The Federal Energy Regulatory Commission (FERC) is not a household name, but its impact on the daily lives of Americans is profound. FERC is an independent and bipartisan federal agency, and a well-functioning FERC is essential to a well-functioning energy industry in the United States. The agency is responsible for (among other things):

• reliability of the bulk power system (the “grid”),
• wholesale electricity markets across the country,
• hydroelectric facility licensing (mostly relicensing),
• certification of interstate natural gas pipelines, and
• siting and construction of liquefied natural gas (LNG) facilities.

FERC’s origin and responsibilities regarding hydropower go back to the 1920 Federal Water Power Act. Most of its present responsibilities come from two major congressional actions in the 1930s—the 1935 Federal Power Act and the 1938 Natural Gas Act (NGA). For more background, see the official “FERC 101” slide deck. Also, I should disclose that I spent about half of my career at FERC and have great respect for my friends and colleagues who work there.

An examination of the natural monopoly premises underlying FERC’s organic statutes is important but beyond the scope of this piece. Those of us who support free markets can debate whether the federal government should have so much authority, but FERC has had a significant level of authority since the 1930s and is not going anywhere soon.

In fact, recent legislative proposals would give FERC an additional responsibility—one that’s presently being abused by the Department of Energy (DOE)—to approve the international sale of natural gas. FERC is responsible for licensing LNG facilities, many of which are for domestic use only. However, under the NGA (as amended by the DOE Organization Act), the DOE is responsible for approving the sale itself—the import or export of the natural gas commodity—if it deems the transaction in the “public interest.”

As Cato’s Scott Lincicome has written, returning the DOE’s LNG authority to FERC is probably a step in the right direction (the NGA tasked the Federal Power Commission with approving international sales of natural gas; the DOE Organization Act created the DOE, renamed the Federal Power Commission to FERC, and gave the authority to the new DOE).

However, any conversation about giving FERC more authority (or encouraging it to push the envelope of its existing authority) should also address the elephant in the FERC room—the near-perennial concern that FERC won’t have enough votes to do its job.

The Quorum Issue, Past and Present

Writing and issuing orders is how FERC operates. By law, FERC needs a quorum of three voting commissioners out of a maximum of five to issue orders, which are typically drafted by FERC’s staff of about 1,500 people. These orders are negotiated and ultimately approved and voted out by the commissioners, who are nominated by the president and confirmed by the Senate. At the moment, the agency has two vacant commissioner roles and three active commissioners. Richard Glick (D) and James Danly (R), each a former chairman and commissioner, left at the end of their terms (in 2022 and 2023, respectively) and have not been replaced.

Commissioner Allison Clements (D), one of the three sitting FERC commissioners, has announced that she will not seek a second term. Her current term expires on June 30, 2024, but she can stay at FERC until she is replaced or until the end of the congressional session. As Politico reported, Clements’ departure would mean a loss of quorum and a standstill for FERC and the two remaining members, Chairman Willie Phillips (D) and Commissioner Mark Christie (R).

Political transitions are particularly vulnerable moments for FERC. The last time FERC was without a quorum was in 2017, when Republican President Donald Trump designated a new chairman among the three sitting commissioners (all Democrats), and the demoted commissioner promptly departed. The new chairman at the time, Cheryl LaFleur, and Commissioner Collette Honorable were left without a quorum, and FERC attempted to issue as many orders as possible by delegating additional authorities to staff. Ultimately, the period without a quorum lasted six months.

If the White House and Senate do not fill at least one of the vacant seats this year, FERC will again lose a quorum in early 2025. It is unclear who would be at fault, and the lack of clear responsibility could be part of the problem. It takes two to tango—the White House and the Senate. However, in this dance, many FERC insiders would say the Senate takes the lead, in part because the Senate Committee on Energy and Natural Resources (ENR) holds the hearings and markups for incoming commissioners.

Further, as a practical matter, the ENR leaders of each party frequently provide the names of top-tier candidates for the president to officially nominate. Last year, Senator Joe Manchin (D‑WV and ENR chairman) recommended former FERC staffer and present ENR staffer David Rosner for the vacant Democratic seat. As of the time of this writing, Senator John Barrasso (ENR ranking member) has not recommended anyone for the vacant Republican seat. (Side note: Senator Barrasso’s wife recently passed away after a long battle with a devastating form of brain cancer, and my heart goes out to the family.)

Given the Senate’s leadership role in approving new FERC commissioners, it can also be a choke point. Senator John Kennedy (R‑LA) recently pledged to block all nominations by President Biden—presumably including FERC nominees—until Biden lifts his “pause” on LNG exports. Senator Kennedy said: “Until Mr. Biden drops this battle against American energy, I’m going to block every nominee he tries to place at the State and Energy departments.” Ironically, if Congress returns the LNG authority to FERC this year, only a Biden nominee would rescue FERC from another lost quorum and enable it to approve LNG exports next year.

Solutions to the Quorum Quandary

It should be a no-brainer that the White House and Congress would give FERC every tool it needs to carry out its important work. However, there is no silver bullet solution to the quorum issue. Ideally, when an existing commissioner comes to the end of their tenure, the White House and Senate would move to ensure that the coming vacancy would be filled quickly by a qualified regulator. This should happen on a regular schedule—the five FERC commissioners would each complete their staggered five-year terms (or several of them), and the president and the Senate would work together to make certain FERC always has a full complement of five commissioners.

Sometimes it takes a nudge to get things moving. Consider this piece my polite nudge to Senate and White House leaders: please fill the two current vacancies (and the coming vacancy) because we need a functioning FERC.

Given the hyperpartisan mess we find ourselves in here in the nation’s capital, there are a couple of ways to move forward. First, the tried-and-true method of pairing a Democratic nominee with a Republican seems to work well in getting both approved. Democrats have put a name forward—Republicans should do the same, the president should formally nominate them, and the Senate hearing and markup should follow in short order.

Second, how about something that’s the opposite of tried-and-true? For an independent agency, there has been a dearth of actual independents or third-party nominees. Given the third vacancy created by Commissioner Clements’ coming departure, now is an opportune time to break that trend and nominate an independent thinker who does not identify as Democratic or Republican (in addition to the typical Democratic and Republican nominees). Both parties might scoff at this suggestion, but it is worth wondering why.

Of course, my preference is to have a nonpartisan and free-market thinker at the helm of FERC, and it seems neither political party fully embraces free-market thinking anymore. If the policy debates at FERC continue to be between typical Democrats and typical Republicans along partisan lines, the odds of FERC regulations embracing an open-ended approach to the energy industry will continue to fall.

Conclusion

FERC finds itself once more with an uncertain future. Likewise, much of the US energy industry—surely the large portion directly regulated by FERC—is subject to the same uncertainty. The prospect of another lost quorum at FERC should be enough to get the Senate and White House moving on FERC nominees. The American people need a reliable power grid and abundant natural gas. Let’s hope partisan politicians don’t hamstring FERC again.

On February 3, Elon Musk posted a simple message on X: “The only action needed to solve climate change is a carbon tax.” Five days later, that message has over 22 million views. And perhaps for good reason—it’s accompanied by a compelling video titled “Elon Musk’s Unbelievably Simple Killer Break Down on Climate Change,” and the pro-carbon-tax message is easy to grasp.

Musk makes taxing carbon dioxide (CO₂) sound straightforward. However, the drawback of his message is that it’s oversimplified because it ignores prominent sticking points in the policy debate over the carbon tax. Specifically, Musk fails to propose the level of the CO₂ tax—or even discuss how to derive it—and glosses over the scope and burden of potential CO₂ taxes.

To be clear, I respect Elon Musk—he’s a world-changing entrepreneur and steadfast advocate for free speech. Although I oppose the subsidies and mandates for electric vehicles in the United States, I appreciate the renewed competition Musk has brought to the US auto industry with Tesla. He’s also widely considered to be an engineering genius and a (somewhat) libertarian public figure. Depending on the day, he’s also the richest person in the world (or second or third).

For all these reasons, it’s worth digging in when Musk claims to have found a simple solution to one of the most vexing public policy problems in human history: climate change.

What Exactly Did Musk Say?

Musk’s tweet on February 3 is new, but his support for a carbon tax is not. In fact, the audio used in the eight-minute video accompanying Musk’s tweet comes from a speech he gave at the Panthéon-Sorbonne University in Paris in December 2015. That speech coincided with the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, or COP 21, which gave us the Paris Agreement.

You can watch video from the longer version of that presentation, including a Q&A session, or read the full transcript.

It seems Musk’s recent message was resurrected in response to the ongoing farmer protests in Europe. In a reply to his own tweet, Musk wrote: “We should not, for example, impose draconian laws on farmers or make citizens uncomfortable by limiting air-conditioner usage!” On the point of not limiting my air conditioning use in the summer, Musk and I completely agree.

The takeaway from the message is simple: ask your legislators to tax CO₂ emissions. Much of the short video and the longer presentation reflect standard economic theory suggesting that the government should tax negative externalities to internalize the costs of economic activities that impose a cost on others. Economists tend to refer to these taxes as “Pigouvian,” named after economist Arthur Cecil Pigou, who pioneered externality theory in his 1920 work The Economics of Welfare.

So, what fault could anyone possibly find in this approach, particularly when thousands of American economists support the idea? As with most simple solutions in politics, it’s complicated.

Glaring Omission: What’s the Level of the Tax?

Musk did not specify the external cost per ton of CO₂ emissions. Instead, he said: “We need to go from having untaxed negative externality, which is effectively a hidden carbon subsidy of enormous size, $5.3 trillion a year according to the IMF every year. We need to move away from this and have a carbon tax.” He is no doubt referring to a July 2015 working paper from the International Monetary Fund (IMF) that claims that the lack of a CO₂ tax is itself a subsidy. I agree there is likely an external cost associated with CO₂ emissions, but what is it?

First, the IMF paper doesn’t say what Musk claims. It reads, in relevant part: “While externality cost accounts for the bulk of the post-tax energy subsidies, at more than 80 percent in both 2013 and 2015, a detailed examination reveals that about three-fourths of these subsidies are related to local environmental damages and only about a quarter are due to global warming effect of CO₂ emissions.” (emphasis added)

In other words, a carbon tax would only address a quarter of the global “hidden carbon subsidy,” according to the IMF paper. Further, in the United States, we already have a robust (and arguably too strict) regulatory regime addressing the cited local environmental damages from criteria air pollutants like sulfur dioxide, nitrogen oxides, and particulate matter, meaning we have addressed those externalities.

Second, if we want to internalize the climate externality, what should be the level of a CO₂ tax? Mainstream economics tells us that the optimal carbon tax would be set at the social cost of CO₂ (SCC). The IMF relied on a 2013 US Interagency Working Group study on the SCC that used a 3 percent discount rate and multiple integrated assessment models (IAMs) to come up with a central estimate of about $43 per ton for the SCC.

If the $43 per ton SCC estimate were a stable or well-supported figure, Musk might have an economic case for establishing a carbon tax at that level. But here’s where the idea of a CO₂ tax gets dicey—the level of the SCC is, at best, an educated guess, and it depends more on the parameters chosen by the modeler than the magnitude of future costs and benefits. For example, consider the chart below showing the range of SCC estimates using the same IAM (the FUND model) under a range of discount rates.

Recall that discount rates are used in cost–benefit analyses to give the appropriate weight to costs and benefits that occur in the future. The higher the discount rate, the less weight the model gives to future impacts. There is a political dimension to this technical question—for example, advocates of a low discount rate previously argued that the discount rate should match lower interest rates but have been silent as interest rates have risen in recent months. It is a hallmark of such arbitrary modeling that anyone choosing any discount rate could be accused of cherry-picking and ignoring relevant data.

Note the wide range in the SCC estimates for 2050, when the United Nations wants the globe to reach net-zero CO₂ emissions. Using a 2.5 percent discount rate, the 2050 SCC will be about $43 per ton, which is right at the 2013 working group estimate and very close to the 2016 working group estimate of $42 per ton. But when we look at the 2050 SCC using a 7 percent discount rate, it implies the economically efficient carbon tax would be just $0.63 per ton of CO₂. An amount so low would scarcely warrant a new federal regime designed to collect it, and it certainly would not drive the global economy to net-zero CO₂ emissions.

The optimal level of the CO₂ tax should be a central component of Musk’s proposal, yet he declines to offer his own SCC estimate. Perhaps that is the safest territory, given that the US federal government’s estimates of the global SCC have ranged from $43 per ton (under President Barack Obama, 3 percent discount rate) to $6–9 per ton (under President Donald Trump, 7 percent discount rate) to $53–63 per ton (Trump, 3 percent discount rate) to $190 per ton (under President Biden, 2 percent discount rate). If the global SCC—the climate externality—could just as easily be zero as $50 per ton or $200 per ton, what is the economic imperative to internalize it?

One final point about the level of the carbon tax. In the Q&A portion of the 2015 speech in Paris, Musk said: “Any price you put on it will be more right than close to zero, which it is right now.” In his defense, maybe he meant any politically feasible carbon price, which would likely be very low (according to the most recent data, just 38 percent of Americans say they are willing to pay a monthly carbon fee of $1). But taking Musk literally, it is easy to imagine a CO₂ tax that is less right than zero. Take, for example, a carbon tax of $500 per ton. Even if we think the SCC is $190 per ton, zero is closer to that than $500 per ton.

The Scope and Burden of a Carbon Tax

It’s unclear whether Musk would be willing to establish a global governance system to create and enforce a global CO₂ tax. He only said, “Whenever you have the opportunity, talk to the politicians. Ask them to enact a carbon tax.” But there are no global politicians, thankfully, and many of the people and politicians of other nations are focused on economic growth, even if it means increased emissions.

In the United States, we have a bevy of local, state, and federal policies that address the climate externality, and that regulatory cocktail cannot be unmixed. With so many existing regulations, mandates, and subsidies—and a few subnational CO₂ cap and trade policies—does it make sense to layer a CO₂ tax on top of everything else?

The choice of a national or global scope also impacts SCC estimates. The Government Accountability Office explained under the Trump administration: “Current national estimates are based on domestic damages and are about 7 times lower than prior estimates based on global damages.”

Regarding the burden of a carbon tax (meaning who pays it), Musk said, “Maybe it takes five years before the carbon taxes are very high so that means that only companies that don’t take action today will suffer in five years.” This statement implies that companies will be the ones suffering under a regime of very high CO₂ taxes. It ignores the fact that energy costs are baked into the manufacturing, transportation, and operating costs of everything a consumer buys. Consumers who don’t radically change their lifestyles will also suffer.

For example, a CO₂ tax of $190 per ton translates to an increase of $1.71 per gallon of gasoline. That means today’s average price of about $3.15 per gallon would rise to $4.86 per gallon if the Biden administration implemented a carbon tax at its most recent estimate of the SCC. Musk claims the increased costs could be offset by reductions in other types of taxes, but it’s difficult to imagine a CO₂ tax scheme that would not be regressive, damaging to the overall economy, and harmful to consumers. Put differently, if fossil fuel companies were the main ones hurt by a CO₂ tax, someone will have to explain to me why so many of them advocate for it.

Finally, there is wide political discretion in estimating the emissions embodied in different consumer goods, as we have learned in recent debates over a CO₂-based tariff on imported goods. This is yet another practical problem with implementing a carbon tax—among many others, including the fundamental problem of using a price instrument to reach an emissions quantity goal (net zero)—that goes unaddressed in Musk’s video.

Conclusion

Recently, some researchers have acknowledged that a carbon tax is not a straightforward or comprehensive solution. For my part, I wish more experts were candid about the complexities involved in climate policy, particularly in estimating the magnitude of the externality caused by carbon dioxide. Unfortunately, without attempting to solve the methodological problems, Elon Musk has left millions of followers with the impression that taxing CO₂ is “the only action needed to solve climate change.”

Last Friday’s Department of Energy (DOE) move to temporarily pause pending requests to export liquefied natural gas (LNG) outside the United States has elicited not only a firestorm of criticism (including from us), but also proposals in Congress to reverse the DOE action. Just two days ago, for example, House Energy and Commerce Committee Chair Cathy McMorris Rodgers announced that the House would soon vote on a measure to overturn the LNG pause, while a group of Republican senators introduced legislation to eliminate DOE’s power to block natural exports altogether.

At stake is a burgeoning industry with domestic and international significance, both economically and geopolitically. The recent growth in LNG exports from the United States should not be taken for granted—the fact that the United States went from importing LNG just fifteen years ago to the world’s largest exporter is an amazing feat and a testament to the powerful growth enabled by (mostly) unhindered production and free trade.

As I explained in a new column for The Dispatch and in a 2013 Cato briefing paper on US energy export restrictions, systemic reform—not simply a narrow reversal of this week’s DOE pause—is needed here. That’s because current law (the Natural Gas Act of 1938 and its amendments) provides DOE—and thus any president who might just be in the middle of a close reelection campaign—with essentially unlimited discretion to block natural gas exports destined for countries without a free trade agreement (FTA) with the United States on undefined “public interest” grounds. 

Given that many US LNG export shipments are “destination flexible,” and that most of the world’s biggest and most geopolitically-important LNG consumers—including in Europe and Asia—don’t have a US FTA, getting a DOE-approved export license is essential for US LNG projects. That fact, in turn, makes the approval process an almost-irresistible point of attack for anti-fossil fuel activists and any politician wanting to win their support. Reforming that process to take DOE—and thus politics—out of the equation (and thus put far more knowledgeable private investors in charge of these important, billion-dollar projects) is a smart and obvious move.

There is, moreover, precedent for just this kind of reform. Back in 2013, for example, I advocated for eliminating the outright ban on US exports of crude oil—something Congress finally did via a 2016 law that allowed the president to block US oil exports only in times of a declared national emergency. (Who says Congress doesn’t work fast?!) After decades of exporting virtually no crude oil, the United States has become a global oil export powerhouse, improving both domestic and global energy security. 

(Web source.)

At the same time, liberalization did not put significant upward pressure on domestic gasoline prices: As the US Government Accountability Office explained in a 2020 report, “[b]ecause gasoline prices are largely determined on the global market, U.S. refiners could not pass on to consumers the additional costs associated with the increase in crude oil prices.” Even though last Friday’s action affects only pending LNG export applications and thus leaves current approved capacity unaffected, all US natural gas producers and exporters deserve this same freedom, to the benefit of not only these market players but also global energy markets, the US economy, and US foreign policy.

Congress seems poised to act. For example, Senator Tim Scott’s (R‑S.C.) Unlocking Domestic LNG Potential Act of 2024 removes the “public interest” determination from the DOE’s purview and hands it—in a stricter form—to the Federal Energy Regulatory Commission (FERC). This would be a positive move in at least two respects.

First, Congress should not let the DOE play politics the way it did last week—it should take back the authority the DOE so clearly abused. Second, returning the authority to FERC is consistent with past practice (recall that the original authority in the Natural Gas Act of 1938 went to the Federal Power Commission, renamed to FERC in 1977), would give LNG exporters a one-stop-shop for environmental and public interest review, and would mitigate against future political abuse.

Although FERC is not perfect, it has been a bulwark against Executive Branch politics, as it demonstrated in rejecting a 2018 DOE proposal to bail out coal and nuclear power plants. An additional reform that would make the transport and trade of natural gas the default policy would be to allow some Natural Gas Act filings to go into effect by operation of law, as with Federal Power Act filings, rather than languish at a deadlocked or understaffed FERC.

Of course, it’s not just the Natural Gas Act that needs reform. As I noted this week (and repeatedly in the past), US trade law is littered with measures that let the Executive Branch—and thus politics— decide the fate of private commercial transactions that just-so-happen to cross national borders. The Trump-era Department of Justice, in fact, went so far as to claim in court that one of those laws— Section 232 of the Trade Enforcement Act of 1962—would let the president ban imported peanut butter on subjective “national security” grounds. And US courts have been loath to question such declarations, even when the president himself admits that the laws’ conditions haven’t been met.

Other potential declarations of national emergency have crept into the energy space, including proposals to use Section 202(c) of the Federal Power Act (another DOE function) to prop up coal-fired power plants. At one point in President Trump’s efforts to boost the domestic coal industry, invoking the Defense Production Act was on the table.

Because the risk of politicization is ever-present, these laws need reform too. But, as the LNG pause demonstrates (and given the stakes involved), the Natural Gas Act is a great place to start.

Travis Fisher, Cato’s Director of Energy and Environmental Policy Studies, contributed to this article.

Offshore wind is one of the most expensive ways to generate electricity. It’s also a perennial favorite when politicians mandate a preferred electricity source. Time and again, East Coast policymakers bet their own political capital and their constituents’ dollars on offshore wind as the future of energy. That is a losing bet.

The fundamental problem with offshore wind mandates is that they do not align with the preferences of energy consumers, which is why the government must subsidize offshore wind for it to exist. But the broad political justification is also curiously absent. Recent polling suggests that just 38 percent of Americans are willing to increase their energy costs by $1 per month to address climate change. The cost of offshore wind exceeds that many times over, meaning offshore wind mandates are out of step with the will of the American people.

Offshore wind faces opposition from local groups because it threatens viewsheds and wildlife, but offshore wind mandates are bad public policy because they simply cost too much and would not be economically viable without taxpayer support. No one has proposed to build an offshore wind project in the United States without lavish subsidies, and the cost to everyday ratepayers is higher than most are willing to pay.

The list of states that have either signed contracts or laid out ambitious goals for offshore wind includes Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Maryland, Virginia, North Carolina, and Louisiana. Offshore wind decrees can come from the legislature, like Maryland’s recent plan to install 8,500 megawatts (MW) of offshore wind capacity by the year 2031. They can also come from executive orders, like New Jersey’s goal to install 11,000 MW of offshore wind by 2040.

The federal government has goals of its own. In 2021, the Biden administration established a goal to deploy 30,000 MW of offshore wind in the United States by 2030. The fact sheet explains how various federal agencies can facilitate the 30 by 30 goal, including offshore permitting from the Department of Interior and loan guarantees from the Department of Energy.

Political Targets Meet Reality

In contrast to the ease and simplicity of issuing aspirational offshore wind plans, policymakers are now confronting the reality that offshore wind faces many obstacles. The second half of 2023 brought story after story of canceled or renegotiated contracts for offshore wind. BP and Equinor canceled their contract with the state of New York; Ørsted canceled two large projects in New Jersey; and developers in Massachusetts canceled four projects totaling 2,400 MW of offshore wind.

Electricity is already expensive in many Mid-Atlantic and Northeastern states. According to the most recent data from the US Energy Information Administration (EIA), New York ranked 9^th most expensive in the United States with a retail rate of about 23 cents per kilowatt-hour (kWh). Maryland ranked 15^th most expensive at 17 cents per kWh. Connecticut and Massachusetts ranked 3^rd and 4^th most expensive at 29 and 28 cents per kWh, respectively, coming in behind only Hawaii and California.

With such high electricity prices, one might expect political leaders to attempt to reduce the burden of the energy costs their constituents pay. Instead, policymakers in these states have insisted on mandating offshore wind, which will invariably increase electricity rates and impose a higher federal spending and tax burden on the country. There are several ways of looking at the cost of electricity from specific resources, such as wind off the East Coast of the United States. Unfortunately, offshore wind is expensive by every measure.

Contract Prices in Power Purchase Agreements (PPAs) and Levelized Revenue of Energy (LROE)

PPA prices are a generous way to examine the cost of offshore wind. They are the price paid by the offtakers of the energy from offshore wind projects—PPAs do not explicitly show the full cost paid by retail electricity consumers and taxpayers. These contract prices are usually expressed in wholesale units of dollars per megawatt-hour ($/​MWh).

As one example, the Vineyard Wind project off the coast of Massachusetts has a levelized PPA price of about $98/​MWh (escalating from a lower base price to a higher final price at the end of a twenty-year contract). As the National Renewable Energy Laboratory explained in 2019:

This LROE estimate for the first commercial-scale offshore wind project in the United States appears to be within the range of LROE estimated for offshore wind projects recently tendered in Northern Europe with a start of commercial operation by the early 2020s. This suggests that the expected cost and risk premium for the initial set of US offshore wind projects might be less pronounced than anticipated by many industry observers and analysts.

Other operational projects, like the South Fork project in New York, don’t advertise the PPA price but have stated that “the power from South Fork Wind … will cost the average ratepayer between $1.39 and $1.54 per month when it starts operating.” (Recall that fewer than 40 percent of Americans are willing to spend $1 monthly to address climate change.)

In short, PPA prices tend to put the cost of offshore wind projects in the best light.

However, even PPA prices for offshore wind resources do not compare well to clearing prices in wholesale markets. Note the difference between the $98/​MWh PPA for Vineyard Wind and the day-ahead wholesale market prices in New England, which are less than half the PPA price at around $44/​MWh.

Source: https://​www​.iso​-ne​.com/​i​s​o​e​x​p​ress/

The Levelized Cost of Energy (LCOE)

LCOE is a common measure of the cost of electricity from a given class of resources. LCOE boils down construction and operating costs into a single cost estimate (in dollars), divided by the energy output of the plant over its lifetime (in watt-hours). Hence the familiar unit of dollars per megawatt-hour. LCOE is a straightforward way to get a sense of the levelized (or averaged-out) cost of a standalone power plant.

According to recent LCOE estimates from EIA, the unsubsidized cost of offshore wind exceeds $120/​MWh and is among the most expensive generation resources. The consulting firm Lazard also publishes LCOE estimates that have become common reference points. In the latest Lazard research, the LCOE for offshore wind ranged between $72/​MWh and $140/​MWh.

Going by LCOE alone, offshore wind compares favorably to the highest-cost natural gas generators ($115–221/MWh) but not to the lowest-cost renewables ($24–75/MWh for onshore wind and $24–96/MWh for utility-scale solar photovoltaics [PV]). Quietly outshining these new resources is existing nuclear energy, which has a levelized going-forward cost (including decommissioning) of $31/​MWh, according to Lazard.

Source: https://​www​.lazard​.com/​r​e​s​e​a​r​c​h​-​i​n​s​i​g​h​t​s​/​2​0​2​3​-​l​e​v​e​l​i​z​e​d​-​c​o​s​t​-​o​f​-​e​n​e​r​g​y​plus/

The Full Cost of Electricity (FCOE) and Levelized Full System Cost of Electricity (LFSCOE)

Recently, scholars have expanded the LCOE model to include spillover costs that are borne by other generators on the system. To remedy the analytical shortcomings of LCOE, the FCOE approach zooms out and considers the all-in cost of the entire electricity system. This is the appropriate measure to use when judging society-wide costs because the full system costs are ultimately borne by retail ratepayers (and by taxpayers when subsidies are involved, as they are today).

The most important element of FCOE that is missing from LCOE is the cost to the rest of the system of intermittent output. Intermittent or “non-dispatchable” generation always requires backup and balancing help from controllable or “dispatchable” resources to satisfy total electricity demand; however, the cost of making other resources fluctuate their output to accommodate intermittent generation—by backing down in times of high intermittent production and ramping up in times of low intermittent production—is not captured in LCOE estimates.

A group of authors who favor using the FCOE of solar PV and onshore wind said, “LCOE is inadequate to compare intermittent forms of energy generation with dispatchable ones and when making decisions at a country or society level.” A quick look at the very high-solar grid in California (the California Independent System Operator or CAISO) illustrates this issue. The term “net load” describes the amount of demand (load) that remains to be met by dispatchable generation, net of production from intermittent sources.

Image source: https://​www​.eia​.gov/​t​o​d​a​y​i​n​e​n​e​r​g​y​/​d​e​t​a​i​l​.​p​h​p​?​i​d​=​56880

Intermittent wind and solar resources present different operational challenges. Although the solar PV output in California is predictable, it still requires a costly effort from dispatchable generators. Specifically, mostly natural gas-fired generators must ramp down their output during the day and ramp up quickly in the evening to reliably meet grid demand. Wind output is more random than solar output—even for offshore wind facilities—but the costs imposed on the fleet of dispatchable generators are similar.

Another scholar recently described the Levelized Full System Costs of Electricity (LFSCOE) as follows:

The LFSCOE are defined as the costs of providing electricity by a given generation technology, assuming that a particular market has to be supplied solely by this source of electricity plus storage. Methodologically, the LFSCOE for intermittent or baseload technologies are the opposite extreme of the LCOE. While the latter implicitly assume that a respective source has no obligation to balance the market and meet the demand (and thus demand patterns and intermittency can be ignored), LFSCOE assume that this source has maximal balancing and supply obligations.

Under the LFSCOE assumptions, the cost of onshore wind in Texas is approximately seven times higher than its LCOE (an LFSCOE of $291/​MWh compared to an LCOE of $40/​MWh). The details of applying an LFSCOE to offshore wind would only be slightly different from applying it to onshore wind. Specifically, offshore wind has a slightly higher capacity factor than onshore wind (about 43 percent versus 34 percent in 2018, according to the International Renewable Energy Agency’s 2019 “Future of Wind” report). However, offshore wind is still an intermittent resource, meaning its LFSCOE is higher than its LCOE.

State Policy, Federal Costs

The cost of state-level mandates for offshore wind does not stay within state borders. Through federal subsidies like the Production Tax Credit (PTC) included in the Inflation Reduction Act, taxpayers across the country are poised to pay for offshore wind. And it will not be cheap—the PTC offers a lucrative tax credit of $27.50/MWh. Returning to the day-ahead wholesale prices in New England of $44/​MWh, the federal subsidy alone represents a hefty 62 percent increase in revenue for wind producers.

As previously covered in this space, the final cost of the PTC by the time it phases down—which could take decades—could reach into the multiple trillions of dollars. Offshore wind’s share of that total would be a modest portion of that (but nothing to sneeze at). If the Biden administration achieves its goal of 30,000 MW of offshore wind and those facilities operate for 30 years at a capacity factor of 43 percent, the total federal taxpayer bill for offshore wind would be over $93 billion. (Note: Although each new facility is supposed to claim the PTC for only 10 years, in practice, owners of many facilities “repower” them: they make enough material changes to the facility to continue to qualify for the PTC for subsequent rounds of 10-year eligibility.)

Conclusion

Ambitions for offshore wind are easy breezy—mandating offshore wind development seems like smooth sailing. The harsh reality of offshore wind mandates is that they are incredibly costly. Ratepayers and taxpayers will feel the sting of these decisions for years, potentially decades. Policymakers need to understand the full costs of their actions and come back to the shore. The American people simply don’t want to pay more for energy—not in their electricity bills and not in their tax bills.

Recent articles in the New York Times and Wall Street Journal highlighted difficulties facing the offshore wind industry. Among them: Jones Act protectionism and a lack of specialized vessels to assemble offshore wind turbines. While the newspapers note that a new US-built vessel that complies with the 1920 law should help alleviate some of these issues, they also make clear that it suffers from problems that will offset some of the vessel’s anticipated benefits.

Wind turbine installation vessels (WTIVs) play a critical role in the construction of offshore wind farms. Featuring a giant crane, these vessels typically transport turbine components such as the tower, blades, and nacelles from a port to the installation site and set them into place.

At least, that’s how it’s typically done in the rest of the world.

The Jones Act, however, means that only US-built and US-registered vessels can transport goods by water in the United States. No existing WTIVs comply with these restrictions, barring them from transporting wind turbine components to installation sites from nearby US ports.

Instead, these vessels must use a workaround. One method is operating out of a foreign port, such as in Canada. Another is for the vessel to position itself at the installation site and have the needed components transported to it by Jones Act-compliant “feeder barges.”

Both bring with them significant disadvantages. Canadian ports can be hundreds of miles away from wind turbine installation sites, lengthening project timelines and adding costs. Feeder vessels, meanwhile, add complexity and risk to projects. The New York Times provides an example of the downsides of this latter approach:

In early November, the first barge to leave New London loaded with turbine parts had to return still carrying three blades because of a mechanical problem transferring them to a ship. It was not until two weeks later that the barge was able to make another eight-hour round trip and a successful transfer.

In other words, the Jones Act forces these vessels to be inefficiently used. While frustrating under any circumstance, it’s particularly so given that WTIVs are relatively rare—fewer than three dozen are operating outside of China—and highly sought after. Chartering these vessels can cost up to $350,000 per day.

In 2020, Dominion Energy announced its decision to order a WTIV from a Texas shipyard to eliminate the need for Jones Act workarounds. Named the Charybdis, it is projected to operate at least twice as fast as installation vessels relying on feeder barges. Such efficiency gains, however, will be at least partially offset by the new vessel’s substantial price tag. Originally set to cost $500 million, that amount has since increased to $625 million.

That’s approximately $300 million more than similar vessels built overseas.

Indeed, in 2021 a vessel very similar to the Charybdis—the same model, in fact (GustoMSC NG-16000X)—was ordered from a South Korean shipyard for $330 million. Beyond its lower price, the South Korean-built vessel also features a more powerful crane—arguably the vessel’s most important feature—capable of lifting 2,600 metric tons compared to 2,200 metric tons for the Charybdis.

But rising costs aren’t the Charybdis’ only problem. Delays in the vessel’s construction have seen its projected delivery pushed back from late 2023 to late 2024 or early 2025.

That’s not a surprise. The shipyard building the Charybdis signed a contract to deliver two containerships in 2020, but the first ship wasn’t delivered until 2022 and the second in 2023. A hopper dredge scheduled for completion this past spring hasn’t yet been delivered either.

The Charybdis’ delayed delivery means additional headaches for US offshore wind projects. Danish energy firm Ørsted had agreed to charter the vessel for use on its Revolution Wind project off the coast of Long Island but has had to scramble for alternatives. The vessel it lined up as a replacement is both foreign-built and foreign-flagged, necessitating the continued use of Jones Act workarounds.

Even after the Charybdis is delivered, however, inefficiencies stemming from the Jones Act will continue for the foreseeable future. The Department of Energy has estimated that between four and six WTIVs are needed to meet US offshore wind energy needs. But the Charybdis is the only one under construction that will meet the Jones Act’s requirements.

One firm considered building such a second Jones Act-compliant WTIV but then backed out last year over concerns (apparently very well-placed!) that the shipyard—the same one building the Charybdis—couldn’t deliver the vessel on time. The company concluded that building such vessels for the Jones Act market wasn’t profitable.

The Jones Act has increased the cost and complexity of developing offshore wind while failing to spur the construction of WTIVs beyond a single costly and delayed vessel. For offshore wind developers, this has to be the worst of both worlds. But so long as Congress refuses to confront the maritime lobby, Jones Act-induced hindrances will remain a feature of offshore wind farm construction.

In a new paper, economists Ryan Kellogg and Richard L. Sweeney examine what might happen if oil and petroleum products could be transported from the Gulf Coast to the East Coast without Jones Act shipping restrictions. Their answer: many more barrels of these energy supplies would be moved between the two coasts, resulting in efficiency gains and lowered prices. The economists estimate that East Coast consumers would experience benefits to the tune of $896 million per year while overall consumer surplus would rise by $769 million annually.

And these estimates, Kellogg and Sweeney add, are conservative.

As I noted last week, the Jones Act’s requirement that only US-built and US-flagged vessels transport goods within the United States introduces significant distortions in the domestic energy market. Such shipping is so costly that it is often more attractive to purchase oil from distant countries—where the Jones Act does not apply—than elsewhere in the United States.

Instead of transporting Gulf Coast crude to East Coast refineries, it’s often sent as far as China and South Korea on less expensive internationally flagged ships. The East Coast, in turn, mostly meets its crude needs from countries such as Nigeria and Saudi Arabia.

The same dynamic also applies to refined products such as motor gasoline. Instead of purchasing domestic supplies, the East Coast imports fuel from Europe and elsewhere while the Gulf Coast exports much of its output to Latin America.

Such inefficiencies mean higher costs. To estimate these costs, Kellogg and Sweeney examined oil and petroleum product price differences between the Gulf Coast and East Coast during 2018 and 2019. They then calculated likely domestic shipping prices in the Jones Act’s absence. Where the price difference exceeded the new shipping price without the Jones Act, they assumed the energy supplies would then be moved from the Gulf Coast to the East Coast.

The estimated result: fuel shipments would have grown from 253 million barrels per year to 371 million barrels—a nearly 47 percent increase. Such an increase would have been of sufficient magnitude to almost entirely replace East Coast imports of jet fuel and ultra-low sulfur diesel and completely replace imports of motor gasoline in the East Coast’s Lower Atlantic region. Significant amounts of light crude oil imports would have been displaced as well.

The efficiency gains by sourcing domestically instead of distant countries would translate into lower fuel prices ranging from 36 to 82 cents per barrel—depending on what is being moved—and consumer savings in the hundreds of millions of dollars.

Significantly, the authors note that their study likely underestimates the long-run effects of no longer applying the Jones Act to the movement of oil and petroleum products. They point out, for example, that investments in mid-Atlantic refineries could become more attractive as the facilities gain access to more competitively priced supplies of oil. It’s also worth highlighting that the study does not examine the Jones Act’s impact on the East Coast’s consumption of certain fuels such as reformulated motor gasoline, liquefied natural gas, and propane.

Furthermore, the study does not cover other parts of the United States whose energy costs are inflated by the Jones Act, such as the West Coast, Puerto Rico, Hawaii, and Alaska. Once these are accounted for there is strong reason to believe the Jones Act imposes costs to consumers that surpass $1 billion annually for energy supplies alone.

A new ProPublica article takes the Army Corps of Engineers to task for major failures coming at the expense of taxpayers and the environment. The article ploughs some of the same ground I did in this 2012 study.

The Army Corps is a government-owned engineering company that employs 24,000 people. It builds and operates river navigation infrastructure, constructs flood control systems, dredges seaports, manages recreation sites, and operates hydroelectric plants. In my view, most of these activities should be transferred to state governments and the private sector.

ProPublica summarizes problems in nine Army Corps projects. Here are some highlights:

• Engineering Failures. “In 2005, design flaws allowed a storm surge from Hurricane Katrina to breach the walls of the $738 million levee system that the Corps had built over the preceding four decades … The American Society of Civil Engineers called the levee failures ‘the worst engineering catastrophe in US History.’” I document the government’s Katrina failures here.
• Economic Losses. The Olmsted Locks and Dam project in Illinois was supposed to cost $700 million and create $920 million in benefits annually but ended up costing $3 billion and creating only $236 million in annual benefits. Another failure is the $2 billion and 234-mile Tennessee-Tombigbee (Alabama) Waterway. The Corps promised it would create 208,000 jobs, but it only created 29,000.
• Costly Fixes. Taxpayers are paying billions of dollars to fix environmental damage caused by the Corps to the Florida Everglades, to Oregon’s salmon runs, and to other natural systems. One project dredged the Mississippi near New Orleans causing a saltwater intrusion and requiring the city to build a new freshwater supply pipe costing at least $100 million.
• Useless Projects. After Hurricane Sandy, the Corps spent $63 million constructing sand dune defenses in Margate, New Jersey, that residents apparently did not want. The dunes have caused drainage problems, as predicated, and litigation has ensued.

Investigations at Down​siz​ing​Gov​ern​ment​.org have found that many federal agencies screw up over and over for decades but are not reformed. The politicians, who are supposed to fix government failures, talk big but never get the job done before they leave office and become lobbyists or retire on gold-plated pensions.

The Corps is a case in point. It has attracted scathing criticism about its wasteful projects for more than a century, as I discuss here. ProPublica quotes a 1971 New York Times editorial: “The American people are becoming increasingly fed up with the expensive, boondoggling, make‐​work, environmentally destructive projects that to a large degree characterize the civilian activities of the Army’s Corps of Engineers.”

The Army Corps has been wasteful a long time. That said, I’m still optimistic about reform of the Corps and other failing federal agencies. Exploding federal debt, technological changes, and other dynamics will force change. Technology, for example, is obsoleting the massive government-owned US Postal Service.

How should Congress reform the Corps? I concluded that many of the Corp’s activities—such as flood control and recreation area management—should be turned over to state governments. Other activities— such as seaport dredging and hydropower generation—should be turned over to the private sector. Remaining activities should be moved to the Department of the Interior and the Corps closed down.