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Alternative energy subsidies skew market

It's the government, not consumers, who drive demand for green power

Over the past three decades, numerous groups and individuals, including virtually every Oregon governor and scores of politicians, have advocated widespread use of alternative energy sources such as wind, solar power and biofuels.

Gov. Ted Kulongoski furthered this agenda by releasing his Action Plan for Energy last year and renewing his call for alternative power development after his re-election earlier this month.

Kulongoski wants the state to meet 25 percent of its energy needs with renewable energy by 2025, to introduce a renewable portfolio standard (mandating the percentage of electricity derived from renewable sources) developed by the Oregon Department of Energy, and to increase state tax incentives for alternative energy. Furthermore, the governor hasdeclared that all state agencies will run completely on renewable energy by 2010.

As the sixth-largest producer of wind energy in the country and a substantial investor in solar power and methane digesters (which use cow manure to produce electricity and more useful manure for fertilizer), Oregon is viewed as a leader in the alternative energy movement.

While renewable energy may seem desirable, there are a number of reasons why the state should stop mandating adoption of alternative energy sources.

The most important is the fact that while alternative energy costs have fallen dramatically over the past 30 years, even with today's high energy prices, alternative energy is still not profitable.

The average national electricity cost is 6.5 cents/kilowatt hour. Wind energy, by comparison, costs12 cents/kWh and solar energy costing 27 cents/kWh. Optimistic claims assert that electricity would have to cost 8-10 cents/kWh to make methane digesters profitable.

After the oil crises of the 1970s, a number of companies, such as Exxon, invested heavily in alternative energy, especially wind energy, and sustained heavy losses in the process. As a result, over the past 27 years, no large energy companies have done any significant research on alternative energy.

While companies such as BP, Chevron and Royal Dutch Shell have been promoting themselves as clean energy companies, none of them have truly pursued alternative energy as a profitable business.

Subsidies, tax credits and grants have made it very easy for individuals and companies to purchase and install their own alternative energy generators. In a recent study by ECONorthwest, two of the three highest factors for commercial users in purchasing solar equipment are 'Return on Investment and Rebates' and 'Tax Credits.'

In a recent Daily Journal of Commerce article, wind energy proponents admit that the government is necessary to build demand and to persuade consumers to purchase renewable energy. Studies on methane digesters tell the same story.

Companies involved in methane digester projects, such as Portland General Electric, have decided they cannot fund these projects on their own in the future. Government aid, not the market, is the real engine driving the boom in alternative energy.

Subsidies and tax breaks provide incentives to adopt alternative energy, inducing consumers to purchase goods that are simply not market-friendly.

The Energy Trust of Oregon, for example, plans to spend $29.8 million subsidizing alternative energy this year. The organization is funded by a 3 percent sales tax on customers of Portland General Electric, Pacific Power and Light and Northwest Natural Gas. The group spent $53 million of taxpayer money in 2005.

A number of promising technologies are emerging in both alternative and traditional energies. The falling costs of wind and solar energy, improvements in methane digester technology, CO2-free coal plants, third- and fourth-generation nuclear power plants with improved safety designs, and many other developments and innovations are pouring out of laboratories, universities and R and D companies.

These technologies should succeed or fail on their own merits, not because government officials and lobbyists in Salem or Washington, D.C. favor them.

Riazul Islam is a research associate at Cascade Policy Institute, a think tank based in Portland.