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With the approval of Maryland’s legislature, Gov. Martin O’Malley will soon sign into law new state subsidies to lure power companies to build windmill generators off the coast of Ocean City. The legislation will raise electricity bills, but the added cost is supposed to bring more jobs, cleaner air and, in the words of Gov. O’Malley, “a better, more sustainable future for our children.”
Credit the governor and state lawmakers for such high-minded goals. Unfortunately, the chief “green” benefit from the proposal will be the millions of dollars in subsidies – some explicit and others well-hidden – that will flow to the power companies and their contractors.
Under the proposal, Marylanders will pay up to 19 cents per kilowatt-hour of electricity produced by offshore wind plants, adjusted for inflation. That’s about four times higher than the average market price of wholesale power today. But that’s only part of the corporate welfare the power companies would receive. They also would get a 10-year federal tax break courtesy of Congress’ production tax credit (PTC). On a before-tax basis, the PTC now pays 3.4 cents per kilowatt-hour, which is often more than the wholesale price of electricity when wind generators produce the most power: at night, when consumption is low.
Another subsidy would come in the form of ratepayers paying for high-cost backup generation to supply electricity when the air is calm and the windmills aren’t turning. Wind power is notoriously undependable, with outages occurring on hot, still summer days when electricity is in heavy demand for cooling and refrigeration. Fossil fuel-burning “peaking” generators will be needed to cover those times. Usually, when a generator is unreliable, its profits are hurt because some of ratepayers’ money must go to backup generators. But the federal and state subsidies will provide guaranteed profits for the lucky offshore wind generators, which means that Marylanders will pick up the additional cost of the peaking plants in order to have electricity when they need it.
Finally, the power companies might get an additional subsidy to cover the cost of large underwater transmission lines to bring the windmill electricity onshore. Under government rules, unreliable generators are supposed to pay for their own transmission lines, but wind power – whether onshore or offshore – never seems to be held to that standard. Instead, the transmission line costs end up being spread across all ratepayers in the region, regardless of whether they’re using electricity from the wind generators.
The proposed Offshore Wind Act is just the latest effort by Maryland to develop subsidized generation. Another initiative will force Maryland ratepayers to subsidize the costs of a new gas-fired generator to be built in Charles County, and perhaps additional generating plants elsewhere in the state. The Charles County plant is supposedly another Maryland-subsidized job “creator.” In fact, the plant, like subsidized offshore wind development, will destroy far more jobs in the long run than it creates, because all of those subsidies take money out of the pockets of every Marylander.
Complex subsidy schemes like the wind energy proposal do more harm than good. Subsidies provide all sorts of perverse incentives and disincentives beyond what policymakers intend —consider all the fossil fuel peaking plants that will be needed to support the wind generators. And consider all the lower-cost generators that the subsidized wind farm will put out of business – and the resulting job losses.
After 35 years of direct and indirect subsidies at different levels of government, there is no economic rationale for continued subsidization of wind generation, wherever it’s built. At the federal level, direct subsidies such as the federal PTC should be ended immediately. Similarly, state-level subsidies like Maryland’s will lead to higher electricity prices and lower economic growth.
Despite Annapolis’s lofty intentions, the wind energy proposal, like all subsidy schemes, will be just a gift to a few politically favored corporations at the expense of households and businesses. This is not the way to nurture a better, sustainable future for Maryland’s children – or anyone else.
Jonathan Lesser is president of Continental Economics, an economic and energy consulting firm in New Mexico that recently completed a study on the dependability of wind energy. A summary of that study appears in the spring issue of Regulation, a microeconomics journal published by the Cato Institute.
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