Considerations in Modeling the Proposed Amendment’s Economic Effect

Supporters of the initiative argue it will help the state’s economy. A member of Gov. Granholm’s Green Energy Task Force recently said about the initiative, “There’s [sic] billions of dollars in investments that are going to come into this type of program here.”[19]

While some new investment in the state is likely to result due to the mandate, other investment will be delayed or fully cancelled due to the higher expected electricity costs. The requirement of more renewable energy will lead to investment in renewable energy facilities, but the statement above does not consider the economy as a whole. Manufacturing plants and other companies which utilize large amounts of electricity will see the potential for large utility increases, as well as the uncertainty surrounding an ever-changing regulatory environment, as negatives. This would dynamically alter the total new investment in the state. In this study, we quantify the negative as well as the positive effects of the RES programs.

Since renewable energy generally costs more than conventional energy, many have voiced concerns about higher electricity rates. A wide variety of cost estimates exist for renewable electricity sources. The EIA provides estimates for the cost of conventional and renewable electricity generating technologies. However, the EIA’s assumptions are optimistic regarding the cost and capacity of renewable electricity generating sources to produce reliable energy.

We reviewed other academic literature and found that in most cases the EIA’s cost projections are at the low end of the range of estimates, while the EIA’s capacity factor for wind tends to be at the high end of the range. The EIA does not take into account the actual experience of existing renewable electricity power plants in Michigan. Therefore we provide three estimates of the cost of Michigan’s RES mandate — low, medium and high — using different cost and capacity factor estimates for electricity-generating technologies from the academic literature. See the Appendix for details.

One could justify the higher electricity costs if the environmental benefits — in terms of reduced greenhouse gases and other emissions — outweighed the costs. However, it is unclear that the use of renewable energy resources — especially wind and solar — significantly reduce GHG emissions. Due to their intermittency, wind and solar require significant backup power sources that are cycled up and down to accommodate the variability in the production of wind and solar power. A 2010 study by Bentek Energy LLC found that wind power actually increases pollution and greenhouse gas emissions due to cycling of coal plant capacity during fluctuations in wind power generation.[20] Thus there appear to be few benefits to implementing RES policies based on heavy uses of wind.

Governments enact RES policies because most sources of renewable electricity generation are less efficient and thus more costly than conventional sources of generation. The RES policy forces utilities to buy electricity from renewable sources and thus guarantees a market for them. These higher costs are passed on to electricity consumers, including residential, commercial and industrial customers.[*]

Increases in electricity costs are not unlike taxes in that they are known to have a profound negative effect on the economy. Prosperity and economic growth are dependent upon access to reliable and affordable energy. Since electricity is an essential commodity, consumers will have limited opportunity to avoid these costs. For the poorest members of society, these energy taxes will compete directly with essential purchases in the household budget, such as food, transportation and shelter.

As noted above, the proposed initiative contains a 1 percent cap on electricity rate increases due to the move to renewable energy. In this study, we set aside this cap in order to provide an apples-to-apples comparison between a baseline case, a 10 percent RES case and the proposed 25 percent RES by 2025.

[*] As noted earlier, for the purposes of determining the economic impact of the existing and proposed renewable energy standards if they were met in full, we have set aside the cost caps in both standards. We will return to the cost caps below in our discussion of the results from the model.