent of sales.
Another unique feature of the Spanish electricity market is its retail pricing. According to a story published in the Economist last year,
electricity prices in Spain has been kept artificially low:
Prices have in fact fallen by 2% in nominal terms in the past ten years, and have dropped by 30% in real terms, even though the cost of generating electricity has shot up.
The cumulative difference between what it costs [utilities] to produce power and what they are allowed to charge for it—the “tariff deficit”—has now ballooned to €14 billion ($22 billion), according to the Spanish National Energy Commission (CNE).
The Spanish electricity market is cut off from the rest of Europe, dominated by a duopoly and subject to artificial price controls. So one could hardly say that any incentives to promote renewable energy are distorting an otherwise free market.

Add to the inefficiencies built into the Spanish market, subsidies that encourages the development of capacity well above the market:
Wind farms installed before January 1, 2008, are entitled to a premium of 40 euros per megawatt-hour over electricity pool prices until the end of 2012, whereas those that went online afterwards may receive a maximum of 82/MWh.
These subsidies (which translate to 5.5 to 11.4 cents per kWH) bear little relation to those encouraging renewable energy in the U.S. For instance, the Bluewater Wind project does not rely on such a direct subsidy for generation, but on a production tax credit of 2.1 cents per kWH.
All of this may explain why Spain's electricity market behaves very differently than ours. But there's another fact that suggests that any generalization from Spain to the U.S. is simply unwarranted: Renewable energy in the U.S. does not cost 59 percent more than conventional energy. If Bluewater's price had come in that much higher, the project would not have been approved.
Back in 2007, Harris McDowell tried to scare us away from adopting offshore wind
by pointing to the high cost of electricity in the Netherlands. Dave Anderson's reference to an analysis of Spain's electricity market is no more relevant than McDowell's reference to the price of Dutch electricity.
I said it then, and I will say it now: I am in favor of wind power, but not at any price. Wind and other renewable sources make sense because the prices are increasingly competitive, and the long term value proposition is compelling in an era of increasing demand for and limited supply of fossil fuels.


Anonymous Edmund Dohnert said...

That Spanish study had recently been discussed on the The Oil Drum website. I and others pretty much agree with your take on it.

One point I'd like to make is the loss of jobs in and of itself is not automatically a bad thing. I know that sound like heresy in these tough economic times, but one has to look at what those jobs are and what they are creating.

For example, if say it takes X manhours to produce a full-size SUV but only 2/3 of that labor to produce a small fuel-efficient car, then is it such a bad thing that a certain amount of labor has been 'lost' in going with the small fuel-efficient car?

So, loss of jobs cannot be viewed in a vacuum, but rather must be analyzed in relation to what we are actually doing with our labor now and what we should be doing with it in the future to move toward a more sustainable economy.

11:01 AM, May 28, 2009  

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