We compare three technologies that produce electricity in the United States: wind, solar, and combined-cycle gas turbines (CCGT). We use the 2016 electric utility database compiled by the U.S. Energy Information Administration (EIA). That database has the advantage of being based on a census of U.S. power plants rather than sampling, as well as excluding any subsidies received by the power plants.
We show the cost savings achieved when there is a shift between coal-fired generation and generation by wind, solar, or CCGTs, where costs include both capital and operating costs. The net cost reduction per tonne of CO₂ reduction is $4,340 for a shift from coal to wind, −$98,826 (a cost increase rather than a cost decrease) for a shift from coal to solar, and a $251,920 decrease for a shift from coal to CCGT.
When the net emissions from switching away from coal are considered, the net cost savings for each tonne of emissions avoided is $1.27 for a switch from coal to wind, −$44.11 (a net cost increase) for a switch from coal to solar, and a savings of $50.72 for a switch from coal to CCGT. The differentials between the savings from a switch to wind or solar and a switch to CCGT is a measure of the “dead weight economic loss involved in switching from coal to either form of “renewables” instead of switching from coal to CCGT.
This research concludes that CCGT is the only “economic” choice from the perspective of benefit-cost analysis.
- Following Joskow, we do separate analyses for peak and off-peak generation.
- This study borrows heavily from a 2014 Brookings Working Paper by Charles R. Frank, “The Net Benefits of Low and No-Carbon Electricity Technologies.” However, we use updated 2016 data.
- The basic data for this study is the annual census of electricity generation conducted by the EIA of the U.S. Department of Energy.
- One advantage of using the EIA data is that it measures the costs of electricity production on a “real resource cost basis.” That is, the data do not incorporate the large U.S. government subsidies paid to the owner/operators of U.S. wind and solar electricity plants.
- The federal subsidy to solar energy is 30% of capital cost. The federal “production tax credit” (PTC) for wind was $.023 per kWh in 2016, but has complex annual yearly inflation adjustments.
OTHER BASIC ASSUMPTIONS
- A new low-carbon (wind, solar, or CCGT) plant replaces a coal plant off-peak and a simple cycle gas turbine on-peak.
- The price of natural gas is the average price paid by electric utilities.
- The cost of capital is 7.5%.
- The emissions from a new CCGT plant are grossed up to account for fugitive from the production and transport of natural gas.
- We include “balancing and cycling costs.” These are the extra cost that electric utilities incur to accommodate the intermittent nature of wind and solar.
THE CONCEPT OF “DECARBONIZATION EFFICIENCY”
Decarbonization cost is the differential cost of producing a MW year of electricity via coal plants and three other technologies – wind, solar, and CCGTs – divided by the differential CO₂ emissions (measured in tonnes per year).
Total net cost savings in 2016 of switching from coal to …
- Wind: $4,340 per MW-year
- Solar: $98,826 per MW-year
- CCGT: $237,684 per MW-year
Tonnes of CO₂ emissions per MW-year avoided by switching from coal to …
- Wind: 3,418
- Solar: 2,241
- CCGT: 4,686
Net cost savings per tonne of emissions avoided
- Wind: $1.27
- Solar: −$44.11
- CCGT: $50.72
DEAD WEIGHT ECONOMIC LOSS …
Of a decision to switch from coal to wind instead of to CCGT:
- $49.45 per tonne of emissions avoided
Of a decision to switch from coal to solar instead of to CCGT:
- $94.83 per tonne of emissions avoided
Conclusion: Switching to either wind or solar instead of to CCGT involves a dead weight economic loss. However, the dead weight economic loss is twice as great for a switch to solar instead of a switch to wind.
A SCENARIO OF DECARBONIZATION
In recent years, U.S. CO₂ emissions have been about 5.8 billion tonnes per year.
Suppose a goal of reducing those emissions by 10% or about 580 million tonnes.
As shown before, substitution of wind for coal results in a cost savings of $1.27 per tonne of CO₂ reduction, or $0.74 billion in this decarbonization scenario.
As shown before, substitution of solar for coal results in extra costs of $44.11 per tonne of CO₂ reduction, or $25.58 billion if all the investment was in solar.
However, if all the investment were done in CCGT, then the total cost savings would be $29.42 billion. So, the cost savings are larger when all the investment is in CCGT. The differences in cost savings are the amount of “dead weight economic loss” from investing in wind or solar instead of CCGTs.
These equations could be turned around to calculate, for a given fixed outlay of costs, what would be the “foregone CO₂ emissions opportunity” from investing in wind or solar instead of CCGT.
OTHER ALLEGED “SIDE BENEFITS OR COSTS” OF RENEWABLES
Job creation. Many of the jobs created by renewables are at the installation or capital goods production stages. The inherent capital intensivity of renewables limit their job creation potential.
Infant industry learning. This was a label invented by Argentine economist Raul Prebisch to argue for tariff protection of industry in less developed countries. However, those tariffs often led to “soft industries” that became dependent on the tariffs and did not focus on increased efficiency. A higher gain results from investing in specialized R&D activity.
Siting issues. Renewables progress over time from more favorable wind and solar sites to sites that involve higher cost per kWh produced, a classic example of “diminishing economic returns.” CCGTs are smaller physical plants, which can be sited close to natural gas supply or end-use electricity customers.
BROADER ISSUES OF RENEWABLES VS. CCGTs
Should CCGT be eligible to receive federal tax credits analogous to the current federal tax subsidies to wind and solar? No. This would be doubling down on a bad federal policy. CCGT does not need subsidies. They can out compete wind and solar on their own.
The states mainly follow a policy of “renewables mandates” placed on regulated utilities. The utilities don’t resist these mandates very hard because the system of a fixed return on “utility rate base” largely eliminates the incentives to lower costs via investment in CCGTs. This pattern is a classic example of political “confusion of ends and means.” If the goal of electricity policy at the state level is reducing CO₂ emissions, then the state should not intervene to put CCGTs at a disadvantage.
James L. Plummer, President, Climate Economics Foundation
Charles R. Frank, Senior Non-resident Fellow, Brookings Institution
Robert R. Michaels, California State University Fullerton
[presented at the 35th United States Association for Energy Economics/International Association for Energy Economics Conference, November 12–15, 2017, Houston]
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