Electricity is confusing...

I learned that when I was a project manager for a general contractor in Chicago. Electrical contractors used it to their advantage. If they said an expensive change order was required, they usually won, because electricity is confusing. Of course, that was Chicago, where corruption permeates every level of society. That wouldn’t happen here in Colorado, would it?

Electricity is also political.  Governor Hickenlooper recently signed Senate Bill 252, which increases the amount of renewable energy produced for Colorado. Seems like a good idea. After all, once you build a wind tower or solar panel, the electricity is free, right? Why should there even be a question? Is there something more to it?

Let’s try to unpack some of the mystery and reduce the confusion.

Renewable Portfolio Standards (RPS)

Colorado’s investor-owned utilities (Xcel Energy and Black Hills Energy) are required, by 2020, to produce 30% (the Renewable Portfolio Standard or RPS) of their electricity by renewable means. Renewable energy, as a political matter, means wind and solar. As a practical matter, it should also include nuclear and hydroelectric. But as I said, electricity is political.

To meet the RPS, Xcel Energy has been installing lots of wind towers. They have 17 wind farms and are preparing to build another one. Because of federal subsidies, improving manufacturing processes, and an abundant supply of wind towers, the next wind farm is going to be relatively inexpensive to build. The federal subsidy is a major factor in wind’s affordability, reducing the cost by almost half. But the federal government doesn’t have any of its own money. It gets it from taxpayers. Us. We Coloradans send a portion of our earnings to Washington, and the politicians send it back to Colorado as a subsidy for wind towers. Do we get a fair share of it back? Perhaps. Xcel Energy has been very aggressive at getting those subsidies. Do you, as a ratepayer benefit? Not a chance.

Legislation generally caps rate increases for renewable energy at 2%. If renewable energy were actually cheaper, there would be no rate increase for it.  Your electric bills are increasing because of the RPS. Further complicating the matter, not all of the costs for renewable energy are included in that 2% cap.

Selling your old car

Let’s say that you wanted to get a new car. When you do that, you might want to sell your old car. After all, if it’s not the one you prefer to drive, why keep it?

When the legislature demanded that Xcel build new renewable energy sources, they didn’t take into account that we didn’t need enough new electricity production to account for the new wind towers and solar panels. In other words, we’ve got a bunch of new plants and can’t get rid of the old ones. Xcel still pays for the old ones, running or not. The cost to build them is amortized over several years, and ratepayers continue to pay that cost. It’s in a part of your bill that isn’t capped at 2%. In fact, in 2011, Xcel requested a $53 million rate increase to cover the carrying costs of 300 megawatts that it couldn’t use. You’re paying for idle plants. And Xcel is about to build 550 megawatts more. Xcel will do the math for us, but I’m willing to bet that it costs more to idle 550 megawatts than 300 megawatts.

You and I, the ratepayers, end up paying to build the new wind farms, and for the old plants. It’s like having old cars that work, but that you aren’t allowed to sell or drive, but you still have to pay off the loans, taxes and insurance. Great, if you’re a car collector. I’m not a power plant collector.

Limited options and excess capacity

The Renewable Portfolio Standard (RPS) limits the other kinds of electricity production available to us. Once the RPS is fully implemented at 30%, barring a hoped-for advancement in electricity storage technology, about 2/3 of our electricity will come from natural gas. Nuclear and coal will not be an option. Here’s why:

There is no technology available to store huge amounts of electricity. Once those electrons start moving, they gotta go somewhere and get to work.

The output of coal and nuclear plants can’t be varied quickly. It takes a while to ramp up, or back off. Nuclear and coal are typically used for baseload electricity demands, the level at which demand never goes lower. Demand above that level must come from sources that can be turned on and off quickly. That’s natural gas.

Now here’s where it gets a bit tricky.

Wind and solar sources produce roughly 1/3 of their rated capacity over time, because the wind don’t always blow, and the sun don’t always shine (see US Energy Information Administration, 2013 Early Release Overview.)  So a wind farm rated at 100 megawatts only produces 33 megawatts. To produce 30% of our electricity from wind and solar, Xcel will need to have renewable capacity at 90% of anticipated demand. That means they must also build a complementary 90% capacity in natural gas. And that’s all stuff they’re gonna build, and you’re gonna pay for.

But isn’t it cheaper?

Cost comparisons between various types of electricity generation can be misleading, because they don’t take into account the money that was already paid or committed (sunk costs) for a facility that has already been built. To compare new wind power to existing coal powered plants, one should subtract the amortized capital cost of the existing power plant. According to the US Energy Information Administration, wind power costs $86.60 per megawatt hour. Traditional coal costs $100.10. But consider, for example, a coal plant that is halfway through its economic life. When you subtract half of the amortized capital cost, the cost is $67.25. (Capital costs, or the cost to build the plant, are amortized in all figures.)

It’s like buying a pair of practical shoes. You probably only need one pair, because they are just practical shoes – not your party shoes or Sunday go-to-meetin’ shoes. You can buy a new pair for $86.60, or keep using your half worn but serviceable shoes that originally cost $100.10. If you’ve got a budget, you’ll just keep using the old pair that you’ve already paid for.

Don’t forget the profit

I like profit. I think it’s a great way to encourage efficiency in free markets. But it isn’t necessarily good in a monopolized market, where the consumer is forced to pay what the producer demands. Xcel Energy commands a monopolized market, and makes 10% on everything they do. Everyone benefits - except most people. Xcel stockholders benefit, and politicians benefit because they spin this as something they are doing that’ s good for us. And because electricity is confusing, they get away with it. Keep in mind, that Xcel is not to blame – seeking profits is their obligation to their stockholders. The blame lies with the legislature.

Other ways we pay

“Anything that requires a subsidy probably doesn’t deserve it.” I’m not sure who first said that. I wish it had been me.

I already mentioned the federal wind production tax credit, without which the wind industry probably wouldn’t survive. Even with it, they’ve been having their fair share of troubles. Subsidization often spells disaster for a company.

A business succeeds and grows because it creates some kind of efficiency that makes it more valuable than its competitors or alternatives. But a company that needs a subsidy obviously lacks that efficiency in the first place. Then the subsidy reduces the urgent need to become more efficient.

Let’s also look at whence the subsidies come. As mentioned earlier, you and I pay for it. Government and businesses merely handle the transaction. Xcel Energy lists 36 categories of subsidies available through them. THIRTY SIX! These subsidies (rebates) are not complete giveaways – you have to spend more money than the rebate provides. For instance, a $120 rebate is available for installing a high efficiency furnace in your home. Such a furnace will cost several thousand dollars. Ratepayers that can’t afford that pay more on their utility bills to provide a subsidy to those who can afford it.  Even though it’s not called a tax, it functions very much like a regressive tax, a tax that creates a larger burden on those who can least afford it. And with the legislature’s support, Xcel makes 10% profit on it.

Subsidies can lead to waste

Xcel’s subsidy program is meant to encourage energy conservation.  However, that high efficiency furnace means homeowners can get more heat for the same utility bill. It does not necessarily follow that they will use less gas or electricity – they might just decide to be more comfortable in cold weather. Conservation may not happen if giveaways encourage greater consumption.

Reliability is at risk

The electrical grid has a sort of “shock absorber” built into it. As long as electrical production matches demand within a certain range, the system works. If a production facility shuts down suddenly, immediate action is required to ramp up other systems to prevent overloads that can cause blackouts. I’ve toured the “command center” where a staff monitors the output and demand, watching numbers to make sure the system stays within that narrow band. Unfortunately, renewable energy is unreliable. Winds can die quickly. Solar panels don’t work when it’s cloudy or at night time.  As more of our electricity comes from these unreliable sources, our entire system is at risk.

So to recap:

We pay for renewable production capacity we don’t need. We pay for more production capacity we don’t need to complement the renewable production capacity we don’t need. We lose the ability to use less expensive clean sources of electricity. Poor ratepayers subsidize wealthier ratepayers through Xcel’s subsidy program. We send our tax money to Washington so they can send it back to us as wind towers we don’t need. And your appliances and air conditioner don’t care where those electrons came from.  They just want them to keep coming. If the grid becomes less reliable because of its dependence on unreliable renewable sources, those electrons may not move when they are most needed.

Still confused?

Reality Over Hope - Three Jobs Saved

We cannot solve our problems with the same thinking we used when we created them. Albert Einstein 

President Obama has explained his new stimulus program. Let’s see how the old one did. Obama’s Council of Economic Advisors (CEA) reports that the American Recovery and Reinvestment Act (ARRA) has been a success, creating or saving 2.4 million jobs through the first quarter of 2011 at a cost of $666 billion. As pointed out by The Weekly Standard, this comes to approximately $278,000 per job. We’d have saved $427 billion by just writing $100,000 checks to each person who has a job because of the stimulus.

The CEA is a group of three economists appointed by the President to…advise the President on economics. Being economic advisor to the man that spent $278,000 per job only to see unemployment stuck at over 9% would be a tough job. How do you tell the President that he wasted oodles of money and prolonged the recession –without losing your job? The report relies on Obama’s old campaign slogan. Heavily invested in HOPE, the president might see only what he wants to see in the report, and believe the skewed conclusions.

The report mentions twice that nobody can observe what would have happened in the absence of the stimulus. We can observe that the economy reversed its downward trend one quarter before the stimulus, and that the biggest positive jump was in the first quarter before 98% of ARRA funds had been spent. And we can see that as stimulus spending increased, the economic growth trend reversed again, going down. The report says that it can’t determine the cause of what happened, but in a triumph of hope over reality, it misconstrues facts, confuses correlation with causation, and lays the groundwork for more stimulus. 

It gets worse. The first company that got a government guaranteed loan under ARRA was Solyndra, a California solar panel manufacturer. Government guaranteed loans, by the way, are actually guaranteed by you and me. Solyndra got $535 million. Assuming all of its 1100 workers were hired because of the stimulus money, that’s over $486,000 per job. Now Solyndra is bankrupt. Solyndra’s 1100 jobs were lost because Obama was mistaken in his choice of handout recipients. How many more failures will we see? If a company requires a subsidy, it probably doesn’t deserve it. 

We’re not done with that CEA report yet. It relies on “independent approaches and supplements those estimates with those of numerous outside analysts”. The data was cherry-picked to create the desired outcome: Impress the President and save the jobs of three economists. If outside data is included, where is data from other countries that demonstrate whether their stimulus programs worked? 

Our nearest “rich country” neighbor is the closest thing to that which the CEA said could not be observed – the effect of doing nothing. Canada did next to nothing. According to David Lee, writing for the Mises Daily, Canada’s stimulus package “was little more than a clever display of political gamesmanship whereby the appearance of action was maximized, while the action itself was minimized…It is precisely in this abstinence that we find Canada's source of relative success”. Canada’s economy grew 3.3% in 2010. Job losses have been recouped. Their unemployment rate is 7.2%, compared with ours at 9.1%. A recent business survey indicates record hiring expectations and optimism about future demand. 

Canada is perceived as the hope-over-reality bastion of socialism in North America. But the truth is that in 1993 “Canada underwent one of the most fiscally responsible periods in its history…[Finance Minister] Martin made it clear from the start that the priorities of the government would be fixed squarely on eliminating the deficit and the record of the following decade leaves little doubt that this was a commitment that was delivered upon powerfully”. 

While the CEA shows us that they can save their own jobs, Canada shows us that government non-interference is how job creation really works.

Bananas and Broken Windows

A guy walks into his local grocery. Noting the price of bananas is 89 cents per pound, he complains that the grocery across the street sells bananas for 69 cents per pound. The grocer asks him why he didn’t buy bananas from the other grocery. “They are all out of bananas.” The grocer tells him, “When we’re all out, we sell them for 49 cents per pound.” 

It makes sense, doesn’t it? When Grocer A runs out of bananas, Grocer B can charge more. As the supply dwindles and he continues to raise his price, some customers will switch to oranges. Meanwhile, banana growers, realizing more profit, will produce more bananas. But now there are fewer customers because some converted to oranges, so grocers will lower the price to sell their bananas before they go bad. This shows that profits motivate sellers to adjust prices to meet changing supply and demand.

This is common sense economics, understood since people first began to trade. An “education” in basic economics just gives you the ability to draw graphs about prices, supply and demand. “Advanced economics” gives certain economists like Paul Krugman the ability to baffle the masses with more complicated graphs. We are led to believe that government intervention by politicians, justified by graph-makers, will cause more employment, abundant goods, stable prices, and a chicken in every pot. Common sense flies out the window. 

The economy is so complex that it’s impossible to determine all the effects of government intervention. A 19^th century economist, Frederic Bastiat wrote, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Bastiat went on to describe the “Broken Window Fallacy” to illustrate the point. Let’s go back to the grocery. 

While the grocer and customer haggle over bananas, a hoodlum throws a rock through the front window. A crowd gathers and begins to discuss the misfortune of the grocer who will have to pay $500 to have his window repaired. Eventually someone points out that the window repairman will have more money to buy bananas for his family. He’ll also buy a pane of glass, providing income for the glass manufacturer. The glass manufacturer will buy raw materials. Truck drivers will deliver these materials. This stimulus will ripple through the economy. When you consider these benefits, isn’t the hoodlum a hero? 

The broken window and the economic activity it will create are easily seen. What is not seen is what would have transpired had the window never been broken. Prior to the act of vandalism the grocer had a good window and $500. After the repair he only has a good window, but not the $500. What would he have done with the $500? Perhaps Christmas bonuses for his staff, a vacation for his family, a new credit card machine to improve service at the checkout register? The very grocer who earned that $500 gets none of the benefit of it! Five hundred dollars of his wealth has been destroyed. If this were truly an effective economic stimulus, the government could hire hoodlums to break windows everywhere!  

The Broken Window Fallacy has been thriving ever since people first began asking government to improve their lives. It’s all the rage today. A tax levied on one group of people to benefit another group has the same effect as throwing rocks through windows. 

Here are some examples of the Broken Window Fallacy:

• Economic development subsidies (see Gaylord Entertainment)
• Stimulus programs
• War-on-Poverty programs
• Government jobs programs

No economist or politician can tell you what would have been created if the tax was never collected.  But you know what you would have bought with the money. Even if you just buy bananas, it’s best left to the wisdom of individuals who own the money instead of government.

Bottom Up or Upside Down, It’s Still More Government

Yesterday I attended the Governor’s Bottom-Up Economic Development Initiative Regional Meeting.  These meetings are part of the executive order Hickenlooper signed on his inauguration day.  His plan is to “to engage Coloradans across the state in

developing a comprehensive and collaborative approach to economic development.” Information from regional meetings and County subgroups will be used to create this new plan.

I was disturbed that so many in attendance have "swallowed the kool-aid", believing that government can craft the right program to get the economy moving and put people back to work.  Any attempt by government to incentivize business is a burden that must be borne by taxpayers, and a comparative disadvantage to the businesses that don't qualify for the incentives.

The Mayor of Commerce City (Paul Natale) boasted that they appoint a person to help any large business that's moving to their city, a single point of contact between that business and the city to facilitate the move. But what are the chances that a smaller business would get that same assistance?  The businesses that drive the economy and offer the most employment are the small, less glamorous businesses. One thousand sole proprietors that each hire one person creates more jobs than a relocated company with 500 employees. And the sole proprietor doesn't show up in any statistics. Making it easy for people to start small businesses by removing barriers can have a far greater impact on employment and the creation of wealth.

Natale also wanted protection (tariffs?) for the concrete pipe companies in Commerce City.  Apparently there's a move afoot to change regulations to specify plastic pipe instead of concrete in public works projects.  This is foolishness all the way around.  Protectionism always harms the consumer (the taxpayer in this case).  And regulations that specify a particular product (rather than performance criteria) invite more governmental favoritism and corruption.

There were lots of ideas about government programs to educate businesses. Really? Perhaps the people who run the Post Office, Medicaid, Medicare, Social Security, etc. can teach us what they know.

Someone wanted to raise the gas tax to fund transportation.  I'm always amazed at the people who believe that if you come up with a new way to tax, it will somehow create new money to be taxed.  It's as if consumers are saving money under their cushions until someone comes up with the right way to pry it out.  Gas taxes are the best way to ensure that the users of roads are the ones who pay for the roads. But if gas taxes are raised, there must be a commensurate decrease in other taxes, or it will further dampen economic growth.

Someone trotted out the common belief that the key to prosperity is to fund higher education. Adams County apparently doesn't have enough college graduates.  The belief is that if we have more college graduates sitting around waiting for jobs, companies will relocate here.  I would contend that companies will relocate here if they see a comparative business advantage, meaning less government intrusion and taxation and more stability in regulations.  Then those businesses will attract the people they need to staff the company.  The main reason to improve higher education in Colorado is so that parents don't have to ship their kids out of state to get a good education.   That's not a bad thing, but let's be honest about it.

One gentleman thought we should have a government agency that businesses could contact to keep abreast of government changes that might affect them.  I believe it's a sad day when our business environment is so volatile because of government that we have to have an agency to help us track the changes.

Someone suggested that the Governor should personally know the CEOs of the top 100 Colorado employers. Can you imagine that weekly phone call from Hick to Mr. Big?  Do you think either will care that Hick generally cannot help Mr. Big’s company without taking from the taxpayers, or putting competing companies at a comparative disadvantage?

Although everyone acknowledged the need to cut red tape, very few specific ideas came up.  It's such a huge task that few know where to begin.  Perhaps it’s also because the government representatives in attendance don't experience the red tape problem.  Remember that the first red tape Hickenlooper cut was for brewers, a problem of which he has first hand knowledge.

This whole fiasco is a classic example of the grand conceit of those who think they can plan our economy.  A room mostly full of government representatives trying to decide how best to "create jobs".  Business people attend because "if you aren't at the table, you're on the menu". TIFs, programs, agencies, enterprise zones, tariffs, incentives, and on and on.  It all adds up to favoritism for the businesses that government approves, and taxpayers foot the bill.

  

Remember what happens when you bend over and grab your ankles - you are Bottom Up. An appropriate name for this misguided attempt to create jobs.

The "New Energy Economy"

This year’s legislature has seen a whole slew of bills that would subsidize the “New Energy Economy”, Governor Bill Ritter’s legacy and proudest accomplishment.  Government believes it needs to nurture this fledgling industry until it develops the technology to power our economy.  Unfortunately, this approach rarely works.  When it does, it can be attributed to coincidence or a “lucky guess” by the government.  That’s far more credible than believing that government has the wisdom, foresight, or knowledge to understand which industries are worthy of coddling, and just how best to coddle them.

Subsidies create dependence.  Once an industry begins to receive a subsidy, it will continue to clamor for that subsidy. The industry will howl about its destruction and the loss of jobs without the subsidy.  Witness the recent solar industry furor over Xcel Energy’s plan to reduce its subsidies. This brief video demonstrates the faulty reasoning behind these subsidies, while giving an entertaining look at how reason will not sway a liberal bent on coercing us all to live a green life.

Studies have shown that the “New Energy Economy” in Europe, where they have been coddling much longer than we have, has resulted in the loss of 2 – 4 jobs for every green job created.

Here is a partial list of green bills that have come to the legislature this session:

HB 11-1132 – On-Bill Energy Efficiency Improvement Financing - killed by House Transportation.  This bill would have allowed utilities to provide financing for energy efficiency improvements to private properties. A bad idea considering the foreclosure rate.  Ratepayers will be left holding the bag if a recipient of this subsidy can’t pay its bills.

HB 11-1160 – Governor’s Energy Office Green Building Incentive Program – Passed the house.  Gives money to certain new home buyers for energy efficiency improvements to their current inefficient homes.

HB 11-1170 – Extend Credit for Alternate Fuel Facilities – Passed Natural Resources committee, referred to Finance.  Provides tax credits for up to 20% of the cost to build or buy a facility for fueling vehicles with alternate fuels.

HB 11-1228 – Economic Development Through Distributed Generation – killed by natural Resources Committee.  Commissions a study to determine economic benefits of feed-in tariffs, a major cause of the collapse of the solar industry in Spain.

HB 11-1255 – Colorado Alternative Energy Park Act – Introduced, assigned to finance, hearing scheduled March 24.  Uses Tax Increment Financing and other tax incentives to subsidize alternative (green) energy. Even requires that transportation for the park be “energy efficient”.

SB 11-032 – On-Bill Financing Program for Energy Cost Savings – Assigned to Natural Resources. Similar to HB 1132, allowing utilities to provide financing for energy efficiency improvements to private properties.

SB 11-047 – Bioscience and Clean Technology Reinvestment – Passed Business, Labor and Technology, referred to Appropriations.  Provides grants for bioscience and clean technology research.  Claims that such funding has been beneficial for Colorado’s economy.

SB 11-130 – Transparency Building Energy Performance – Assigned to Natural Resources.  Requires utilities to monitor and report energy consumption by all commercial buildings to the EPA.  This is clearly invasion of privacy and a step toward EPA regulation of all energy consumption.

SB 11-131 – Colorado Smart Grid Task Force Recommendations – killed by Natural Resources.  Moves Colorado toward implementation of a “smart grid”, which can eventually be used to restrict consumer use of power.  Also integrates “feed-in tariffs”, which will require ratepayers to pay cost plus a profit to every alternative energy supplier, regardless of efficiency or cost.