Evaluating the Case for Renewable Energy: Is Government Support Warranted?

January 10, 2002 • Policy Analysis No. 422

Solar, wind, geothermal, and biomass energy are used in about 2 percent of total U.S. electricity generation and are expected to produce only 2.8 percent by 2020. The use of renewable energy and forecasts of its growth are low because the cost of renewable energy‐​fired electricity is greater than that of its main competitor, combined‐​cycle natural gas. Few analysts believe that this will change any time soon.

Renewable energy sources are also capital intensive compared with combined‐​cycle natural gas. In deregulated electricity markets, investors lack any guarantee that capital costs will be recovered from customers. Accordingly, investors favor technologies that have higher marginal but lower capital costs, such as combined‐​cycle natural gas.

Advocates of renewable energy argue that the demand for renewables would rise if conventionally generated electricity were priced to reflect its pollution costs. But a reasonable interpretation of the evidence suggests that the additional cost of further pollution reduction would exceed the additional health benefits. Even if current regulatory costs are insufficiently reflective of true environmental costs, “getting prices right” will not significantly affect consumer choices of fuel. For example, reducing emissions of nitrogen oxides and sulfur dioxide by 75 percent below 1997 levels would increase electricity prices by only about 1 percent, too little to trigger a shift from coal or natural gas to renewable energy.

Cracking down on greenhouse gas emissions to comply with the Kyoto Protocol would provide economic help for renewable energy technologies, but such initiatives would result in only a 7 percent market share for renewable energy and a 43 percent increase in electricity prices in return for benefits that are still very uncertain.

Media Name: pa422.jpg

Download the Policy Analysis

About the Authors