Land of the Free

One of the more serious problems we have in our public debate today is the debasement of language. Words are supposed to have clear meanings, but to many people, they are just political tools. Take, for example, the word “free.” According to Greenpeace’s website:
Globally, the sun provides 10,000 times the energy humanity uses – energy free to anyone who can harness it.
What exactly does this mean? The word “free” means “costing nothing”, so Greenpeace’s statement should really read, “energy free to anyone who can harness it without cost.” But then again anything that can be acquired without cost is free.
The US is experiencing a difficult economic period, characterized by excessive debt, out-of-control government spending and insufficient savings rates. We ought to reinforce, not undermine some basic concepts of economics. Here, for your consideration, are two ways to misuse the word “free.”
When we talk about costs, we usually distinguish between fixed costs – the amount you have to pay no matter how often you use the product – and variable cost – the amount you pay each time you use the product. Is it, for example, cheaper to own a car or to take taxis? Owning a car has a high fixed cost. Even if the car never leaves the garage, you have to pay for your car loan, your insurance, registration and periodic maintenance. The variable cost includes gasoline, tires and some maintenance items. According to the AAA, the cost of owning a mid-sized sedan is about 55¢ a mile, including 38¢ of fixed cost and 17¢ of variable cost. That’s a lot cheaper than a taxi, which costs $3-4 per mile.
The AAA assumes, however, that you drive your car 15,000 miles a year. If you live in Manhattan and you only drive your car 1,000 miles per year, your average cost would be $6 a mile. In that case, you’d be better off taking cabs wherever you needed to go.
The fallacy of Greenpeace’s argument is that, while the variable cost of solar power is very low, the fixed cost is very high. The average cost of residential electricity in the US is about 11½¢ per kilowatt-hour (kWh). Photovoltaic panels cost about $5 per Watt of installed capacity. If the panel operated all the time, it would produce 24 X 365 = 8,760 Watt-hours or 8.76 kWh every year. Producing $1 worth of power every year (8.76 X $0.115) for a $5 investment wouldn’t be bad, but the sun doesn’t shine all the time. On average, solar panels only produce about 1.3 kWh per year for every Watt of capacity. That’s about 15¢ of power every year on a $5 investment. That ain’t free by anyone’s definition of the word.
The other misuse of the word “free” concerns government subsidies. Every article I read (and there are many) about the constantly improving economics of solar power include the available tax credits and other government programs. One of us can always subsidize another, but the society as a whole cannot subsidize itself. When we talk about the real cost of solar power, we have to talk about what the society as a whole sees, not just what one consumer sees. When a consumer installs solar panels on his house and takes advantage of generous federal and state tax credits, he is paying part of the cost and his neighbors are paying the rest. After all, an S-class Mercedes is a cheap car, if someone else pays for it.
Most of these subsidies are explicit. If you get a $1,000 tax rebate for installing a solar panel, we can see that cost clearly. Others, however, are hidden. Take, for example, “net metering.” Under this system, which is legally mandated in some states, you are allowed to supply any excess solar power you generate from your house back into the grid. When you do this, your electricity meter essentially runs backward. You are billed for the kWh you buy minus the kWh you supply. Sounds fair, right? Actually, it’s not. Let’s suppose we have two adjacent pizza parlors: Luigi’s and Mario’s. Luigi offers Mario a “mutual support contract”. Under Luigi’s draft, if Luigi suddenly needs some extra pizzas, Mario agrees to provide them. If, on the other hand, Luigi cooks too many pizzas, Mario agrees to buy them. Fair? Of course not. Luigi would have rights but no responsibilities, while Mario would have responsibilities but no rights. “Net metering” is the same thing. You can sell electricity to the power company whenever you want, but the power company has to supply you with electricity whenever you demand it. In states where net metering is not required, surplus power from solar and wind systems, which cannot after all be promised in advance, sells for a substantial discount to power-on-demand, yet the company is required to pay you the full retail rate.
Another hidden subsidy is a Washington favorite – the renewable portfolio standard (RPS). An RPS specifies the share – generally 10-25% – of power generation that must come from renewable sources. The definition of renewable is a bit of a game, since hydroelectric power (currently about 6½% of total US electricity generation) may or may not be classified as renewable. If the law requires 10% of power generation to be from renewable sources, and the selected renewable sources cost 50% more than conventional power, then the RPS would increase everyone’s electricity bill by 5%. The idea is to spoon-feed the additional cost to people in the hope that they will tolerate it.
Much of our consumer protection legislation concerns false advertising, hidden fees, “fine print” in contracts and other deceptive practices. The antidote to deception is clarity. When people go to the store, they generally expect that the price of the things they buy will be displayed clearly so they can make a sensible decision on whether to buy the product or not. Environmental groups, however, with considerable help from the federal government. have gone out of their way to disguise and hide the costs of renewable energy, making it seem less costly than it really is. Sorry, Greenpeace, the lunch still isn’t free.