Saturday, April 14, 2012

1 March 2011 – Lessons in opportunity cost


I find it interesting that European countries are starting to take a closer look at some of their long-standing “green” policies from a stand-point of cost-benefit analysis.  This is a refreshing change from the usual political arguments for investing in green power.

We’ve heard a lot about “green jobs” and “the green economy” over the past few years, especially from south of the border.  The thing is, when “green jobs” programmes based on renewable energy technologies (other than hydroelectric power) are evaluated on a level economic playing field against conventional energy technologies, they rarely come out on the positive side of the ledger.  We got the first inkling of that from Spain (which President Obama had touted as a model for the adoption of green energy technologies) with a research report published at the University of King Juan Carlos in March 2009.  This study concluded that “Despite its hyper-aggressive (expensive and extensive) ‘green jobs’ policies it appears that Spain likely has created a surprisingly low number of jobs, two thirds of which came in construction, fabrication and installation, one quarter in administrative positions, marketing and projects engineering, and just one out of ten jobs has been created at the more permanent level of actual operation and maintenance of the renewable sources of electricity.”; that “since 2000 Spain spent €571,138 to create each ‘green job’, including subsidies of more than €1 million per wind industry job”; and that “the programs creating those jobs also resulted in the destruction of nearly 110,500 jobs elsewhere in the economy, or 2.2 jobs destroyed for every ‘green job’ created.” (Note A)

The Spanish report, not surprisingly, attracted a firestorm of vituperation from those with an ideological or financial stake in renewable energy technologies, but it should have come as no surprise to anyone who has looked at actual cost-benefit data.  Without taking into consideration significant tax incentives, direct payments by governments, exemptions from regulations, and the many other benefits that the renewable-power industry enjoys (and that the conventional power industries markedly do not), “green power” - as I pointed out in a recent, yet-to-be-published paper - is still vastly more expensive per installed MWh than any conventional generation technology.

One might reasonably ask why, if “offshore wind” and “nuclear” generation are so close in terms of dollar investment per kWh of installed capacity, we don’t emphasize wind more.  The answer is twofold.  First, wind power is intermittent; the average capacity factor for a turbine in high-wind areas is 25% (I addressed this in my 3 Feb CoP on wind power in Texas).  So in order to generate 1 MW of power, you have to install four 1 MW turbines.  That quadruples the cost, and the quadrupling is not reflected in the chart.  The second reason is because turbines freeze in the winter.(Note C)  It would not be considered acceptable for a coal, hydro, oil, gas or nuclear power plant to drop off line for several weeks in the winter, as the wind farm operated north of Bathurst by GDF Suez Energy did, because of “ice build-up”.  The only reason that thousands of New Brunswickers didn’t freeze to death is because New Brunswick has reliable conventional power available.

  Figure 1: Dollars per installed kWh for various energy sources. (Note B)

But those are operational concerns.  Let’s get back to the economics of the problem.  The Spanish study, as I said, did not go over well with the proponents of wind and solar power, and there was much wailing and gnashing of teeth.  But it did break the logjam.  In May of last year, the Istituto Bruno Leoni in Milan published a study entitled “Are Green Jobs Real Jobs?” that looked at Italy’s experience with mandated and government-subsidized renewable energy programs.(Note D)  This study, which also incorporated a look at the experience with green power in Denmark, Germany and Spain, concluded that the opportunity cost of “green energy” investments in Italy was very high: “the same amount of capital that creates one job in the green sector, would create 6.9 or 4.8 [jobs] if invested in the industry or the economy in general.” (Note D, p. 40)  The principal reason for this, they conclude, is that the vast majority of “green sector” jobs are temporary because once the infrastructure is in place, the bulk of the work has been done.  In other words, “green power”, while expensive, isn’t necessarily bad, but it is not an “industry” as such, and it is inaccurate to paint the “green economy” as likely to create permanent employment.  It is, in fact, more likely to create temporary employment at the cost of amounts of capital that would create much more, and much more permanent, employment if invested in other sectors of the economy.  This conclusion reinforced the conclusions of the Spanish study.

And now, as of yesterday, we have a third study to back up the results from the other two - this one from the bastion of “green policy”, the UK itself.  Verso Economics, working from government and energy industry data, has concluded that investments in renewable energy in Scotland (principally wind power, as Scotland has no lack of wind) have cost 3.7 jobs for every one job created in the UK as a whole - despite favourable tax and regulatory exemptions and massive direct investments from taxpayers in both Scotland and the broader UK.(Note E)  The Scottish government disputed the report, arguing (a) that heavy investments by foreign companies in renewable power in Scotland prove the economic viability of renewable energy (a non sequitur if there ever was one), and (b) that the Verso report ignores the impact of “climate change”.(Note F) 

Actually, the UK report doesn’t ignore climate change; it notes that in addition the £330,000,000 in direct subsidies that renewable power in Scotland has received, the exemption that renewable power projects in the UK enjoy from the national “climate change levy” has deprived Her Majesty’s coffers of approximately £100,000,000 in revenue.  This brings the overall cost to taxpayers of these projects to just shy of half a billion pounds.  This must rankle in a winter when large expanses of the UK’s wind farms have either stood idle due to the drop in winds that tends to accompany extremely low temperatures - or have had to be electrically heated in order to enable them to turn at all, meaning that, for days on end, the turbines were in fact consuming power from the grid instead of producing it.(Note G)

It’s interesting to see renewable energy projects increasingly being evaluated on a basis of costs vs. benefits, and to see the claims of their proponents being subjected to at least some degree of statistical scrutiny.  As money gets scarcer over the coming years and taxpayers become ever more grudging of government’s grip on their shrinking earnings, we may see a little more arithmetically literate scepticism of the promise of the “green economy,” and - just perhaps - a corresponding tightening of the purse strings. 


B) Data from US Energy Information Administration [].  IGCC = Integrated Gasification Combined Cycle; NGCC = Natural Gas Combined Cycle.  STG = Solar Thermal Generation.  SPVG = Solar Photo-Voltaic Generation. Based on this chart, one might reasonably ask why NGCC is not the dominant electrical generation technology in the US.  The answer is operating cost.  In the US, natural gas is scarce and expensive, while coal – like uranium – is cheap and plentiful.  NGCC turbines are expensive but efficient; their virtue lies in quick start-up, which makes them ideal as backup generation systems for unreliable or intermittent power sources, like wind.  And yes, this chart appeared as Figure 19 in a paper I wrote examining the anthropogenic global warming thesis.