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Wednesday, July 14, 2010

Flash: Markets work better than governmental fiat!

When Oregon’s feed-in tariffs sold out in 15 minutes, it unfortunately revived interest in a justifiably discredited approach to promoting adoption of renewable energy.

The issue came up today at the SolarTech-sponsored workshop “Accelerating PV Commercialization,” held next door to the InterSolar trade show in San Francisco. Fortunately for those in the room — if not the broader policy audience — Hal LaFlash of PG&E swatted down the idea as quickly as it came up.

Basically, there are two common ways that government force utilities to purchase of renewable energy that is not cost-competitive with conventional sources of power:
  • The feed-in tariff to set a specific price that utilities use to buy RE. This approach was pioneered by Germany and copied with disastrous results by Spain.
  • Force utilities (using regulation and penalties) to buy a certain amount of RE, and leave it up to them to figure ut how to do that most efficiently. This is the basis of the California Renewables Portfolio Standard.
As LaFlash pointed out, the latter approach works much better, because the utility has the incentive to buy the power, but at the most cost effective fashion possible. In response to PG&E’s periodic solicitations for proposals, the RE generators state how much they want for their power and the utility runs a reverse auction, picking the most efficient (cheapest) one.

(LaFlash also noted the utility is working to streamline the paperwork process for connecting projects under 20 MW, in which the transaction costs is disproportionate to the project size.)

Stimulating renewable energy generation is about buying a commodity to achieve a policy goal at the most efficient possible price. The problem with feed-in tariffs — as demonstrated by Spain, Oregon and elsewhere — is that they assume a priori analysis or some other state planner can do a better job of setting a price than the market.

That’s what markets do best: set prices. We call it the supply and demand, or capitalism. Despite the delusions of the economically illiterate, that battle was fought and won decades ago. So here it’s California providing a model for how governments can use market forces to achieve environmental goals.

According to Harvard economist Greg Mankiw, the Federal government is apparently in the process of ignoring (or intentionally unlearning) this lesson when it comes to sulfur dioxide emissions and acid rate.

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