Removing roadblocks to the growth of renewables
On Friday, the U.S. Energy Information Administration released new monthly statistics for renewable energy output as well as output of traditional forms of power. The good news is that renewable energy in May, the latest month for which statistics have been compiled, is at its all-time highest level, accounting for 13% of total power. The bad news, however, is that the vast majority of this, about 9.4%, comes from traditional hydropower. The other renewables — wind, solar, biomass, and geothermal — accounted for just 3.6%. Wind accounts for 1.8%, biomass 1.3%, geothermal 0.4%, and solar 0.3% of the total.
All of the sources of renewables grew, but the growth rates were modest. Wind grew year-on-year by 12.5% and solar by only 3.5%. These growth rates might be passable for mature technologies with a huge starting base. However, for comparatively new technologies with a tiny denominator, these growth rates are not impressive. True, the data do not reflect the full force of the Investment Tax Credit (for solar installations) extended last fall and the American Recovery and Reinvestment Act passed this winter — because of the lag in the data. Still they tell at best a story of an industry surviving the recession. They do not tell a story of economic rebirth based on the promise of a low-carbon future.
There are reasons to hope clean energy would be growing much faster than these rates–the goal of lowering greenhouse gas emissions, essential to addressing climate change, and the goal of creating a new wave of clean technology-driven growth. (The goal of energy security is less dependent on renewable technologies since coal is present in the United States but is nonetheless also served by replacing oil in our nation’s energy mix.)
However, there are also reasons to expect clean energy to be growing far faster than it is: the declining cost curves of renewables relative to fossil fuels, the large subsidies the government has put in place and the huge push America is making, from the president’s speeches to the T.Boone Pickens Plan for energy independence on down. In many states, renewable energy is even mandated through a Renewable Electricity Standard. Looking abroad, Germany produces 7% of its power from wind, about four times what the U.S. does, and Spain’s solar power capacity grew 364% in 2008. Now that is the type of growth needed to have a real effect! The fact is, U.S. growth rates in renewable industry are not meeting reasonable expectations for clean energy growth, let alone desirable targets.
I have been studying the question of why clean technology is moving so slowly into the marketplace in the United States and my research suggests that adoption of clean technology and renewable energy must be about more than pricing and incentives. It is about decision-making and removing obstacles to the deployment of clean energy. These obstacles are present, once you peer into the complex world of the electricity industry, in a host of non-economic barriers to implementation.
To understand why clean energy is not — even with large incentives in place — displacing dirtier forms of energy, it is important to recall the extraordinarily complex nature of the industry. Like all large industries, the electricity industry has incumbents. These incumbents–unlike, say, car manufacturers or computer companies — are protected by regulation. During the 1990s, the industry was partially deregulated so that market forces were introduced in some parts of the industry in some regions. However, the work of regulatory reform proceeded only part way, leaving the industry in a sort of limbo. Today, some regions of the country have wholesale competition. Others have limited retail competition. Still others have wholly vertically integrated companies supplying their customers with soup-to-nuts service unchanged from a half century ago. And there is limited trade in electricity — this in an era when frozen dinners served in the United States are made in Thailand and fresh flowers cut in Bolivia.
Indeed, the electricity industry is quite rare today in remaining geographically divided. With some exceptions, it is illegal for a utility in one region to sell to customers in another. There is effectively no such thing as national competition. There are, of course, many precedents for these legalized restraints on trade. Banking used to be organized this way prior to reforms in the 1980s and 1990s. Telecommunications after the breakup of Ma Bell but before the 1996 Telecom bill and development of national communications services was similarly organized by region. In the case of electricity, besides the legal restraints on trade, there are major physical restraints in the form of lack of capacity on the grid to move power where it is needed.
The absence of universal market allocation of power means that decision making — of what types of power to buy, what types of clean technology to implement, and what types of infrastructure to build — is left frequently to a small group of decision makers who are also incumbents and have a rational bias towards decisions supporting their incumbent position. A transformative technology, for example, could reduce the value of their legacy assets. Building a new transmission line to connect wind power to the grid may make a plant they own obsolete. It may therefore be entirely rational for them to discourage rather than encourage the deployment of new technology.
It would be one thing if the decision makers were acting on their own. However, typically they make decisions under the rate-base system that provides a guaranteed rate of return on anything they can place in the rate base. This would ordinarily incent them toward over-investment. However, since regulators oversee these rate cases and generally try to lower costs, the decision makers at utilities have a conflicting mandate to gain a high rate of return but also keep costs down. This can lead to a bias toward investments that pay off immediately and against investments that pay off longer term.
The upshot is that getting the type of growth rates of renewables needed to unlock the economic and social potential of clean energy is likely to take more than economic incentives and mandates. It may well require reform to remove obstacles to the deployment of new technology.
The energy bills now working their way through Congress contain some measures to address these problems. But my research suggests more work needs to be done.