Media Briefings

WIND POWER IN THE UNITED STATES: ‘Green’ investment is less efficient

  • Published Date: March 2016

Many US wind farms are being built in the wrong place because their investors want to look environmentally conscious. That is the central finding of research by Yatang Lin, to be presented at the Royal Economic Society’s annual conference in Brighton in March 2016.

Wind energy production has grown throughout the United States, making up more than 4% of total electricity generation as of 2014 and growing by over 25% each year. The new study looks at a range of factors influencing where wind farms have been built – from energy prices to local restrictions. It finds that the investments could be almost 50% more profitable if they had been built in the best spots within the country rather than where they are now; and 20% if they were just in a better spot within their county.

This inefficiency arises mostly because wind farms in more environmentally-friendly counties tend to be funded by locals and non-profits, which end up building them closer to cities and other places where they are less effective. Policies also play an important role: grants that do not depend on performance do not encourage better location choices, while benefits which reward efficiency spur projects to find windier spots.

The author comments:

‘The desire of many investors in wind farms to look green is making the public worse off. Support schemes for renewable energy should be redesigned in a way that realigns the public and private costs and benefits of renewable investments.’

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Wind power is becoming an increasingly important part of the US energy mix, taking up more than 4% of the total electricity generation as of 2014 and having grown by 25.8% annually for the past decade.

But are wind turbines being put in the right locations? This research looks at the location efficiency of wind power projects across the continental United States and attributes a significant share of deviation of the existing wind farms from the optimal location to investors’ intrinsic motivation of ‘acting green’, which directs wind power investment to more salient but less windy places.

The study assembles a comprehensive dataset on the determinants of wind farm profitability, including information on wind resources, energy prices, transmission devices, land value and local restrictions on wind power development.

This makes it possible to quantify the loss in aggregate efficiency in this sector due to wrong project location by comparing current distribution of wind farms to an ideal profit-maximising scenario. The study then decomposes the observed deviation from optimum into different levels and investigate the factors that might contribute to it.

The main findings are:

First, there is substantial misallocation: the average profitability of US wind projects would increase by 47.1%, 37.4% and 19.8%, should they be placed in the best spots in the whole country, within their own states and counties.

Second, a large proportion of the within-state and within-county misallocation in wind farm siting is attributable to investors’ ‘acting green’ behaviour: wind farms in more environmental-friendly counties tend to be set up by local and non-profit investors; they are closer to cities and more populated areas; they are much less responsive to local fundamentals; and they have significantly worse performance ex post.

Third, renewable energy policies play a mixed role: different renewable policies contribute differently to the efficiency of projects. Policies that award fixed non-performance-dependent subsidies to wind power development, such as grant, property and sales tax break, do not seem to affect the efficiency of wind farm location choice over time.

In contrast, performance-based subsidies – such as corporate income tax credits and feed-in tariffs – significantly improve the within-state allocation of wind farms, mostly through attracting profit-oriented investors and investments in ‘browner’ but windier counties.

This study looks at renewable energy from a new perspective: maybe the surest and fastest way to bring the cost of renewable energy to par with that of fossil fuels is to treat it as a serious business, instead of a pro-social activity.

It also calls for attention from policy-makers to the allocative efficiency of renewable energy projects. The most important rationale of renewable support schemes is that they are the more politically acceptable way to internalise the public benefits generated by renewable electricity generation. Therefore, they should be designed in a way to realign public/private benefits/costs of renewable investments.

One of the most important lessons is that we have paid too little attention to the importance of green preferences in green investors’ private benefits, which is shown to be negatively correlated to the public benefits generated by a wind farm project given the same amount of private costs. In light of this, non-performance-based renewable support schemes are clearly dominant since they tend to screen in greener but less efficient investments.

On a related note, to engage people and organisations with strong environmental preferences, promoting markets for green electricity where people can purchase electricity generated from renewable sources at a premium and get visible award for it would be a better idea than encouraging them to invest in their own renewable energy projects.

ENDS