Resources for the Future (RFF) has published an Issues Brief titled Retail Electricity Rates Under the Inflation Reduction Act of 2022. According to the report the Inflation Reduction Act (IRA) legislation, will “save typical American households up to $220 per year over the next decade and substantially reduce electricity price volatility.” This setoff my BS detector so I got some data from Texas to see if the state with the most total renewable energy production has seen reduced costs from their wind and solar development.
I am not going to address the IRA provisions directly. The Institute for Energy Research described the huge renewable tax incentives and subsidies earlier this week. Anthony Watts applauded the Wall Street Journal and Bjorn Lomborg for showing how useless the IRA is at tackling climate. The RFF report was one of the analyses that alleged that the IRA would benefit consumers and I will focus solely on that.
RFF analyzed the effects on the crucial electricity sector using their in-house Haiku Electricity Market Model to “project electricity retail rates for a range of potential scenarios that account for variability in future fuel prices, capital and technology costs, and uptake of specific provisions of the legislation. The analysis found that if the legislation is passed:
• Retail costs of electricity are expected to decline 5.2-6.7 percent over the next decade, saving
electricity consumers $209-278 billion, given expected natural gas prices.
• The average household will experience approximately $170-$220 in annual savings from smaller electricity bills and reductions in the costs of goods and services over the next decade.
• Ratepayers are insulated from volatility in natural gas prices, with electricity rates projected to
decrease even under a high natural gas price scenario.
• 2030 electricity sector emissions are projected to drop to 69.8 percent to 74.9 percent below 2005 levels, compared to 48.5 percent below 2005 levels without the policy.
The RFF Haiku model analyzes regional electricity markets and interregional electricity trade in the continental United States. It is all the rage for consulting companies to develop an in-house model suitable for projecting future electric system resources. RFF claims that:
“The model accounts for capacity planning, investment, and retirement over a multi-year horizon in a perfect foresight framework, and for system operation over seasons of the year and times of day. Market structure is represented by cost-of-service (average cost) pricing and market-based (marginal cost) pricing in various regions. The model includes detailed representation of state-level policies including state and regional environmental markets for renewable energy and carbon emissions and frequently has been used to advise state and regional planning.”
I have had to deal with these electric production and costs models for over 40 years. I cannot over emphasize that even the most sophisticated of these models have difficulties dealing with the generation capacity needed for peak loads and the intricacies of the transmission grid. The Haiku Electricity Market Model documentation shows that the model is so simplified that I don’t think it can get reasonable projections correct. For example, the model simulates the contiguous United States with 21 regions and calculates the transmission between those regions in order to estimate capacity requirements. New York alone has eleven control areas and the transmission constraints for those areas and adjoining regions are needed to accurately estimate generating resource needs. All the little constraints that are averaged out in the RFF model mask a major portion of the capacity requirements and energy needs that under-estimate costs. This is a particular problem as more and more wind and solar energy resources are added to systems. The RFF model and others like it have consistently under-estimated the emission reductions from fuel switching from coal and oil to natural gas electricity production and I think they are under estimating the difficulty replacing natural gas generation with wind and solar. Moreover, somebody, somewhere has to account for the intermittent nature and lack of ancillary services from wind and solar. I don’t think a simple model can capture those costs.
On the other hand, if adding renewable resources in certain jurisdictions has led to lower costs then my reservations are wrong. According to a recent US News and World Report article Texas produces produce the most total renewable energy (millions of megawatt-hours), according to the U.S. Energy Information Administration. That article notes that: “In the first quarter of 2022, Texas led all states in overall renewable energy production, accounting for over 14% of the country’s totals, due in large part to the state’s prolific wind energy program”.
The United States Energy Information Administration (EIA) Electricity Data Browser enables a user to access electricity generation and consumption data as well as electricity sales information. The data can be filtered as needed. I filtered the data to look only at Texas data. I downloaded the monthly total net generation (GWh) and the net generation from just renewable resources so I could calculate the percentage of renewable generation energy. Then I downloaded the average monthly residential average price of electricity. The following graph shows the results. The residential cost of electricity has been increasing steadily since 2001. The percentage of renewable energy has increased from almost nothing in 2001 to recent months over 30%. I am not seeing that the deployment of renewable resources produced a reduction in costs.
In conclusion, the Texas data do not show that renewable energy deployment reduces costs. The RFF projections that the IRA will reduce costs due to renewable development are very unlikely because the overly simplified model cannot reproduce the features of the electric system that lead to higher prices from intermittent wind and solar resources.
Roger Caiazza blogs on New York energy and environmental issues at Pragmatic Environmentalist of New York. More details on the Climate Leadership & Community Protection Act are available here. This represents his opinion and not the opinion of any of his previous employers or any other company with which he has been associated.