By Isaac Orr for Real Clear Energy
In August 2022, President Biden signed a $370 billion spending package known as the “Inflation Reduction Act” that does little to reduce inflation, but it does a lot to subsidize solar power generation. Unfortunately, these subsidies lead to market distortions that drive up electricity costs for Mississippi households and businesses.
The biggest problem with subsidies is that they induce rational actors to do irrational things.
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In this case, the Inflation Reduction Act provides a 30 percent investment tax credit (ITC) for solar that encourages Magnolia State electric companies to build facilities that don’t make sense from a business perspective.
To understand why subsidizing solar energy is irrational, it helps to understand some basic facts about how this technology works.
A solar power facility is called a solar energy “farm” because utility-scale electricity generation requires a large amount of land, referred to by its maximum capacity – for example 100 megawatts. It’s called their “nameplate” ability. But the reality is that power plants rarely operate anywhere near their capacity, and solar plants are worse in that regard.
United States Energy Information Administration (EIA) figures show that solar farms in Mississippi will have produced only about 22 percent of their capacity in 2021. That means a 100 MW plant is operating like a 22 MW plant on average, yet the customer is paying. 100 MW plant.
This productivity percentage is often called the “capacity factor”. The capacity factor for solar facilities in Mississippi is poor compared to other energy sources such as nuclear, which produced 96 percent of its potential output in 2021 (it averaged only 62 percent over the previous five years), with natural gas combined cycle plants generating 63 percent and coal plants 44 percent, as shown in the graph below. Natural gas plants.
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Even these data points may overstate the utility of solar energy because the panels can only generate electricity if the sun is shining, which is obviously beyond our ability as humans to control. On the other hand, the capacity factors of natural gas and coal plants can be improved by burning more fuel.
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This point is critical because the most important thing to know about the electric grid is that electricity is generated to meet demand when that demand occurs. Think about what happens when you turn on a light or an air conditioner – you either expect or “demand” that there be electricity.
If demand increases as Mississippi households turn on their air conditioners or heaters, the electric company must increase the supply of electricity on the grid to meet it. Generating more electricity on demand is relatively easy with natural gas power plants and impossible with solar power when the sun isn’t shining. That’s why natural gas or nuclear power plants must stay online no matter how many solar panels they build, to ensure the lights stay on when the sun goes down.
Understanding these physical realities is essential to understanding why the Biden administration’s subsidies for solar will ultimately increase electricity costs for Mississippi households and businesses.
Some economists have suggested that utility companies are not really private companies at all, but rather government-sanctioned monopolies with the exclusive right to sell electricity in their service territories. Consumers living in those areas are legally obligated to buy their energy from the monopoly.
Since electric companies have a monopoly, it is unfair to allow them to charge whatever they want, so electricity prices must be approved by the state Public Service Commission (PSC) regulator, using a formula that allows the electric company to charge adequately. When they build new infrastructure approved by the Public Service Commission, whether it’s a natural gas plant, a solar plant, or whatever, they cover the cost of providing electricity and a government-approved return, usually 9 to 10 percent in equity. New corporate offices. When they buy new furniture they get reimbursed – and profit from electricity consumers!
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This regulatory structure means that every dollar spent on new infrastructure raises electricity rates. This unfortunate reality is compounded by the fact that solar power, which is not available 24 hours a day, cannot replace natural gas plants, meaning that consumers pay for natural gas plants and solar plants, not at low cost. .
The subsidies enacted by the Biden administration make solar more affordable on paper (subsidies don’t change the cost of the product or service, no matter who pays for it) and it incentivizes power companies to build more solar facilities. Although it makes more sense for ratepayers to utilize natural gas facilities, to increase their bottom line for their shareholders.
In this instance, it is the Public Service Commissioner’s job to scrutinize proposed projects and protect ratepayers from rising prices that accompany the construction of new solar facilities.
Sadly, the fact that PSC commissioners have approved $1.4 billion in renewable energy projects through 2020 — which will necessarily raise prices — suggests that PSC commissioners have not put ratepayer interests first.
Although the subsidy package signed into law by President Biden is called the Inflation Reduction Act, it is more aptly named the Inflation Generation Act because the end result of solar subsidies is higher electricity prices for Mississippi households and businesses.
Syndicated with permission from RealClearWire.
Isaac Orr (@thefrackingguy) is a policy fellow specializing in energy and environmental policy at the American Experiment Center.
The views expressed by contributors and/or content partners are their own and do not necessarily reflect the views of political insiders.