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Dick Davis Column: Mixing Markets and Mandates Makes for Renewable Energy Morass |
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Written On: April 2006 |
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Written By: By Richard S. Davis - President, Washington Research Council |
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Energy policy in Washington has begun to take on some unpleasant "eat your spinach" qualities. Sure, some of it's probably good for us, but it’s still hard to warm up to the scoldings. Most of us would rather be convinced than commanded.
The governor and Legislature started us off with biofuels. To move what they see as a mulish market, lawmakers relied on carrots and sticks, incentives and mandates, to boost an industry that will convert foodstuffs into fuel stuff. The legislation parted the "Cascade Curtain" to help eastern Washington farmers and Puget Sound area biofuels investors and producers.
This fall, we can expect more of the same. Voters will likely be asked to embrace another green initiative, one with fewer carrots and a pretty big stick. Initiative 937 would require utilities with more than 25,000 customers to generate at least 15 percent of their electricity from renewable sources, like wind and solar, by 2020.
Melissa Kirkpatrick, with the I-937 campaign, says the mandate would lead to "a more competitive market" by creating a better investment climate for businesses engaged in renewable energy production. Utilities, she says, sometimes stick with "traditional resources" based on short-term planning heavily influenced by "fossil fuel pricing." The mandate would assure producers a market, backers say, providing long-term stability for investors.
That stability unsettles others, however. As the executive director of the Industrial Customers of Northwest Utilities, Michael Early represents the state's most energy-conscious firms. "We don't think that a mandate is required," he says. "Renewables are penetrating the market. If they're cost competitive, they’re going to be acquired."
If they're not cost competitive, requiring their use means higher prices to consumers.
Wind energy is cost competitive over time, say initiative backers. And they point out that the initiative includes a 4 percent cost cap to protect consumers. Kirkpatrick says, "The most utilities would be required to invest is 4 percent more than their incremental cost for 15 percent of their load."
Early questions just how that will work — the devil's in the rule-making and interpretation — and he says that for industrial customers even slight price increases have large consequences in a globally competitive business.
"We're looking for the lowest-cost energy mix," he says.
While on still days the big windmills don't turn, the prevailing political winds have steadily favored the renewables industry. Twenty-seven states now boast some form of what are called "renewables portfolio standards," mandating that utilities include wind, solar, biomass, etc., in the mix. The details and energy resources vary among the states, making comparisons difficult.
Washington already relies on abundant, renewable hydropower, which Early emphasizes. Compared to other states that have adopted renewable portfolio standards, Early says, "Washington is already doing more than its fair share if you include existing hydro." But utilities will not get credit for their existing hydropower, only efficiency gains in hydro will count.
Puget Sound Energy has already invested heavily in wind farms, for example, and is benefiting. Currently, wind (helped by federal tax credits) is a better deal than natural gas. Still, no one can say what the cost structure will look like 20 years from now.
Where investments in wind farms have been made, property values have risen, jobs have been created, and landowners have made money. Of course, it's hard to find a required public investment that doesn’t create some business winners. The benefits are often concentrated, while the costs are generally dispersed, unknown or unacknowledged. Among the RPS winners will be investors and developers already active in the industry, like Goldman Sachs, General Electric, Shell and PPM Energy. Companies that fare well in competitive markets do even better when they're assured an edge.
I-937 adds a new dimension to a closely regulated utility industry with defined service.
"I'd love to be in a business where government could guarantee me a certain percentage of market share so I don't have to compete," Early said. "Where do I sign up for that deal?"
When I'm told government mandates make markets work better, my skepticism kicks in. We'll learn more as the election approaches, but for now, take this spinach with a grain of salt.
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