John Locke Update / Research Brief

Cronyism Making Renewables ‘Competitive’ but Won’t Help Pay Your Light Bill

posted on in Economic Growth & Development, Economics & Environment, Energy & Environment, Law & Regulation, Rights & Regulation
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The News & Observer recently ran an op-ed from Froma Harrop arguing that renewable energy has become competitive with traditional energy resources.

It’s a bold claim. For several decades now, renewable energy advocates have promised politicians, activists, media, and consumers that their industry is “almost there” in terms of being competitive. These promises go back to at least the 1970s.

But it was just back in September Forbes published an article entitled “Renewable Energy Tax Credits — Forever?” Massachusetts Institute of Technology research recently asked and answered: “Will we ever stop using fossil fuels? Not without a carbon tax.” Engineers at Google and Cambridge found that renewables are simply “incapable of replacing hydrocarbons at scale.” The list of ways governments prop up renewable energy resources is extensive.

So the strength of Harrop’s claim hinges on what she means by “competitive.” Normally in this context “competitive” means able to compete for customers successfully in the free market. It’s what most people would assume she means.

But what if it isn’t?

What is competition?

Let’s establish terms. What is competition? It is “the core concept around which all modern economics is built,” as George Mason University economist Jack High wrote for the Concise Encyclopedia of Economics. It is based on a market economy that respects private property rights of consumers and providers:

The competitive process that has wrought these enormous changes is governed by rules that, taken collectively, we call the market economy or the system of private property. This system recognizes the right of each person to use his property as he sees fit, and to keep the fruits of his labor. This leaves the worker free to pursue the occupations for which he thinks himself best suited. It leaves the entrepreneur free to explore new forms of production.

There is still a kind of competition in systems in which market competition isn’t allowed, as High points out, such as in socialist economies. This competition is not to woo consumers, but to capture government planners. To be “competitive” in that sense is to be able to compete for government favoritism successfully.

One word for such a perverse system of competition is cronyism. Under cronyism, as Investopedia explained it:

Instead of success being determined by a free market and the rule of law, the success of a business is dependent upon the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.

Alongside incentives, of course, sometimes government favoritism includes hitting their competitors with penalties and disincentives or even forbidding public discussions.

Cronyism is directly opposed to market competition. After all, you don’t have government forcing people to do what they’d do anyway. That’s why there’s no law saying you have to put on your pants before your shoes.

What kind of “competitive” is renewable energy?

Is renewable energy competitive in a market economy, or is it competitive in cronyism? The answer can be inferred from Harrop’s article. Let’s examine her points.

She begins with the unusual case of Wyoming taxing wind power (a disincentive; i.e., cronyism that favors coal and other resources) and asks why not let market forces decide. Good question. That’s when she answers: “Renewable energy has become competitive, and the fossil fuel producers know it.”

So she bases her case on market competition. Her points:

Bids from solar and wind producers undercut coal in Denver. This argues for market competition (provided you ignore the list linked in the third paragraph above of government favoritism).

President Donald Trump (with a broad hint he opposes renewable energy) “currently wants to slash the Energy Department’s $2 billion energy efficiency and renewables programs by 72 percent.” This is no argument for market competition. If anything, it suggests renewables are not market competitive without government programs, which hints at cronyism.

China is “showering tax credit on foreign solar companies that move there.” Cronyism.

China’s policies are causing solar panel prices to fall, which simultaneously hurts domestic manufacturers while making the domestic industry more price-competitive. This is a mix.

Trump wants to put a tariff on foreign solar panels. Cronyism for traditional resources and for domestic solar panel manufacturers (who favor the tariff).

The top states for renewable energy are interested in it for “jobs and dollars.” Cronyism.

“The cards are on the table,” Harrop writes. If they are, what’s the game?

The European Parliament is pushing for a target of 35 percent renewable energy by 2030. [Cronyism, obviously.] In Norway, a major oil exporter, over half the cars sold are now electric or hybrid. [Cronyism: the government has outlawed sales of conventional cars and vans by 2025.]

California lawmakers are trying to mandate that 100 percent of the state’s electricity come from renewable sources by 2045. [Cronyism, and based in bad science.] Hawaii enacted a similar law in 2015. (It has already saved the state a reported quarter-billion dollars.) [Cronyism, and fatuous.] Tesla will be soon selling solar panels and the batteries to store the energy they produce … [Cronyism, in the multiple billions of dollars.]

Harrop’s case makes it plain: renewable energy sources are “competitive” in cronyism. They are winning favorable government policies to boost their industry and penalize — even flat-out ban or outlaw — their competitors.

That’s not what consumers would consider “competitive.” That’s certainly not what Harrop’s question about letting market forces decide seemed to suggest.

It’s a sure way to hike the total cost of providing electricity, especially when you factor in the costs that don’t show up in rate statements but also in government expenditures, opportunity costs of choices prevented, net effects of generation sources prematurely shuttered and less efficient sources artificially boosted, standby generation issues, grid issues, etc. Those are the sorts of unseen costs short-term and long that factor into decisions made in market competition, but not in cronyism.

Utilities trying to best serve their customers are left with, in the words of a recent energy industry white paper, is a dilemma over “how to harmonize markets and public policy.” It’s a dilemma because only market competition achieves reliability at the least cost to consumers.

Ensuring customers have reliable, least-cost electricity is the Number 1 issue in electricity policy here. It will remain No. 1 for as long as consumers are given no choice over who they purchase electricity from, for what price, and from what generation sources.

Market competition is the best way forward. Yes, it boosts the most efficient technology of the moment. But it also pushes the lesser competitors to improve, which cronyism can’t. Most importantly, it benefits consumers.

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As Director of Regulatory Studies at the John Locke Foundation, Jon gets into the weeds in all kinds of policy areas, including electricity, occupational licensing, hydraulic… ...

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