Electricity used to be cheaper in Minnesota than elsewhere, which gave energy-hungry Minnesota businesses a much-needed competitive advantage. This was especially helpful considering that other costs of doing business — labor, property, taxes — tend to be higher here.
However, from 2007 to 2014, Minnesota electricity prices (adjusted for inflation) rose by 12.5 percent. By comparison, the average U.S. price dropped by 1.6 percent.
The average household might not notice the price increase, but Minnesotans should take note. Due to past policy decisions in St. Paul giving preferential treatment to certain “green” energy sources, despite there being better options for the environment, there’s a real risk that this is just the start of a substantial price increase putting Minnesota businesses at a disadvantage. When that happens, workers and consumers will suffer lost jobs, lower wages and higher prices.
Jobs are already likely disappearing. Economists working for the state of Kentucky recently released a report using over 30 years of state-level electricity and industry data that indicate that Minnesota will lose over 21,000 jobs due to the rise in electricity prices since 2007.
A number of factors contribute to rising electricity prices, including the downturn in the economy, environmental improvements and upgrades to nuclear facilities. But these sorts of things impact utilities across the country, not just in Minnesota. So, why have prices risen here?
One of the major differences between Minnesota and elsewhere is that in 2007, state lawmakers passed “the most aggressive energy-efficiency and renewable-energy utility standards in the country.” That’s how Mike Bull, who at the time advised Gov. Tim Pawlenty on energy, recently described the law.
Bull and supporters argue that this law spurred the “development of clean, renewable sources such as wind and solar at very competitive costs.”
Minnesota’s rising electricity prices suggest otherwise.
Utilities must now spend much more money to promote energy efficiency. Of course, everyone wants to do more with less energy. It saves money. But with natural financial incentives already in place for businesses and households to save energy, the state’s requirement to further subsidize and manipulate energy-efficiency spending turns out to be very wasteful.
Energy-use data reveal that the program is likely paying for efficiency upgrades that would have been funded anyway. You’d expect electricity usage to start declining in Minnesota relative to other states if the expensive program spurred additional efficiencies. But over the last 20 years, Minnesota’s rank for electricity usage per customer has not improved a bit.
Minnesota’s mandate requires utilities to generate 25 percent of their electricity from renewables by 2025. Again, we’re told by advocates and even Xcel Energy that these renewable resources are very cost-competitive.
However, other utilities report that renewables cost them more for two reasons. First, utilities were required to buy renewable generation when they didn’t need new generation. Consequently, much of the spending on wind represents waste and duplication of existing generation.
Second, wind tends to blow at night and during seasons when power demand and, therefore, electricity prices are low. Thus, utilities generally get a poor price for the wind-generated electricity they sell.
It’s hard to believe Xcel and other utilities escape these two price-inflating factors.
Some might say paying more is worth the price because adding wind and solar reduces carbon emissions.
However, a recent report published by the Brookings Institution shows that converting to hydroelectric, nuclear or natural gas provides more net benefits in terms of avoided carbon-dioxide emissions, avoided energy costs and avoided capacity costs than wind or solar.
In sum, Minnesota’s energy-efficiency program and renewable requirements raise electricity prices and yet demonstrate little environmental benefit, especially when compared with other options.
Understanding the importance of low energy prices to jobs and the failings of current energy policy, Republicans in the Minnesota House passed an important bill to redesign energy policy. The House bill would end the current energy-efficiency program, a program that has not shown results. Recognizing that efficiency remains important, it would establish an advisory task force to recommend how to reorganize the program to be more effective and accountable.
The bill also would start fixing costly renewable policies by opening lower-cost avenues to reduce carbon. It would allow utilities to meet their renewable requirements using zero-carbon hydropower; eliminate the bias toward high-cost solar by allowing “any other more affordable” renewable energy to meet the requirement, and repeal the moratorium on new low-carbon nuclear facilities.
Detractors complain that these moves represent a step backward, as though current policy can never be improved upon. On the contrary, these policies represent a step forward toward a stronger jobs climate and a more rational approach to reducing emissions.
Peter J. Nelson is director of public policy for the Center of the American Experiment.