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

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Solar, wind, geothermal, and biomass energyare used in about 2 percent of total U.S. electricitygeneration and are expected to produce only2.8 percent by 2020. The use of renewable energyand forecasts of its growth are low because thecost of renewable energy-fired electricity isgreater than that of its main competitor, combined-cycle natural gas. Few analysts believe thatthis will change any time soon.

Renewable energy sources are also capitalintensive compared with combined-cycle naturalgas. In deregulated electricity markets, investorslack any guarantee that capital costs will be recoveredfrom customers. Accordingly, investors favortechnologies that have higher marginal but lowercapital costs, such as combined-cycle natural gas.

Advocates of renewable energy argue that thedemand for renewables would rise if conventionallygenerated electricity were priced to reflect its pollution costs. But a reasonable interpretation of theevidence suggests that the additional cost of furtherpollution reduction would exceed the additionalhealth benefits. Even if current regulatorycosts are insufficiently reflective of true environmentalcosts, "getting prices right" will not significantlyaffect consumer choices of fuel. For example,reducing emissions of nitrogen oxides and sulfurdioxide by 75 percent below 1997 levels wouldincrease electricity prices by only about 1 percent,too little to trigger a shift from coal or natural gasto renewable energy.

Cracking down on greenhouse gas emissionsto comply with the Kyoto Protocol would provideeconomic help for renewable energy technologies,but such initiatives would result inonly a 7 percent market share for renewable energyand a 43 percent increase in electricity pricesin return for benefits that are still very uncertain.

Jerry Taylor and Peter Van Doren

Jerry Taylor is director of natural resource studies and Peter Van Doren is editor of Regulation magazine at the Cato Institute.