this. So, to sidestep the high-cost problem, Cape Wind’s advo-cates have cobbled together all manner o arguments to justiy itsdevelopment, most notably how it will spur a new oshore windindustry in Massachusetts.Several economic allacies underlie green energy and green jobs policies. For example, some renewable energy proponentsand green jobs advocates undamentally misrepresent wealth
. Stealing money rom Peter and givingit to Paul may benet Paul, but it hardly creates wealth. More-over, a number o “green jobs” studies have touted renewablesdevelopment as a source o unbridled economic growth. Thesestudies all contain one striking omission: they ignore the adverseeconomic eects o the resulting higher electricity prices thathigh-cost renewable generation brings. They are cost-benetanalyses that ignore the “cost” part. No wonder the results areso encouraging.In this article, I begin by explaining the welare economics o subsidized green energy. For most economists, this is a standard,no-such-thing-as-a-ree-lunch analysis. However, it also high-lights the problems caused by one o the supposed benets thatrenewable energy proponents fog: that renewable energy willhelp “suppress” electricity prices, thereby creating huge benetsor consumers. I then examine the Cape Wind project, which Iconsider to be the current poster child or green energy’s excesses,and I discuss why the billions o additional dollars that Massa-chusetts ratepayers will be orced to pay or the electricity it gener-ates will not provide economic salvation but will simply hastenthe exodus o business, industry, and jobs rom the state.
How Renewable Energy SubsidiesReduce Economic Well-being
Ignoring, or the moment, the issue o green jobs creation,renewable energy studies oten talk about “price suppression”as being a benet o renewable resource development. Theconcept is straightorward: by increasing the supply o electric-ity, market prices decrease and consumers benet. This is un-damentally true, but while consumers obviously benet romlower prices in a competitive market, the “benets” o articialprice suppression are temporary and costly.For those whose amiliarity with electricity markets ends at thelight switch, beore there were competitive wholesale electric mar-kets, utilities built enough generating capacity to ensure that whenthe demand or electricity peaked (such as on a hot and humidsummer’s day), there was sucient generating capacity available.The construction costs o these resources were part o utilities’ ratebase, on which they earned a regulated rate o return.With deregulation and electric industry restructuring, regionalwholesale energy markets were created to replace the old vertically integrated utility industry. Not only were wholesale markets cre-ated or electric energy, but also markets or “installed capacity”— essentially payments to generating rms to recover the xedconstruction costs that were previously included in the rate baseand to provide sucient revenues or rms to construct addi-tional generating capacity or use during peak times, though thatcapacity would be uneconomical in a standard wholesale market.In overseeing wholesale energy markets, the Federal Energy Regu-latory Commission sought to ensure that these markets wouldprovide sucient revenues to generators, especially peaking gen-erators used only sparingly, to ensure they would be economically viable and thus available on those hot summer days.Creating a market is always a challenge, and markets or“capacity” have proved no dierent. The rules governing thesemarkets are mind-numbingly complex, whether by accident ordesign. But one thing these markets did was provide explicit pay-ments to generators that had been paid only implicitly beore.Outraged at having to pay or something they mistakenly thought was ree, politicians in several states sought to take advan-tage o these markets and lower prices. As a result, a number o states introduced “price suppression” as an explicit policy goal inreaction to the creation o installed capacity markets, especially inNew England. In 2007, or example, Connecticut passed legislationthat required the state’s Energy Advisory Board to issue Requestsor Proposals that would reduce capacity market prices in the state.Similarly, in Massachusetts, Section 105(c) o the Green Commu-nities Act o July 2, 2008 was designed to orce renewable resourcegeneration into the New England capacity market.Essentially, these states have required that their local utili-ties build new generation (paid or by ratepayers) and bid theoutput into the energy market at a zero price. (There is a pricefoor or bidding into the capacity market.) Adding additional“ree” supply into a market obviously lowers, or suppresses, themarket-clearing price.In some ways, this is a good thing: i I can build a better, less-expensive mousetrap, mousetrap prices all and consumers(although not mice) are better o. The problem with the price“suppression” practiced by these states is that the resources thatwere built have been subsidized by ratepayers. As such, this typeo price suppression is really just another way to manipulate themarket in a way that makes it less ecient. Moreover, the pricesuppressive eect is only temporary, because it drives out actualcompetitors and reduces the likelihood o new competitors enter-ing the market. (Generators will not enter the market i they thinkregulators and politicians will simply drive them out at a later date. Also, investors, perceiving greater risk, will require larger expectedreturns.) Thus, rather than building a better mousetrap, theselawmakers are using subsidies to articially and temporarily reducethe price o mousetraps. And, in act, generators that compete inthese markets have ought back and
has taken notice.To understand the dierence between articial price suppres-sion and true increases in competitive supplies, examine Figure 1,which shows the demand or electricity and the eect o a renew-able generation subsidy. In the gure, the initial supply curveis given by the solid light red line S
. The market-clearing priceis P*, and the quantity o electricity sold is Q*. In this market,generators A and B sell all o their output, and C sells an amountQ* − QB. Generator D sells nothing.Next, we introduce a subsidized renewable generator, R, such