This verdict, that a continued or enlarged federal effort is needed to subsidize energy technologies on both the demand and supply side, is undermined by the major findings of the present analysis. The problem has not been market failure but government failure (and analytic failure). The economic and environmental shortcomings of renewable energies point to a stark historical fact: a multibillion dollar public-sector malinvestment has taken place. The fuel of choice in electric generation has turned out to be the fuel that the DOE did not feature in its R&D portfolio -- natural gas. Of the $60 billion (1996 dollars) spent by the Department of Energy from FY 1978 through FY 1996, only 1 percent ($787 million) has been spent on natural gas, while 99 percent has been spent on conservation ($13.3 billion), civilian nuclear ($20.1 billion), coal ($13.3 billion), solar ($5.1 billion), geothermal ($1.8 billion), wind ($900 million), other renewables ($2.8 billion), oil ($1.4 billion) and hydro ($193 million).²⁹⁷

The lesson from the past is a warning for the future. One caution about a governmental R&D silver bullet has come from Paul Gipe:

Whenever renewables seem stymied, environmentalists, regulators and politicians respond that more R&D is needed. This cry arises from an outmoded belief that technological and social innovations spring from the womb of large centralized organizations. This model of innovation no longer produces results either in government or commerce. The call for more R&D diverts attention from what is needed most, structural change in the market.²⁹⁸

Ending Renewable Energy Subsidies The policy implication of the present analysis is: stop throwing good money after bad. All renewable energy subsidies from all levels of government should cease. Once again, the lesson has been learned the hard way that government invariably picks losers, the market picks winners and "infant industries" requiring government favor have trouble growing up. The history of subsidized renewable output also provides another case study of the unintended consequences of even well-intentioned government intervention in the marketplace. The unnecessary demise of members of endangered species populations and controversial unnecessary development in environmentally sensitive areas are unintended consequences of the eco-energy planners' energy agenda that they must openly and honestly confront.

The end of renewable and conservation subsidies translates into a number of specific public policy reforms. One is to end state-level integrated resource planning (IRP), a central planning exercise by utilities and regulators to determine "optimal" demand- and supply-side strategies. The end of IRP would entail repealing sections 111 and 115 of the Energy Policy Act of 1992.²⁹⁹ Iowa would repeal its 1983 Alternate Energy Production law. California would need to repeal Sections 701.1 and 701.3 of the California Public Utility Code to end the requirement for energy diversity and renewable set-asides.³⁰⁰

Another policy revision on the state level would be to cease conditioning utility mergers on environmental commitments that lower the wealth of either ratepayers or shareholders. In what Ralph Cavanagh of the Natural Resources Defense Council called a model for future merger proceedings, 13 special-interest groups required the acquiring company in a particular merger to purchase a minimum amount of wind and geothermal resources regardless of cost.³⁰¹ Ratepayers were also required to fund energy efficiency programs, among other things, all through a nonbypassable transmission charge ("wires charge").

On the federal level, the aggressive programs of the Department of Energy to subsidize renewables and conservation should be reconsidered. The planned FY 1996-2000 outlay for energy research and development of $8.75 billion, and conservation-related programs of $2.15 billion -- a total of $10.9 billion³⁰² -- should be terminated entirely. This will go a long way toward achieving fuel neutrality in the U.S. electric generation market for the first time in decades.

Restructuring as Reregulation. Electricity restructuring is gaining momentum at both the state and federal level. Many of the reforms being proposed and adopted still suffer from an unthinking reliance on the paradigm of eco-energy planning and thus threaten to negate much of the rate savings possible from increased industry competition.

Backtracking in California. The California Public Utilities Commission's about-face on the matter of eco-energy planning has been a disappointment to those welcoming the prospect of lower electricity rates. Despite initial hostility by the CPUC toward the range of expensive subsidies for renewable energy and energy conservation programs, heavy pressure from eco-energy planners and welfare-seeking corporations led it to ultimately endorse maintaining, if not enlarging, renewable subsidies.³⁰³ On the other hand, the California Energy Commission at least began to reconsider the need for quotas on renewables to achieve fuel diversity, given available market instruments to do the same.³⁰⁴

Twenty-nine months after the restructuring debate began, the California legislature settled the issue with a resounding victory for eco-energy planning. Fully $2 billion worth of ratepayer money is to be dedicated to propping up the eternally uneconomic renewable and mandatory conservation market. For the 1998-2001 period, the investor-owned utilities were instructed to commit $872 million for energy efficiency, $540 million for qualifying renewable generation (existing and new),³⁰⁵ and $350 million for research and development. Public power entities in the state would allocate approximately $400 million more in these areas.³⁰⁶ In addition, "green pricing" programs were sanctioned, and qualifying renewable portfolios of at least 50 percent were allowed "open access" to the electricity grid on the opening day of the program, January 1, 1998.

Allocating the $540 million of funds for renewable projects was a central planning exercise by the CEC despite instruction from the California legislature in AB 1890 to employ "market-based mechanisms." The choices were among seven or more qualifying fuels; among existing, new, and emerging technologies; and among the four years 1998-2001. The final allocation was 45 percent for existing technologies ($243 million), 30 percent for new technologies ($162 million), 10 percent for emerging technologies ($54 million) and 15 percent for customer-side accounts ($81 million). Within the existing technology account, 56 percent went to biomass and solar thermal ($135 million); 29 percent to wind ($70.2 million) and 15 percent to geothermal, small hydro (under 30 MW), digester gas, municipal solid waste and landfill gas ($37.8 million). The allocation of money for new and emerging technologies was by bid and request, respectively, and the consumer-side allocation was divided between customer credits for renewable purchases ($75.6 million) and money to provide customer information ($5.4 million).³⁰⁷

The $243 million allocation to existing technologies, 5 percent more than was required under the legislation, represented a bailout of existing renewable facilities threatened by the end of PURPA contracts and marginal-cost competition in a restructured industry. Solar was the big winner given its highly uncompetitive state as a central-station generator, while wind projects hit the jackpot since, the past having been forgotten, "the best way to reduce high operating and maintenance costs on older turbines is to largely or completely replace them with new equipment via retrofitting or repowering."³⁰⁸ Confirming the environmental problems of new wind siting, the CEC determined that "repowers are preferable to green field development from an environmental standpoint."³⁰⁹ Yet left standing was wind power's notorious killing field -- Altamont Pass.

Regarding intent versus result, a sleeper in the overall allocation is the $5.4 million subsidy for "a central, unbiased, and consumer-friendly source of information about renewable energy choices."³¹⁰ With the cleanest natural gas plants in the nation located in California, a consumer case can be made against renewables -- not only for renewables -- if "unbiased" information is provided.

The CPUC will oversee the energy efficiency expenditure, while the CEC will oversee the renewable and R&D programs. Since that money has been allocated but not necessarily spent, not all is lost from a critical viewpoint. It is incumbent upon the CPUC and CEC to scrutinize applications and deny funding for speculative proposals that have little chance to advance commercialization. Such prudence can leave hundreds of millions of dollars unspent to return to ratepayers. It is also prudent to terminate all subsidy programs at the end of calendar year 2001 as the legislation now reads.

Reflexively throwing another billion or two dollars at uneconomic technology and exhausted opportunity after two decades of failure will not achieve "fuel diversity," "job creation," "export commercialization," "clean air" and other goals any more than before. It will only exacerbate a public policy failure by having the renewables industry compete against an overbuilt, utility-dominated energy-efficiency industry in a state plagued by excess capacity, high rates and low marginal costs.³¹¹

Other States. Two states besides California have already moved ahead toward restructuring in ways that protect renewable energy and conservation programs from the competitive winds of the marketplace. Only one state with legislation (thus far) has resisted the temptation:

• Rhode Island, which on August 7, 1996, became the first state in the country to enact electric restructuring, required each distribution company to include a $0.0025 per kwh charge to fund DSM and renewable programs.

• Pennsylvania specified ratepayer subsidization of conservation programs but did not specify a renewables program.

• New Hampshire simply stated that customers should be allowed the opportunity to choose to pay a premium for renewable energy.

In Arizona, a restructuring order from the state public utility commission established a set-aside for solar of a half-percent by 1999 and 1 percent by 2002. Commission orders in Vermont, Maine, and Massachusetts are also tending toward renewable portfolio requirements.

In other states, mandated environmental spending is proving to be too much for some parties to agree to industry restructuring. In Texas, for example, the industrial-user Coalition for Competitive Electricity complained that a proposed $1.5 billion ratepayer commitment for renewables and energy efficiency was unaffordable.³¹²

The lobbying effort of eco-energy planners is intense in many, if not all, states contemplating a restructuring of their electric industries. A report signed by six New England governors issued in January 1997 calls for "greater commercialization of efficiency, renewables and other innovative technologies."³¹³ In Texas, the state Energy Conservation Office, a division of the General Services Commission, is conducting a statewide "Renewable Energy in Texas" campaign using funds collected from Exxon due to alleged oil overcharges in the 1973-81 price-regulated period.³¹⁴ If legislators do not trust their free-market instincts and remember back to previous failed attempts to commercialize alternative energies, bad decisions will result from what so far is a one-sided lobbying effort.

Federal Proposals. Industry restructuring at the federal level also provides challenges. The proposed Electric Consumers' Power to Choose Act of 1997 (H.R. 655), introduced by Representative Dan Schaefer (R-CO), would require that each state's power generators submit credits to the FERC for qualifying renewables (organic waste biomass, dedicated energy crops, landfill gas, geothermal, solar and wind) in the following percentages of total generation: 2 percent in 2004; 3 percent in 2005-2009 and 4 percent for 2010 forward.³¹⁵ States with less than these percentages would be required to purchase credits from generators in those states with extra qualifying renewables.

The renewable provision would not only force technology on markets whether or not it was economically or environmentally desirable, it would create unequal wealth effects favoring states with preexisting renewable infrastructure or more attractive renewable sites at the expense of other states with less renewable energy activity or prospects. California, in particular, would enjoy a windfall at the expense of the dozens of states with little qualifying renewable activity. The federal set-aside, unlike the California law itself, continues the quota for an indefinite period.

This provision contradicts the intention of the restructuring bill to lower electric rates for consumers. Coming on top of the generous federal tax credit (see below) and promises of "green pricing" (see below), the quota mandate reveals the economic plight of a two-decade old subsidized industry that the U.S. market is rejecting.

While a competing electric-restructuring bill by Representative Tom DeLay (R-TX), introduced on September 28, 1996 (H.R. 4297) and reintroduced on April 8, 1997 (H.R. 1230), does not specify a renewables or energy-conservation program, leaving such matters to the states, another bill introduced by Senator Dale Bumpers (D-AR) (S. 237) adopts the same renewable quotas as Schaefer's bill, with higher percentages to include hydroelectricity, but has a sunset date of 2019.

Behind the federal bills to restructure the electric industry has been an intense lobbying effort by eco-energy planners. Numerous national environmental groups, DOE, EPA and industry lobby groups such as the American Wind Energy Association, Solar Energy Industries Association and the Business Council for Sustainable Energy have been involved. On the other side has been scattered opposition by free market think tanks and industrial groups such as the Electricity Consumers Resource Council (ELCON). Even Republicans like Dan Schaefer, with major federal renewable projects in their states, are leading the charge for a new round of renewable energy subsidies. The free-market instincts of the other Republicans and the remembrance of past failed subsidy efforts will be required to turn aside a new round of eco-energy planning. It is not only an energy issue but a growing "corporate welfare" issue with some of the larger corporations in the United States now involved.

Green Pricing Policies. State and federal regulators and legislators should remove all subsidies to renewables to create the conditions for a truly voluntary green-pricing program. To the extent that authorities must approve such programs in the transition to open-access competition, they must ensure against hidden subsidies from the "nongreen" portfolio (such as providing the backup of firm power) to the "green" portfolio. In no case should federal authorities consider creating national labeling standards for "green" energy, which assumes that an objective environmental reality exists that must override the values that individual consumers place on the environment. Private sector standards, in contrast, would reflect consumer demand in the market.

"Customer Value" DSM. An analogue to green pricing for renewables is voluntary demand-side management programs by utilities and independent service providers. After hearings to reevaluate the long-standing Total Resource Cost (TRC) test, the California Energy Commission recommended a new "customer value" approach that "would not need ratepayer funding to succeed, need to pass regulatory tests or expose ratepayers to the cost of potential failure."³¹⁶ The absence of taxpayer and ratepayer obligations would replace political conservation with market conservation, where stand-alone decisions would be made by each energy user about energy-capital stock. This, in fact, is already under way as utility programs depending on rebates and other subsidized inducements are giving way to programs that are more self-supporting.³¹⁷

Two decades of artificially high prices, forced conservation and conservation subsidies have led me to predict that "deregulation will uncover excess capacity throughout the DSM infrastructure, as with the airlines, trucking, railroads and natural gas industries."³¹⁸ If so, this market verdict should be respected, not lambasted before the fact as "a tragedy of the commons of enormous proportions."³¹⁹

Mandated energy-efficiency standards for appliances, equipment, and buildings -- virtually everything that uses electricity -- should be rescinded as part of a market-based energy conservation policy. As it stands now, in the DOE's words, "the stringent efficiency standards for new appliances mandated by [the Energy Policy Act] could displace the current market for DSM programs."³²⁰

Fuel-Neutral, Free-Market Energy Policy. Changes in consumer demand and technology can make what is uneconomic today economic in the future. If central station power from wind, solar or other renewables become economic on their own merits, there will be no complaint from free market quarters. In fact, free market advocates will likely be defending these resources from zero-tolerance environmentalists who will condemn even air-emission-free energy for its other environmental costs.³²¹ For now, the harsh environmentalist opposition to hydroelectric power, the only meaningful alternative to fossil fuels from the renewable portfolio, should be reconsidered. A public-policy initiative to privatize waterways to allow market decision-making with existing and new hydro facilities is long overdue to replace the current political conflict over these public resources.

The chance that market verdicts may change with such resources as wind and solar in central-station electric generation cannot be a rationale for government to pick "winners" and "losers" before the market does. The evolutionary market process is theoretically and empirically the best way to allocate scarce resources amid uncertainty -- a conclusion buttressed not only by theory but by the history of market and government forces in energy markets.³²²

It is possible that the primary source of energy in 50 or 100 years will be renewable-based, as a study by Shell International predicts.³²³ But then again, present trends may continue to make wind and solar backstop fuels, as synthetic oil and synthetic gas are today, while fossil fuels, and even nuclear power, continue to be abundant and increasingly nonpolluting through technological change. Joseph Stanislaw, a principal of the Cambridge Energy Research Associates, includes in his scenario of the 21st century energy market,

• Resource availability. Oil, gas and coal are seen as virtually unlimited resources to be used in any combination.

• "Supply security" becomes "environmental security." For now, technology has made it possible to burn all fuels in an environmentally acceptable fashion.³²⁴

Government planners and the eco-energy planning intelligentsia cannot know if a transformation to preferred renewables will occur or what its specific parameters might be if it were to occur. The results of a complex, evolving market discovery process cannot be known ahead of time.

The failed coercive model of eco-energy planning should be replaced with a market energy model predicated on private property, competition, market pricing, profit/loss signals, technological improvement and growing real wealth and philanthropy. This paradigm shift should be welcomed by environmentalists who

• prefer voluntary negotiation to coercion (civil society to political society),

• recognize the unintended negative consequences of government intervention and the unintended positive consequences of market transactions, and

• understand the positive correlation between private economic wealth and improving technology on the one hand and ecological sensitivity and progress on the other.