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Fact Check: Koch-Funded Group Misleads Michigan Voters on Clean Energy

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On November 6, Michigan voters will decide on Proposal 3, a renewable electricity standard (RES) that requires utilities to increase their use of clean, renewable energy sources like wind and solar to 25 percent by 2025. The initiative is affordable and will deliver important economic and environmental benefits. But a flawed and biased study released last week by the Koch-funded Mackinac Center for Public Policy and Beacon Hill Institute threatens to undermine Proposal 3 and stall Michigan’s progress toward a clean energy future.

Missing the mark on the policy details

A fundamental rule of sound energy policy analysis is to model the proposal as accurately as possible. The Mackinac Center analysis fails to do this in two major ways, which not surprisingly leads to a biased conclusion heavily skewed toward higher costs right from the start.

Stoney Corners Wind Project - Heritage Wind

Stoney Corners Wind Project
Source: Heritage Wind

Cost Cap? What Cost Cap? First, the report authors deliberately exclude a central provision in Proposal 3: the ratepayer cost cap. Even though current market trends indicate investments in renewable energy will actually reduce rates over time,  Proposal 3 includes a cost cap to protect Michigan ratepayers from higher than expected costs associated with achieving the 25 percent RES.

That cost cap clearly states compliance “…shall not cause rates charged by electricity providers to increase by more than 1 percent in any year.” Rather than factor this critical detail into their analysis, the Mackinac Center ignores it and instead argues that utilities will use other means to collect their renewable energy compliance costs from ratepayers. Really? Detroit Edison and Consumers Energy are leading the opposition to Prop 3 and have already pumped nearly $6 million into blocking it. Call me skeptical that they will want to spend a nickel more than required in order to comply with the 25 percent standard.

Move the Starting Line. To evaluate the net cost of Prop 3, the Mackinac Center disingenuously compares its implementation against a business as usual projection that includes no RES at all. Yet, a 2008 Michigan law already requires utilities to achieve a 10 percent by 2015 RES, and as described below, they’re well on their way to achieving it. Prop 3 builds on that law, and would allow all the renewable energy developed to meet the 10 percent RES to be counted toward the higher targets. Therefore, an honest evaluation of the cost associated with Prop 3 would compare it with a business as usual projection that includes the existing 10 percent by 2015 RES. To move the starting line back to before the passage of the existing RES significantly and artificially inflates cost projections because the study assumes utilities will be required to develop 40 percent more renewable energy than Prop 3 actually requires.

Oblivious to reality

For an institution headquartered in Michigan, the Mackinac Center’s analysis relies very little on actual readily available state-specific utility data. Michigan’s utilities are currently heavily dependent on old, polluting, and inefficient coal power plants for their electricity, and spent more than $10 billion from 2002-2010 on coal imports to run them.

The cost of supplying coal to these facilities jumped 81 percent for Detroit Edison and 119 percent for Consumers Energy during that same period. This is in large part why this year alone Detroit Edison raised its residential electricity rates by 13.5 percent, while Consumers Energy raised its residential rates first by 3.3 percent and then again by 11 percent, according to the Michigan Public Service Commission (PSC). And that’s only the beginning. Detroit Edison and Consumers Energy anticipate spending as much as $3.3 billion over the next 4 years just to keep these aging and dirty coal plants running. These costs will ultimately get passed onto ratepayers.

Solar PV Facility, Lansing Michigan

Solar PV Facility, Lansing Michigan
Source: Dave Anderson

Meanwhile, renewable energy is being rapidly deployed in Michigan to meet the state’s existing 10 percent RES at costs below initial projections, according to a recent PSC study. With more than 1,000 megawatts of renewable energy capacity installed so far, the average cost of wind contracts from 2009 to 2011 has been about $94 per megawatt-hour (MWh) and trending downward.  In fact, the levelized costs of the two most recently signed wind contracts in Michigan were $61-$64/MWh.

But the Mackinac Center takes no notice of these actual in-state trends. Instead, their assumptions for the levelized cost of wind projects in 2010 inexplicably range from $149-$289. It’s no wonder they mistakenly conclude Prop 3 will hurt consumers.

Garbage in, garbage out: Starting with bad data ends with bad results

Throughout the analysis, the report authors make questionable assumptions about the cost and performance of renewable energy technologies, often citing out of date, controversial, or unsubstantiated material to support their assertions. For example, the paper references a flawed and soundly refuted study by the natural gas firm Bentek Energy to support the erroneous claim that renewable energy provides few emission reduction benefits.

In addition, a 2003 analysis of U.S. wind facilities and other similarly outdated information are cited to support Mackinac’s contention that the Energy Information Administration’s assumption for wind capacity factor of 34 percent is overly optimistic. Consequently, they chose to apply a capacity factor range that drops as low as 15 percent, which significantly increases cost estimates for wind power.

Yet the Department of Energy’s definitive annual Wind Technologies Market Report released this August confirms that the actual capacity factor in 2011 averaged 33 percent for all U.S. wind facilities and 30 percent for those located in the Great Lakes. The authors of that report also project capacity factors to be much higher in the near future (2012-2013) due to taller towers (80-100 meters) and advances in low wind speed turbines. The DOE analysis also projects continued declines in wind capital costs that will lead to near-term reductions in total levelized costs on the order of 5 – 40 percent.

In addition to plugging bad data into their analysis, the Mackinac Center study cherry picks only the negative impacts on the economy from overly inflated higher electricity prices (inappropriately modeled as a sales tax). What they don’t consider is the positive job and economic development from displacing imported fossil fuels and increasing local spending on construction, manufacturing, operations and maintenance. They also don’t consider the benefits to rural communities from new tax revenues and land lease payments for wind projects. And they don’t account for the price suppression benefits that wind power has on regional power systems, as confirmed by a recent Synapse Energy Economics study commissioned by the Midwest Independent System Operator.

Michigan voters need quality and accurate information in order to make a sound decision about the merits of Proposal 3. Without question, the Mackinac Center’s analysis fails to provide it. Fortunately, there is reliable research available that offers a more balanced assessment of the impact that the 25 percent RES has on Michigan consumers and the state economy. To learn more about the consumer benefits, check out my colleague Rachel Cleetus’ recent blog post.

Posted in: Energy Tags: , , , , , , , , , , ,

About the author: Jeff Deyette is a senior energy analyst with expertise on the economic and environmental implications of renewable energy and energy efficiency policies at the state and federal level. He holds a master’s degree in energy resource and environmental management & international relations. See Jeff's full bio.

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  • https://twitter.com/MonteBlachford Monte Blachford

    Common Sense tells you IF you CAP Energy costs on the 25%, you will drive UP the Energy costs of the other 75% NECESSARILY.

  • Wolfgang Uhl

    It is my understanding that coal-fired power plants spew out a total of 50 tons of Mercury per year in the US. In addition, each kwh of electricity produced from coal adds over 2 pounds of CO2 to our already over saturated atmosphere.
    If we are able to produce electricity with wind and solar power for comparable costs, why would any sane person consider coal?
    Speaking for myself only: I would gladly pay a premium for wind generated electricity in order to stop CO2 and Mercury pollution.

  • Brandon

    I’m going to let the economists fight about the numbers, but Jarrett is arguing a losing case when he says:

    “if the electricity sources he prefers become cost-effective, then no mandate is necessary to encourage their use. Mandating the generation of more expensive electricity costs the state economy, period.”

    This is an absurd view of the electricity market today. There is no free market. The market is the creation of institutions and values that have evolved over the years to lock out lower-cost and renewable fuel sources.

    Michigan imports most of its fuel from Wyoming in the form of coal. Why should Michigan send its energy dollars out of state?

    And, given that the cost of generating electricity from new coal plants exceeds that of renewable sources, we need the 25/25 mandate to correct today’s market failures.

    • Jarrett Skorup

      Yes, please let an economist who knows how to read an economic impact study respond.

      Again: Not a single one of the criticisms in the UCS piece is accurate.

      • Jarrett Skorup

        “Michigan imports most of its fuel from Wyoming in the form of coal. Why should Michigan send its energy dollars out of state?”

        Perhaps an economist could explain the value of free trade and specialization to you while you’re at it.

      • Brandon

        Thanks Jarrett. But I find your rhetoric to add nothing to the subject at hand.

        Again, why should Michigan consumers send their dollars out of state? Why would Michigan consumers benefit from building new coal-fired power plants that generate energy at a higher cost than new renewable sources? How does your economic impact study account for the damage to human health and the climate from coal- and fossil-fuel energy sources?

      • Frank Pulawski

        Jarett – I understand the environmental-side study was done by experts with more than 20 years each in the utility field. What are your qualifications in this area?

  • Jarrett Skorup

    Not a single one of these criticisms is accurate.

    http://www.michigancapitolconfidential.com/17638

    Deyette states that the Mackinac Center “cherry picks only the negative impacts on the economy,” and does not include the benefits of increased investment. The STAMP model used in our analysis, however, explicitly considers the increased investments this mandate will cause as well as the decreased investment caused by the increase in electrical costs. In fact, our study is the only study on the 25 percent mandate that includes both the costs and the benefits. Ironically, Deyette points to a study that considers only benefits but no costs of the mandate (and even uses the misleading “job-years” as its primary metric).

    Deyette asserts that we do not consider the marginal costs of the 25 percent mandate above the current 10 percent mandate. He forgets Graphic 2, which does so.

    Deyette makes the judgment that the study used “very little state-specific data,” though he does not state whether that makes any assertion in the study inaccurate. The study used state-specific information on electrical prices, usage, projections, mostly available from the U.S. Energy Information Administration.

    Deyette wrongly alleges that the study “ignores” the cost cap included as part of the proposal. The cap is fully addressed in the study and does not have an impact on the economic consequences of the mandate.In short, the study shows that the cost cap only addresses the cost of “compliance” with the mandate. This requires further bureaucratic interpretation to be an effective cap on consumer rates. The calculated cost of compliance can shift the economic costs of mandate into other “recoverable charges” passed along to consumers. In addition, the costs of subsidized power would not be included in the mandate, though this has economic consequences. Finally, utility firms may decide to pay an increase in the cost of the mandate out of their accumulated reserves, which would also have economic impacts. These points are spelled out in the study but ignored by Deyette’s criticism

    He also asserts that the study uses overly conservative estimations for wind energy capacity. But his preferred figure is within the range used in the study.

    He offers no further criticism, though he comments about the trend toward lower costs in renewable energy. This tactic indicates the issue: if the electricity sources he prefers become cost-effective, then no mandate is necessary to encourage their use. Mandating the generation of more expensive electricity costs the state economy, period.

    • http://www.ucsusa.org/news/experts/jeff-deyette.html Jeff Deyette

      Jarrett, thanks for your comments. I stand by the accuracy of my critique. Consider:

      - “Deyette asserts that we do not consider the marginal costs of the 25 percent mandate above the current 10 percent mandate. He forgets Graphic 2, which does so.”

      Graphic 2 simply shows the cost results of a 25% RE in 2025, as compared with no RES at all, and your cost results for the 10% RES in 2025, as compared with no RES at all. It does not report the marginal impact of the 25% proposal above the current 10% RES as you suggest. Presumably, you would have readers simply subtract 25% results from the 10% results in order to arrive at a marginal impact. Yet, that would be an inaccurate representation of the marginal impact. For example, achieving the current 10% standard will lead to technology learning and other economies of scale that would help further lower renewable energy, transmission and integration costs compared with what you are assuming in your no-RES case. A more accurate analysis of Prop 3 would compare it with a reference case that includes the 10% RES, which is, in fact, business as usual policy for Michigan. Instead, the text of your report explicitly and inappropriately suggests (both in the executive summary and again in the results section) that the costs of achieving Prop 3 are based on a comparison with having no RES at all.

      - “Deyette makes the judgment that the study used “very little state-specific data,” though he does not state whether that makes any assertion in the study inaccurate.”

      I believe my blog made this point, but I will try to be more clear. Your analysis assumes levelized energy costs for wind that range from $149/MWh to $288/MWh in 2010 (Graphic 6). These costs are 1.5 to 3 times higher than the average cost of wind contracts in Michigan from 2009 to 2011 ($94/MWh) and as much as 4.5 times higher than the state’s most recent signed wind contracts ($61-$64/MWh), according to the Michigan Public Service Commission. You apply those costs to wind development from 2010 through 2018 of the forecast period and represent a significant overestimate of compliance cost during this time. The use of indefensibly high wind cost assumptions extends through 2025 in both the average and high cost cases.

      Furthermore, neither the no-RES case, nor the 10% or 25% policy cases account for the significant increases in electricity rates that have been levied this year (11% to 13.5% for residential customers) due to substantial increases in conventional power costs, according to PSC documents. Your analysis also does not account for the $3.3 billion in new expenses that Detroit Edison and Consumers Energy will spend over the next 4 years to keep their old and polluting coal plants running. By relying on older EIA electricity price data and failing to account for these higher coal and electricity costs, the analysis inaccurately minimizes the value of the avoided costs of conventional power due to the renewable energy development under Prop 3. It also skews upward the results presented for the percent increase in electricity rates caused by Prop 3.

      - “Deyette wrongly alleges that the study “ignores” the cost cap included as part of the proposal.”

      Here is a direct quote taken from page 1 of the report: “In our calculations, we set aside electricity rate cost caps in the RES…”. That is pretty clearly stated. The report does seem to assert that the PSC will not enforce the cost cap or that the utilities will use other funds to pay for renewable energy. Making the case that the PSC won’t do its job in regulating the utilities strikes me as an odd assumption to make in a policy analysis, but especially so in light of the fact that the PSC is currently enforcing the cost cap under the existing RES without problem. I also find it highly unlikely that utilities will opt to use shareholder profits for example to deploy renewable energy that wouldn’t be required if the cost cap were properly administered, especially given that Detroit Edison and Consumers Energy are using millions of shareholders dollars to oppose Prop 3.

      - “He also asserts that the study uses overly conservative estimations for wind energy capacity. But his preferred figure is within the range used in the study.”

      There is simply no defensible explanation for using a capacity factor of 15.5% in the analysis, even for the low end of a range. Actual data from wind development in the region simply does not support assuming anything below 26% as a low end for older wind projects and 30% or 31% for more recent existing projects. For a high end capacity factor, recent advances in wind technology suggest that closer to 40% would be reasonable for future projects. Indeed, the latest wind project application from Detroit Edison projects a capacity factor of 47%.

      Furthermore, it is misleading for you to apply the low end capacity factor assumption to the “low cost” case in the analysis, as suggested in Graphic 6 of the report. Doing so disingenuously inflates the results of your “low cost” because more more megawatts of wind would be required to meet the generation targets. A defensible “low cost” case would combine optimistic cost and performance assumptions: low levelized energy costs and higher capacity factors.

      No matter how you spin it, your analysis uses questionable assumptions and methodology to deliver an outcome biased toward greater costs and negative impacts on Michigan consumers and the state economy from the passage of Prop 3.

    • https://twitter.com/UCSMidwest David Anderson

      Appreciate your thoughts Jarret.

      Regarding your claim that Jeff Deyette “offers no further criticism” beyond the points you respond to, please note his fact check correctly points out that the Mackinac Center has received funding from the fossil fuel industry’s billionaire Koch brothers, raising important questions about the credibility of their claim to be an independent source of information on clean energy policy.

      Specifically, the most recent data available from a review of tax records shows the Mackinac Center received tens of thousands of dollars from the Charles G. Koch Foundation between 2002 and 2009. We do not know how much Koch money the Mackinac Center has received since then, due to a lack of transparency.

      In their initial response to Mr. Deyette’s post, the Mackinac Center fails to address this concern. In fact, they make no mention of it, falsely claiming our analysis “offers no other substantive criticism…”

      When @UCSMidwest pointed out this rather glaring omission on Twitter, the Mackinac Center posted a second response. They again fail to answer the question of Koch funding, instead attempting to define the whole issue as a “logical fallacy,” or an attempt to steer the conversation away from the substantive issues at hand.

      To the contrary, it is critical for Michigan voters to know that the Mackinac Center has received funding from fossil fuel industry opponents of renewable energy policy. Anti-Proposal 3 ads paid for by the utility-funded CARE for Michigan cite the Mackinac Center. Voters armed with the facts about where the Mackinac Center gets its money can then judge for themselves the merits of the claims made by these ads.

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