The nation's first RPS program was implemented by Iowa in 1983. Over the last 35 years, RPS programs have become a favorite policy lever for renewable energy advocates and politicians alike. Through 2015, RPS programs had been adopted in 29 states and the District of Columbia, which collectively account for 62% of electric power generation in the United States. In the early years, RPS targets were modest. Recently, some states have grown bolder and policy targets of 40% to 60% are not unusual while happy-talk of a 100% renewable grid is commonplace.
On April 21st, the University of Chicago's Energy Policy Institute released a research report titled "Do Renewable Portfolio Standards Deliver?" It describes the methodology used and conclusions reached in a comprehensive study that compared retail electricity prices in states that have renewable portfolio standards with states that don't. The study was the most granular analysis ever undertaken and based on comprehensive state-level data from 1990 through 2015. Instead of focusing on highly optimistic assumptions about what renewable energy should cost, the EPIC study was based on granular hard data that shows the impact of RPS implementation on retail electricity costs.
The core conclusions were simple. Adding renewables to the electric power grid increases electric costs to ratepayers while providing very costly CO2 abatement. I wasn't surprised by the EPIC study's conclusions since I've long believed that renewable energy advocates understate the costs and overstate the benefits of their preferred technologies. I was, however, surprised by EPIC's willingness to discuss the thoroughly inconvenient truths. It is, after all, a unit of the University of Chicago and a sister institution to Argonne National Laboratories. So, tossing a wet blanket over the entire renewable energy sector must have been a political minefield.
Since EPIC's conclusions are 180 degrees out of sync with neo-religious dogma that humanity's future will be electric everything powered by soft breezes and sunshine, I think the EPIC report is a watershed event. While a single report from a prestigious institution is unlikely to spark a wholesale reversal of policies that were 35 years in the making, I hope it will spark more honest debate and thoughtful reconsideration of facile renewable-energy assumptions that are neither accurate nor reasonable.
The EPIC study vs. traditional LCOE analysis
Historically, decisions to adopt or expand RPS programs have been based on the "levelized cost of electricity," or LCOE, a widely used metric that calculates the per unit cost of generating electric power from a particular asset or class of assets. In a conventional LCOE analysis, like this one from Lazard, wind and solar are always competitive.
What the EPIC study found is that LCOE analysis provides a grossly inadequate picture of the real cost of renewables because it fails to recognize or incorporate three classes of ancillary costs that the addition of renewable resources impose on the electricity system:
- The intermittent nature of renewables means that back-up capacity must be added.
- Because renewable sources take up a lot of physical space, are geographically dispersed and are frequently located away from population centers, they require the substantial addition of transmission capacity.
- In mandating an increase in renewable power, baseload generation is prematurely displaced, which imposes costs on ratepayers and owners of capital.
We've all seen countless stories about how a Green New Deal to accelerate the deployment of wind turbines and solar panels will bring us to a utopian age of cheap and clean electricity for all homes, businesses and transportation systems. Unfortunately, it appears to be yet another situation where "It ain't what you know that gets you into trouble, it's what you know for sure that just ain't so." (unknown but frequently misattributed to Mark Twain).
How much energy do wind and solar really contribute?
The United States consumes an enormous amount of electricity each year. In 2018, the total was 4,177,810 million megawatt hours. Natural gas contributed 35.1% of the total while coal contributed another 27.4%. In contrast, wind contributed 6.6% of the total while utility-scale solar contributed 1.6%. This graph shows the relative contributions of coal, natural gas, wind, and utility-scale solar to US electricity consumption since 2001. For the sake of clarity, the graph lumps electricity from nuclear, conventional hydroelectric, minor fossil fuels, and other renewable sources into a single class.
If you pay attention to news reports, you probably believe wind and solar power are rapidly gaining ground and forcing across-the-board retirements of coal-fired power plants. While there's a tiny grain of truth in those broad-brush assertions, the most important driver in declining coal-fired electricity production has been a massive increase in electricity production from plants fueled by natural gas.
Frankly, I find it shocking that RPS programs resulted in the deployment of assets that supplied 8.2 of our power needs while increasing average retail electricity prices by 11% to 17%. For that to happen, the all-in cost of unreliable electricity from renewables would have to be roughly 3x the cost of electricity from cheap and reliable natural gas.
Talk about the tail wagging the dog!
But that's not all folks!
The EPIC study did a fine job of analyzing the impact of RPS programs on retail electricity prices paid by consumers. It did not consider a variety of collateral costs and externalities that don't end up in the utility rate base. These costs include:
- Federal production tax credits of $0.02 per kWh for electricity from wind turbines.
- Federal income tax credits of 30% on qualifying solar power installations.
- State and local renewable power incentives.
- Inefficiencies that renewables impose on natural gas production and transportation systems for utilities that ultimately get shifted to other natural gas consumers.
When you turn the crank on all the numbers, renewables are quite simply a luxury no man can afford.
The conclusions of EPIC study do not bode well for the obscene market valuations of companies like Tesla (TSLA), the poster child for this era's sustainable energy mythology, and a host of lesser lights like First Solar (FSLR), and Vestas Wind Systems (OTCPK:VWDRY). As the market comes to grips with the inescapable truth that the renewable energy emperor has no clothes, renewable energy bulls who don't question their assumptions and hedge their long positions will suffer.
Disclosure: I am/we are short TSLA THROUGH LONG-DATED PUT OPTIONS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.