Minnesota and South Dakota have very different energy policies, especially in regard to wind power. One has instituted a mandate for renewable energy sources, while the other leaves things to market forces. The two approaches say a lot about their respective states and illustrate some important concepts in economics.
The policy-making freedom states have is the greatest strength of our federal system. States can act on their citizens’ own perceived needs and on their judgments about how best to address those needs. That creates natural experiments in which different states try different polices to accomplish similar goals. Voters and policy analysts elsewhere can look at the different outcomes and gain some insights as to the strengths and weaknesses of different approaches.
Minnesotans, through their political process, have decided that dependence on fossil fuel energy sources is bad. In a series of steps, we instituted a requirement that 25 percent of the state’s electricity come from renewable sources by 2025. Xcel Energy, which provides about half the electricity used in the state, has a stiffer requirement: 30 percent by 2020. In contrast, South Dakota has a nonbinding goal of 10 percent by 2015.
The Minnesota standards grew out of a political compromise in the mid-1990s when Xcel agreed to increase production from renewable sources in return for permission to store more nuclear waste on-site at its Prairie Island plant.
At the time, this was seen primarily as a response to nuclear safety concerns and only secondarily about emissions from coal-burning plants. However, as concern about greenhouse gas emissions has grown, at least for part of the population, the mandate has shouldered a broader purpose.
Moreover, in an ironic twist, a command-and-control policy that economists viewed as inefficient decades ago and that was associated with big-government liberals was championed by Republicans like then-Gov. Tim Pawlenty because the more economically effective alternative includes the word “tax.”
The upshot of all of this is that in Minnesota, people who own land in windy areas find it economically viable to construct wind projects or to sell their wind rights to third parties. Landowners in South Dakota cannot.
Our family has a 5 percent share in a 10-megawatt project under construction near Chandler in southwest Minnesota. Xcel Energy has contracted to buy our power for nearly 7 cents per kilowatt hour. A reader queried me because he owns land in a breezy area of South Dakota 120 miles to the west of our project and is interested in a similar project.
Following up some leads I gave him, he found that his land, while not as favorable as ours, would be viable in terms of available wind energy. But without any hard mandate to buy wind power, utilities in his state will pay only 3.5 cents per kilowatt hour, just above what it would cost them to generate with coal. At current construction costs, that makes a wind project in his area unviable.
Who is right: Minnesota with its mandate, or South Dakota with voluntary guidelines that allow market forces to drive wind development?
All other things being equal, economists generally think policies most related to markets are best for society. But this is not true when there are external costs like pollution. In that case, leaving things entirely to free markets can leave society worse off. So the key question is what fossil-fuel generated power really costs society.
Get some scientists, engineers and economists together and they can make ball-park estimates of the costs of emissions of mercury, nitrous oxides, sulfur dioxide, particulates, etc. Estimating the cost of dependence on imported energy, to the extent that is relevant for electricity in the Midwest, is harder.
Greenhouse gas emissions are the knotty problem. There is more scientific consensus than opponents are willing to acknowledge, but any estimate of costs 50 or 100 or 200 years into the future is always fraught with uncertainty. And the whole question of whether climate change is a valid concern has become highly politicized.
Regardless of the exact damages from pollution, the total cost to society of coal-generated electricity is higher than what customers pay. And wind energy has higher direct production costs than coal. Which has the higher total cost for society?
If wind energy has higher total costs to society, then South Dakota’s toothless goals are a better policy than Minnesota’s rigid mandates, even if not the best possible policy in the opinion of economists.
The higher direct generating costs for wind have to be paid, somehow. In Minnesota, Xcel can pass purchase costs along to consumers. Our state’s households and businesses will pay more than those in South Dakota. The mandate functions as a tax, albeit a hidden one.
However, the damages caused by pollution from burning coal also cost society. Policies that allow ongoing pollution also function as a hidden tax on society, one that transfers money from electricity customers to those harmed by pollution.
South Dakotans may be entirely rational. With a small population spread over a large area, they have some of the cleanest air in the nation and few bodies of water that might be harmed by acid or mercury in rain. Most importantly, prevailing wind patterns are such that their state is a net exporter of pollution. In view of their own self-interest, there is little point to paying more for electricity so residents of other states to the south and east can have cleaner air and water.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.