The Economics of Renewable Energy in the U.S.
Clearly, we must change how we generate and use energy to curb climate change. But will this damage the U.S. economy? Will subsidizing renewable energy create new jobs, or destroy high-paying jobs that depend on the fossil fuels? Can renewable energy provide cheap electricity without subsidies? These are all questions that concern governments and individuals alike. But, whatever the answers, the cost of business as usual spells disaster for our planet.
All of mankind’s significant advances have been connected to better ways to produce and use energy. Even progress in health and agriculture are limited by the need to distribute medicine and food economically. Throughout our history, the development of new sources of energy has been so beneficial that it has advanced largely unchecked. But we are now at a crossroads. The needs of an exponentially growing population now exceed the limit of our planet’s ability to clean up after us. According to the 2014 Intergovernmental Panel on Climate Change, “Continued emission of greenhouse gases will increase the likelihood of severe, pervasive and irreversible impacts for people and ecosystems.”
So what are our choices and how do we evaluate their costs? Power plants vary greatly in what they cost to build and operate. Operating a wind turbine is almost free, but building an offshore wind farm costs about 3 times as much as building a coal-burning plant to produce the same power. A hydroelectric dam extends over a large area, while a geothermal plant requires relatively little land. Any realistic comparison of costs must include the costs of borrowing capital, acquiring land, construction, operation, maintenance, and eventual decommission, and it must take into account when these costs are incurred – before, during, or after the plant is producing energy.
1. Hot water is pumped from deep underground through a well under high pressure.
2. When the water reaches the surface, the pressure is dropped, which causes the water to turn into steam.
3. The steam spins a turbine, which is connected to a generator that produces electricity.
4. The steam cools off in a cooling tower and condenses back to water.
5. The cooled water is pumped back into the Earth to begin the process again.
Renewable Energy Costs in the U.S.
The cost of building and operating a renewable plant depends greatly on where it is located. A good place to study these costs is the United States, the second largest energy-consuming nation in the world. Although China consumes the most energy, an American on average uses about 4 times as much energy as a person in China. It may surprise many to learn that in the last ten years, the U.S. has reduced both its total and average consumption, and has reduced greenhouse gas emissions more than all of the other nations of the world combined.
The U.S. uses every available means of producing energy, and there is abundant data on their costs. To make a fair comparison between different sources of energy, economists use a factor called the levelized cost of energy, or LCOE. The LCOE includes such estimates as the future costs of fuel and interest rates for capital. To be attractive to a utility company, renewable sources must have grid parity; they must produce electricity for the grid at an LCOE comparable to that of fossil fuel plants. (Note LCOE for the grid is different than the cost to a homeowner for a rooftop solar system that becomes competitive at retail rates, which are two or three times higher than the wholesale costs paid by utility companies).
The table below uses data from the U.S. Energy Information Administration to show a simplified comparison of the LCOE for major sources of power for U.S. plants constructed in 2017 that will provide service beginning in 2022:
|Plant Type||Capital Cost||Operation||Added|
Cost of Transmission
|Natural Gas Advanced|
|Wind – Onshore|
|Wind – Offshore|
|Advanced Coal (without CCS**)|
|Advanced Coal with CCS|
Some key observations about the LCOE estimates in this table:
- Onshore wind energy is among the lowest cost.
- Geothermal is the cheapest, but suitable sites are rare.
- A lack of suitable locations limits hydroelectric dam construction as well. Despite being included in this table, no major hydroelectric dams are likely to be built in the U.S.
- The cost of solar photovoltaic, such as the familiar solar panels that convert sunlight directly to electricity, have fallen more than 40% in just the two years since the 2015 estimates, a trend that is expected to continue.
- The fracking revolution has cut natural gas prices in half, and as a result, gas power plants have been rapidly replacing coal. This revolution has provided enormous benefits in reducing carbon emissions. The U.S. is the only industrialized nation to significantly reduce carbon dioxide emissions, which have fallen to the levels of 25 years ago. But, while much better than coal, natural gas is still a carbon-emitting fossil fuel that will also need to be replaced. And it is still an open question whether methane leaking from fracking operations offsets the benefit of lower carbon emissions.
- High capital costs are the major problem with solar thermal for large plants. These installations focus sunlight to heat special fluids to power turbines. Developers risk heavy investment losses if these plants fail to produce as intended, as was initially the case at the world’s largest solar plant at Ivanpah in California. Additionally, large installations tend to be hard to modify for improved technology, whereas modular wind farms and photovoltaic installations can be readily upgraded.
- The U.S. Energy Information Administration data for 2017 do not include an LCOE for new coal plants without carbon capture and sequestration (CCS) since, under the Obama administration, this technology was a requirement for all new plants. A November 2017 report from the Congressional Research Service indicates that the Trump administration’s proposed FY2018 Department of Energy budget would be a reversal of the Obama and Bush administration policies and “reduce CCS activities substantially” which would also reduce the LCOE for coal. For a point of reference, this comparison uses the last published LCOE for coal without CSS.
In general, most renewable sources are far from the grid, and their output is often produced by numerous separate generators at a single site. In addition, their intermittent output requires other sources to provide power when needed. Such plants need new and specialized connections to the national grid. If the grid were capable of distributing it, wind power from Kansas alone could in principal provide power for almost the entire country. Upgrading our aging electrical network presents enormous benefits, and not just in energy savings. The grid could become impervious to weather disruptions and hostile software intrusions.
Even so, in areas where sun and wind are plentiful, the cost to consumers of electricity from renewable sources has fallen below that from fossil fuels. In states like Oklahoma and Texas, the unsubsidized price of wind energy is about two-thirds that of coal or gas, and electricity from solar plants is roughly on par. When factoring in government subsidies, the price of electricity from new wind sources in these regions is cheaper even than electricity from already existing fossil fuel plants. But these subsidies are controversial. Fossil fuel providers claim they represent an unfair government intrusion in the free market.
To get a fair picture of subsides for renewable energy, we must first understand the subsidies for fossil fuels. This is difficult, because the oil industry in particular has benefited from generations of direct and indirect tax credits and deductions, favorable leases of public land, tax payer funded roads and highways, and much else. In the simplest analysis, the U.S. Treasury recently identified eleven annual fossil fuel tax subsidies that it recommends for termination which are equal to the government subsidies for solar energy – including the notorious oil depletion allowance — that total about $5B! And that’s every year!
But even including these costs overlooks hidden costs to the economy, to public health, and to national security. The National Academy of Sciences estimates that burning fossil fuels results in 20,000 premature deaths every year in the United States from emissions alone. This does not account for fatalities resulting from coal mining, offshore drilling, or transporting the fuel. It does not account for deaths from the black lung disease that is very common among coal miners and has outcomes similar to tobacco smoking. Nor does it include the loss of life from the decades-old strife in the Middle East that has resulted from Western nations securing their oil resources.
Mercury pollution, acid rain, water pollution, oil spills, smog and particulates not only cause serious and sometimes fatal illness but also damage the environment. These pollutants have financial consequences as well: they reduce crop yields, fishing stocks, timber harvests, and even degrade buildings and infrastructure. While the total costs of fossil fuels cannot be expressed in monetary terms alone, estimates by the International Monetary Fund and the World Bank put the worldwide total in the trillions of dollars annually.
In the past, the development of fossil fuels helped raise the standard of living around the world, but those undeniable benefits have turned deadly from the overuse of burning fossil fuels to bring power to billions of people. The economic considerations alone make it imperative to replace fossil fuels with renewable energy.
Plants that burn fossil fuels will remain in operation for decades to come. New coal burning plants have a 40-year lifespan, and today 1200 new coal plants are planned or under construction in 60 countries. Emissions from these plants will need to be controlled in some way to protect public health; but this will reduce the energy output of the plants and their profitability. So the customers of these utilities, including industry and commerce, will pay higher rates for electricity than they would if it were generated by renewable sources.
Utility companies will not reduce greenhouse gas emissions unless it is their financial interest to do so. To accelerate the transformation, limits on emissions can be mandated, in the same way that car companies must meet smog emission limits in order to sell their vehicles. Mandates are the best way of dealing with pollution when it poses an imminent threat to public health, as say smog does to the Los Angeles basin, but they allow no flexibility to enterprises that provide essential services.
Businesses prefer incentives to reduce emissions either from a carbon tax or a cap-and-trade system. Each has advantages and disadvantages. With the tax on carbon, consumers pay for energy based on the amount of carbon dioxide produced when it’s generated. A carbon tax allows businesses to plan for a known cost for energy and leads providers to shift to sources that have lower carbon content and are therefore cheaper. Over time a free market will choose renewable energy over fossil fuels. Many countries, including Japan and the United Kingdom, have instituted a carbon tax.
But a carbon tax does not guarantee emission reductions. If fossil fuel costs are kept artificially low, no change is likely to occur. Since it provides a source of revenue for the government, a poorly designed tax may even be an incentive not to reduce emissions. Determining the correct rate should reflect the cost to society of fossil fuel use, including climate change, while not harming the economy. It may also impose a disproportionate financial burden to low-income earners — a burden that can be mitigated in industrialized nations, but which can fall heavily on the poor in developing countries where options are limited.
Cap-and-trade, or emissions trading, is a government regulatory program designed to limit or “cap” greenhouse gas emissions for a period, at the end of which the limit is lowered as emissions are reduced. The cap is usually measured in billions of tons of carbon dioxide per year, and covers emissions from all sources, including oil generation, natural gas generation, electricity generation, large manufacturers and transportation companies.
In California, which has a successful cap-and-trade system, specific pollution standards are set for individual polluters. Permits are allocated to these enterprises and operating without a permit is against the law. Companies that do not conform to their pollution limit have to pay a fine. The government can issue permits for free, especially to companies or factories that are more vulnerable to competitors from areas not under the cap-and-trade system. It can also sell permits to raise revenue for administering and enforcing the program.
The “trade” portion of the plan refers to the ability of companies to sell and buy carbon permits. A key element in this scheme is that the number of permits issued is fixed, so that if an enterprise needs to increase its emissions, it must buy credits from companies that have already reduced their emissions enough to be able to sell credits that they no longer need. Companies that achieve the largest reductions accrue increasingly valuable credits for resale. Over time the number of permits issued is reduced, which enforces a decrease in total emissions.
Credits are sold on an exchange called a carbon credit market. Enterprises that specialize in capturing greenhouse gas emissions and selling these credits are a feature of cap-and-trade. The European Union has the largest market and their experience to date has been mixed. In hindsight it is clear that emission caps were set too high and more credits were issued than were required, which reduced their value. As a result, cap-and-trade in Europe produced no CO2 reductions in its first eight years of operation. Adjustments to the program appear to have reduced emissions more than 20% in 2013, but the economic slowdown makes determining this difficult.
Cap-and-trade enables the government to set reduction goals by sector. But it’s more complicated than the carbon tax, and that can lead to manipulation. At times, heavy polluters have reaped windfall profits. Some companies that had produced high levels of emissions in the past were granted a large number of cap-and-trade credits so that they could continue to operate. Then, after implementing the simplest mandated improvements, these firms owned an abundance of unneeded credits that they then resold. Similarly, fraudulent or poorly planned allowances, such as claiming as a credit the carbon saved by not harvesting trees in forests that were already being preserved, have undercut the credibility of some credits.
Nevertheless, the success of cap-and-trade in controlling other types of emissions shows it has great promise. In 1990 the U.S. introduced cap-and-trade to reduce the acid rain produced by coal power plants. This program succeeded both in diminishing acid rain and, contrary to expectations, actually decreased the cost of electricity when energy plants were motivated to reduce their emissions. Operators found they were able to use less fuel to produce the same energy, which lowered their costs. Reducing carbon dioxide emissions is technically much more difficult than capturing the sulfur dioxide emissions that make rain acidic. It likely will raise electric rates for consumers, though probably not as much as industry claims.
According to the Nobel prize-winning economist Paul Krugman, there is a general consensus among economists that strong measures to fight global warming would cause a small reduction in the growth rate of the U.S. economy. By these estimates, the U.S. economy in the year 2050 would be between 1.1% and 3.4% smaller than if we continue business as usual. Industrialized countries that have already made progress in developing renewable sources may not experience harm to their economies by even this small amount. Developing nations, by implementing new efficient renewable technologies to begin with, most likely would see their growth improved because their present infrastructures typically waste significant amounts of energy.
Converting to a Carbon-free Energy Economy
Will drastically reducing greenhouse emissions also drastically reduce employment? According to Mark Jacobson, professor of civil and environmental engineering at Stanford, the answer is a resounding “no.” In a series of articles beginning in 2009, a team led by Jacobson claims that converting to 100% renewable energy would create two million new jobs the United States. The Jacobson study was designed to find out if it’s possible to convert to a completely carbon-free energy economy soon enough to eliminate the greatest climate change risks. The team extended their study to the entire world with a country-by-country plan for how to achieve zero emissions.
Their findings are that it is entirely possible to replace fossil fuels by 2050 using only the energy generated by wind, water and solar power. This depends heavily on fully implementing smart grid technology and energy efficiency measures. The US would use electricity for all its energy, even for heating and transportation. About half of the total energy would come from wind turbines, nearly half from solar and the remaining fraction from dams and a few other already existing renewable sources, such as geothermal. Surprisingly, widespread energy storage is not thought to be needed, as an intelligent grid will be capable of balancing the intermittency of solar and wind against each other, using hydroelectric power used to fill in when needed.
Some of the changes to eliminate fossil fuels are easy to picture because they are already underway:
- All cars will be electric.
- Hot water for home and industry will come from solar heating and heat pumps.
- Residential heating and cooling will come from passive designs that make use of the climate to maintain a comfortable temperature range in the home, boosted by electricity as needed.
1. Water or a refrigerant moves through a loop of pipes.
2. When the weather is cold, the water or refrigerant heats up as it travels through the part of the loop that’s buried underground.
3. Once it gets back above ground, the warmed water or refrigerant transfers heat into the building.
4. The water or refrigerant cools down after its heat is transferred. It is pumped back underground where it heats up once more, starting the process again.
5. On a hot day, the system can run in reverse. The water or refrigerant cools the building and then is pumped underground where extra heat is transferred to the ground around the pipes.
The plan for transportation depends on the development of fuel cells that produce hydrogen from electrolysis (passing an electric current through water to dissociate the molecules). Since this is a fundamentally inefficient process, fuel cells would be used only where essential – for example in long-distance transport by heavy vehicles like trains and ships – to take advantage of their light weight and high energy storage. Airplanes would be powered by burning liquid hydrogen, which is extremely inefficient to produce but has the required energy density beyond that of fuel cells.
“If properly harnessed, there’s enough sunlight that falls on the earth in just one hour to meet the world’s energy demands for a whole year.”
In 2011 a collaboration including the actor and activist Marc Ruffalo, Jacobson and other scientists, business people and cultural figures founded The Solutions Project with the stated mission “to use the powerful combination of science and business and culture to accelerate the transition to 100-percent clean, renewable energy.”
The Solutions Project has developed an interactive map showing estimates by state of which new energy sources will be needed and the net number of jobs that will be created to reach the 100% renewable goal by 2050. It includes not only estimates of jobs created and potential cost savings, but also the costs of illness and mortality that could be avoided by adopting the program rather than continuing “business and usual.”
Using California as an example, by 2050 the state would receive 55% of its power from various types of solar power and about 35% from wind farms. Clicking on the state in the site map reveals more details, including the number of deaths per year from air pollution that will be avoided (about 12,500 in California), and the savings in health care costs (about 3% of the state’s GDP, which is very significant since California has one of the world’s largest economies).
The details for California show that changing to renewable energy would reduce the cost of electricity about 10% from projected 2050 levels, and that the state would gain more than 450,000 new jobs. The full report shows that when the jobs lost from fossil fuel industries are factored in, California nets only 45,000 new permanent jobs. Still, adding tens of thousands of new jobs in just one state is far different from claims by the fossil fuel industries that changing to renewable energy would devastate employment.
As expected, employment in some states fares better than in others. Texas would lose over 500,000 fossil fuel jobs and suffer a net loss of more than 60,000 jobs. But next door in Louisiana, more than 180,000 net jobs would be created by the construction and operation of thousands of offshore wind turbines. An exciting feature of renewable energy is that the best sites are often to be found in areas that would benefit from an infusion of industry. Many of the poorer states, like Mississippi and Kentucky, would experience the greatest new job creation. In total, two million net new permanent jobs would be created in the nation.
Some of the assumptions of the Jacobson plan raise questions even among those in agreement with its goals. For example, it would be very difficult, as the plan requires, for a liquid hydrogen infrastructure to be completed by 2025. If U.S. 2050 energy needs are not reduced by 39% by 2050 as the plan requires (and it is commonly estimated that the nation’s energy needs will actually double by that time), then many more new plants will be needed beyond what is already a daunting number. For example, the plan already calls for 156,200 new five-megawatt offshore wind turbines.
There will obviously be numerous obstacles to achieving these goals. The Solutions Project and its companion 100% Campaign have done much to raise awareness and encourage action. A hotline for clean energy concierge services and important policy work aim to make it easier and cheaper for consumers to switch to clean energy. Celebrity events and leader spotlights help raise awareness. Coming at a time when increased disasters caused by climate change seem inevitable, initiatives like these give everyone a positive vision for the future and a way to get involved and contribute.
John Abraham, The Guardian
Wind, solar, and storage could meet 90–100% of America’s electricity needs
International Renewable Energy Agency (IRENA)
Newly installed renewable power capacity increasingly costs less than the cheapest power generation options based on fossil fuels.
Al Gore, TED
Al Gore, founder and chairman of The Climate Reality Project, poses three questions that will determine the future of our planet – and why there’s good reason to be optimistic.
Bloomberg New Energy Finance
“Deep declines in wind, solar and battery technology costs will result in a grid nearly half-powered by the two fast-growing renewable energy sources by 2050.”
Leonardo DiCaprio / National Geographic
This epic documentary follows Leonard DiCaprio’s 3-year journey around the world to examine firsthand the effects of climate change and delivers a hopeful view of how we can prevent catastrophic damage that could make the Earth unsustainable for human life.
Mark Jacobson presents solutions for global warming and air polution and energy price stability.
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