Touting Failure

by Russ Roberts on May 28, 2009

in Energy

The Washington Post reports:

President Obama touted his plans for clean energy and economic stimulus
Wednesday at an Air Force base near Las Vegas, pointing to the base's
vast array of solar panels as a model for the nation as it seeks to
reduce its dependence on foreign oil.

Obama, visiting Nellis Air Force Base between fundraising events in
Las Vegas and Los Angeles, toured the largest solar power plant of its
kind in the Western Hemisphere, a collection of more than 72,000 panels
built on 140 acres, including part of an old landfill. The plant, a
public-private venture that cost $100 million, generates about a
quarter of the electricity used on the base, where 12,000 people live
and work.

The president said the project created 200 jobs and will save the
Air Force nearly $1 million a year while reducing carbon pollution by
24,000 tons a year — the equivalent of removing 4,000 cars from U.S.
roads.

A project that costs $100 million (though I'd guess this number probably doesn't include the land costs) to save almost $1 million a year? There's a name for that—a lousy investment. And creating 200 jobs? Not really. The project employed 200 people. Not the same thing.

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mike May 28, 2009 at 10:19 am

Only 100 years until we break even on that investment!

Adam Malone May 28, 2009 at 10:31 am

And that only holds true if you say that a $ today is equal to a $ 100 years from now.

Ike May 28, 2009 at 10:37 am

The project removes the equivalent of 4,000 cars off the roads.

Why not inflate the CAFE standards again, so we can say it removed the carbon equivalent of 4,000,000 plugin hybrids from the roads?

Daniel Kuehn May 28, 2009 at 10:59 am

mike -
RE: "100 years until we break even"

No. It saves the Air Force $1 million a year. That's not one year's revenue for the plant!

This is a stupid metric for determining whether it's a good investment or not (and that's as much a criticism of the Obama administration as it is of you, Mike). I suppose if it actually saves the Air Force that much money, that bodes well for it's cost effectiveness… but since we don't really know the cost per kilowatt hour and the output of the plant, it's tough to say whether the $100 million was well spent or not.

I'm surprised it's saving the Air Force money – I was under the impression solar was relatively expensive at this point.

Regardless – I'm not sure why Russ thinks the savings accruing to one customer determines whether the investment itself is worthwhile. As long as we're in the dark on the revenue of this plant, we're more or less in the dark about it's advisability.

Daniel Kuehn May 28, 2009 at 11:01 am

Or is this thing supplying the Air Force base alone… OK they called it a plant, but now I'm confused about exactly how this is set up.

True_Liberal May 28, 2009 at 11:09 am

The applicable metric is "payback period". A worthwhile payback period might be 2 to 5 years. Anything longer than that, and the rationale becomes political, not economic.

EconGrad May 28, 2009 at 11:14 am

It appears that the plant was built for the sole use of the Air Force. Thus, the high investment costs are not reflected in the per kilowatt-hour price, thus they see the $1M savings. My question is what price they paid for the investment, as anyone who lent them $100M is going to charge more than 1% interest, therefore the money savings would never be able to pay back the investment. So overall, we run into the problem of not seeing the market price, because it is so heavily subsidized and there is a monopsony at work.

Daniel Kuehn May 28, 2009 at 11:20 am

http://www.airforcetimes.com/news/2007/11/airforce_nellis_solar_071119w/

This provides more detail than the Post article. It looks like it is profitable but only by virtue of Nevada's renewable energy requirements. The cost savings are real but somewhat hazy… 2.2 cents per kWh compared to the 9 cent alternative, but some of that difference is being subsidized by other Nevada Power customers… not clear how much, though.

kingstu May 28, 2009 at 11:25 am

"I'm not sure why Russ thinks the savings accruing to one customer determines whether the investment itself is worthwhile."

My understanding is that the plant only supplies electricity to the Air Force base. If that is the case, a $100MM project delivering cost savings of $1MM per year (even in perpetuity) would only be returning about .00000000001% per year (give or take).

Daniel Kuehn May 28, 2009 at 11:34 am

True_Liberal -
When you attribute it to "political motivation" that makes it very vague and indeterminate and shady.

It could very well be for long-term economic motivations that high discount rate private actors don't have the incentives to invest in. "Green" energy sources are relatively new.

The first commercial nuclear reactor in the US was a joint operation between the Navy and a private corporation as well – now nobody is disputing the cost effectiveness of nuclear energy produced by private companies. A lot of this is about creating a market for a new source of energy because of a lower social discount rate – not about politics. I think it will be decades before we know whether this project is worth it, and then we won't really know because we won't know what would have happened without the initial federal investment in these technologies.

Mark Tele May 28, 2009 at 11:37 am

"And why are so many Americans and politicians worried about our "dependence" on foreign oil when no one seems to be worried about our "dependence" on, say, foreign coffee? . . ." http://livefreeormove.blogspot.com/2009/05/green-investment-lousy-investment.html

Methinks May 28, 2009 at 11:59 am

Hey! You missed the bit where Obama proudly proclaimed to have "created or saved" 140,000 jobs!

That "saved" is POLITICAL GENIUS. No way to measure it. Even the sycophants who reported that had to admit there was no way to know how many jobs have been "saved"…or not.

Our Dear Leaders are just soooo capable.

Methinks May 28, 2009 at 12:08 pm

Daniel,

I believe power plants which supply U.S. military bases both here and abroad supply the base only. They aren't part of the civilian network for obvious reasons.

A friend stationed in Italy recounted a story about how the Navy base in Naples was switching to a newly built power plant (or something like that). The power plants are built for and supply only the base. However, since Italy has such a rocking economy, practically everything is stolen or comes by way of the black market. So, of course, the surrounding neighbourhood promptly hooked into the Navel base's power plant and stole power (yes, the Navy knew). When the power was shut off at the old plant after the switch, the whole neighbourhood went dark. Were the Italians ashamed of their theft? Hell, no. They protested and screamed for the Navy to turn the power back on at the old plant! My friend was shocked the Navy didn't restore power. It was Christmas, dammit.

Daniel Kuehn May 28, 2009 at 12:10 pm

Methinks -
Ya, I'm of a split opinion on the "saving jobs" thing. In a lot of ways, it's MORE accurate, not less. After all, that is how economists think about things – you want to compare a policy to the counterfactual of what would have happened otherwise. And to be sure – there are methods for doing this.

But then there's the problem that nobody knows exactly how many jobs were saved.

This isn't a new problem. As Russ points out in the original post, there are problems even with simply "jobs created" because that doesn't mean that net employment was increased as a result of the project.

I wouldn't be so critical :) this doesn't really change the game – we never knew the appropriate counterfactual for any metric of success! That isn't a new problem. In the abstract, though, "job saved" is a very meaningful term.

The question is going to be what it has always been – how good is the estimate they put forward?

Daniel Kuehn May 28, 2009 at 12:14 pm

That's hilarious RE: the italians, btw. I missed that when I first posted :)

Methinks May 28, 2009 at 12:19 pm

Daniel,

You miss the point. This isn't an academic exercise but a political manipulation.

The problem,is that no matter the outcome, politicians can and will always claim that things "would have been worse". There's no way of disproving them because we don't know what jobs weren't created and it's hard to count what jobs may have been lost because resources were poured into the politician's pet project.

You oppose Bush's 2001 fiscal stimulus because you think there was no reason for it. However, Bush will tell you that you only think that because his stimulus prevented a much worse outcome. He and Greenspan saved us. Glory Hallelujah. You can present counterfactuals until you die, but you won't be able to prove he's wrong because he'll always have a counterfactual too.

Charles N. Steele May 28, 2009 at 12:19 pm

RR: A fine example of government "investment" in action, I'm glad you pointed it out.

Daniel K: It simply isn't true that "no one disputes the cost effectiveness of nuclear energy produced by private companies."

See http://www.salon.com/news/feature/2008/06/02/nuclear_power_price/

Also, the MIT cited is pretty clear that over a longer term nuclear power must be subsidized to "compete."

See http://web.mit.edu/nuclearpower/

I have no position on the issue myself, but your statement was mistaken.

Daniel Kuehn May 28, 2009 at 12:31 pm

Methinks -
RE: "You miss the point. This isn't an academic exercise but a political manipulation. "

You seem pretty confident in your knowledge of Obama's thought process on this. You're basically restating my point that we can't know for sure that jobs are saved. I know that very well, Methinks. But the point is, the concept of a "saved job" is a very, very legitimate one.

You seem to be just echoing my counterfactual argument! That's exactly what I'm saying. I said I'm split on it precisely because we don't know exactly how to evaluate the counterfactuals he produces… but it's still a worthwhile concept.

As for Bush's stimulus – I've said in the past that a tax cut in 2001 was probably reasonable (I wasn't as tuned into conditions back then, but it seems like it was probably reasonable). I don't know what fiscal stimulus there was besides that. So in that sense, I didn't oppose Bush's stimulus in 2001. What I have opposed was the subsequent tax cuts while we were waging two wars and the economy was growing.

Charles N. Steele -
Thanks for correcting me. I'm not an energy expert and had no idea subsidies were still so substantial. Of course, this doesn't completely close the question. If private actors aren't internalizing externalities from pollution, etc. etc. – subsidies for this kind of thing may still be efficient. But obviously it puts a greater onus on promoters of nuclear and solar if private nuclear plants are running in part on subsidies (which is what I said with solar – that it's clear that subsidies and Nevada state mandates are propping it up).

Bob Smith May 28, 2009 at 12:55 pm

I still don't understand why the same nuts who whine about "sprawl" can stomach energy sources like wind and solar that waste huge amounts of land for trivial power production.

John Dewey May 28, 2009 at 1:10 pm

daniel kuehn: "It looks like it is profitable but only by virtue of Nevada's renewable energy requirements."

I read the article you referred to, Daniel. But I didn't reach the same conclusion you did. Can you explain why you feel this project which cost $100 million was profitable?

Here's a quote from the article:

Construction on the project cost more than $100 million, “but none of that cost is going to come back to the Air Force,” Price said. “It’s no-cost, but we’re going to save money.”

Were you meaning that the project was "profitable" for the Air Force, which didn't have to put up any cash?

Here's another passage:

Nellis’ primary energy supplier is Nevada Power, which has to produce a certain amount of its power from renewable sources — or buy renewable energy credits from companies that do — to meet state guidelines. So MMA profits by selling power to the Air Force and by selling its credits to Nevada Power.

Did you mean that the project was "profitable" for MMA Renewable Ventures because they took advantage of a government requirement that would have forced even more costs on the customers of Nevada Power?

As I see it, there is nothing profitable about this project. It's simply government forcing an economically inefficient – extremely inefficient – means of production on the customers of Nevada Power.

S Andrews May 28, 2009 at 1:14 pm

Bob,

You can't just install wind turbines and forget about it. Whereas a coal or NG burning power plant is likely to be a in one location, the wind turbines could be spread over many 100s of acres of land spread over difficult terrain. It has a high cost of maintenance.

solar panel surfaces need to be kept clean for it be effective – an onerous task in places where they are usually installed. Not counting the cost of goods, production and material that goes into making these panels – I doubt if they are really generate less CO2, assuming that reducing CO2 is a worthy goal.

But I am all for all these alternate energies, so long as they can compete in the marketplace on their own.

RLH May 28, 2009 at 1:35 pm

Is it possible that the 200 newly created jobs are those of the folks whose job it is to continually Windex the 140 acres of solar panels? :-)

K Ackermann May 28, 2009 at 1:36 pm

This is failure? In terms of how the government and the military operate, it was a wild success.

You want failure? I'll show you failure:

An aircraft carrier off the coast of Italy launching sorties around the clock. The planes launch, dump their fuel in the ocean, and practice their emergency landing. That's how they handled an end-of-the-year fuel surplus.

How about little Hitler, dressed in costume, standing on the deck of an aircraft carrier declaring victory in his $1-trillion dollar contrived war?

How about $300 billion in weapons programs cost overruns alone?

How about fund managers destroying trillions of other peoples money?

How about Alan Greenspan telling people that fraud did not have to be monitored, because victims would eventually stop doing business with perpetrators?

If you want to attack Obama for the sake of attacking Obama, then go after the big stuff, like his failure to reign in lobbying, and the massive damage done to this country by the lobbies.

Why not take an honest look at some very troubling trends such as:

As consolidation continues to concentrate hospital ownership, why are costs rising disproportionately compared to independent hospitals?

Why are the administrative costs of Blue Cross only 3% vs. 11% for private insurers?

Why are administrative costs for health insurers 600% higher in the US than for the average developed country?

These last stats were pulled from here, and reference CBO reports.

Rich Berger May 28, 2009 at 1:47 pm

Hitler had aircraft carriers? I did not know that.

anon May 28, 2009 at 1:52 pm

Here's the reality of solar panels.

First, only about 5.5kw-hrs of energy hits every square meter on a sunny day in a sunny, generally cloud-free climate. But the typical solar panel is about 20% efficient, at a cost of around $1,000 per square meter. Give or take.

So that $1,000 buys you about 1.1 kw-hr per day — a grand total of 11 cents of electricity at 10 cents/kw-hr.

http://www.solarpanelstore.com/solar-power.large-solar-panels.sanyo-hit-power.sanyo-hit-power-200w.info.1.html

http://www.solarpanelstore.com/pdf/HIT%20series%20data%20sheet.pdf

So, for $1,000, at 10 cents/kw-hr, you could by 10,000 kw-hrs, or install a solar panel and wait nearly 10,000 days (i.e., about 25 years) to collect them.

Now you can quibble with my numbers and argue +/- 25% here and there, but you don't change the final answer. Solar panels are a waste of resources (except in certain applications, e.g., isolated locales).

Good engineers aren't very "green." Sorry.

Methinks May 28, 2009 at 1:59 pm

Dan,

Counterfactuals belong in academic debate, not in political promises.

MWG May 28, 2009 at 2:26 pm

"A lot of this is about creating a market for a new source of energy because of a lower social discount rate – not about politics."
-DK

Solar energy is not new.

MWG May 28, 2009 at 2:31 pm

K. Ackerman, How does pointing to other waste or failures (real or perceived) make Russ's post any less relevant?

Further, what the hell do trends in hospital ownership and medical insurance have to do with solar energy?

dg lesvic May 28, 2009 at 2:41 pm

Can anyone still deny that Obama is a socialist?

John May 28, 2009 at 2:44 pm

Ever notice that when the government touts solar power it is always in the form of a power plant?
I can't recall anyone in government promoting the use of solar panels for home use, either photovoltaic or heating water.

Is it because power plants produce taxable energy and home use does not?
Or perhaps because large scale solar energy production perpetuates the regulated monopoly while a smart grid would not?

Daniel Kuehn May 28, 2009 at 2:49 pm

Methinks -
RE: "Counterfactuals belong in academic debate, not in political promises. "

I think the implication of this would be that politicians can make no claims about any changes whatsoever… I think the nature of linear time (which barring exploration of multiple dimensions is what we're stuck with) is always going to provide problems with counterfactuals. That's nothing to get too worked up or worried about – just stay skeptical.

dg lesvic -
Re: "Can anyone still deny that Obama is a socialist?"

Yes :)

John -
RE: "Is it because power plants produce taxable energy and home use does not?"

Yes – CLEARLY the $100 million dollar investment was a crafty attempt to raise more tax revenue. Brilliant!

RE: "Or perhaps because large scale solar energy production perpetuates the regulated monopoly while a smart grid would not?"

This is perhaps more to the point.

But I think your question is misleading to begin with. Aren't they offering rebates for home installation of solar panels? Just because Russ is touting this example doesn't mean Obama isn't touting multiple examples.

K Ackermann May 28, 2009 at 2:55 pm

Further, what the hell do trends in hospital ownership and medical insurance have to do with solar energy?

Russ's comentary does not even mention solar energy. What makes you think this is a post on solar energy?

John May 28, 2009 at 3:01 pm

"Yes – CLEARLY the $100 million dollar investment was a crafty attempt to raise more tax revenue. Brilliant!"

I didn't mean this one. There are other attempts to build solar power plants across the country producing energy for domestic, not military, consumption.

John May 28, 2009 at 3:02 pm

"Aren't they offering rebates for home installation of solar panels?"

Even with rebates the panels need to be replaced before they pay for themselves.

Heck, in my state some guy placed panels all over his yard and the neighbors sued him saying the setup was ugly and lowering their property values.
I believe they won.

MWG May 28, 2009 at 3:08 pm

"Russ's comentary does not even mention solar energy. What makes you think this is a post on solar energy?"
-KA

Are you serious? The post is about whether or not a $100 million investment in solar energy that saves the air force $1 million/yr. and "creates" 200 jobs is a good "investment"… I can't believe I'm even responding.

Randy May 28, 2009 at 3:51 pm

I remember Nellis. Red Flag. That is, they fly fighter jets night and day there. Laughing out loud at the idea of Nellis AFB as an example of promoting energy independance.

dg lesvic May 28, 2009 at 4:18 pm

Daniel,

I suppose I should have said, Can anyone except Daniel Kuehn still deny that Obama is a socialist, but I thought that would be understood.

Daniel Kuehn May 28, 2009 at 4:48 pm

John -
RE: "Even with rebates the panels need to be replaced before they pay for themselves."

Oh, I'm not advocating the rebates or even this plant. I don't know enough to advocate it, and it's clear currently the technology isn't cost effective. I'm just saying the administration has talked as much about home use as it has about commercial use.

dg lesvic -
RE: "I suppose I should have said, Can anyone except Daniel Kuehn still deny that Obama is a socialist, but I thought that would be understood."

Perhaps the question should be "does anybody who didn't already think that the U.S. was on the way to fascism BEFORE Obama appeared on the national stage think that Obama is a socialist?"

Daniel Kuehn May 28, 2009 at 4:49 pm

*cost effective from a consumer and producers point of view – not from the long-term/leveraging new technologies point of view

Chris in Austin May 28, 2009 at 4:53 pm

$100 million ($33,000 per person) to provide electricity to only 3,000 people?

$100 million ($25,000 per "vehicle") to remove the pollution equivalent of 4,000 cars?

Spend $100 million ($500,000 per job) to create 200 jobs? Note: Many capital intensive solar jobs are in temporary construction positions and won't last in the long run.

Only a politician could consider this project a success.

K Ackermann May 28, 2009 at 5:09 pm

If presiding over the largest redistribution of wealth from the public sector to private enterprise is a definition of socialism, then… I don't know what to think.

Seth May 28, 2009 at 5:31 pm

"The plant, a public-private venture that cost $100 million, generates about a quarter of the electricity used on the base, where 12,000 people live and work."

I could be wrong, but this seems to imply the base is the only customer making the $1 million cost savings a good proxy for profitabilty analysis.

I'd also be interested to know the nature of the cost savings, because, like others have mentioned, I understood solar to be more expensive than other methods of electric production. I hope the cost savings aren't subsidies.

dg lesvic May 28, 2009 at 6:04 pm

Daniel,

You wrote,

"Perhaps the question should be 'does anybody who didn't already think that the U.S. was on the way to fascism BEFORE Obama appeared on the national stage think that Obama is a socialist?'"

That's just too complicated for my little brain. Could you please explain the point of it. And since you still can't see Obama as a socialist, what will it take, a tan Mao suit and cap with a little red star on it? Or will you still need to see actual concentration camps and killing fields?

And don't you think by then it may be a little late?

dg lesvic May 28, 2009 at 6:09 pm

Daniel,

From your statement about the US on the way to fascism, before Obama, it appears that you recognize that fascism doesn't just spring up overnight out of laissez faire, but is the culmination of a gradual transformation from capitalism to socialism. If you could see that process without Obama, why can't you see it with him? Has he turned things around again, back in the direction of laissez faire, or accelerated the movement to fascism?

Morgan May 28, 2009 at 6:20 pm

It's actually worse than $100 million to get $1 million per year. It's $100 million from Nevada utility customers, plus a huge tract of Air Force land that was ceded by taxpayers (for free) to the use of a private solar power generation company, in return for $1 million per year in "savings".

I'm offering a similar deal. If anyone would like to send me $100,000, I'd be happy to send you $1,000/year for the next 20 years to your utility company. This will greatly reduce your energy bill, and you'll save a lot of money.

All you have to do to take part in this deal is allow me free use of your storage shed.

K Ackermann May 28, 2009 at 6:22 pm

dg lesvic, I am really glad you are not prone to hyperbole.

It will be interesting to see if those concentration camps will be efficiently run by private industry, or if the government will mess up there too.

I think Obama ran on a platform of efficient concentration camps.

K Ackermann May 28, 2009 at 6:24 pm

P.S. I think McCain would have won if he didn't cling to his policy of killing children to save food.

Methinks May 28, 2009 at 6:30 pm

If presiding over the largest redistribution of wealth from the public sector to private enterprise is a definition of socialism, then… I don't know what to think.

Allow me to clear it up for you…

The public sector doesn't generate wealth. It gets wealth by taxing away a portion of the wealth created by private enterprise. So, the wealth created by private enterprise is going back to private enterprise after the mafia…sorry…government takes a huge for performing this "service". But, this wealth is redistributed in ways the government deems more "fair", "necessary", "prudent". etc. Confiscating and redistributing wealth is socialist.

The next step is the state actually owning the means of production. Starting with AIG, and the autos, we're getting there.

Sam Grove May 28, 2009 at 7:42 pm

The public sector doesn't generate wealth. It gets wealth by taxing away a portion of the wealth created by private enterprise.

The logical evidence of this is taxation itself.

Productive companies do not tax people for their income, rather, they EARN the monies they collect by creating goods and providing services that people need or desire.

If government actually produced wealth, then it would be able to exchange that wealth in the market for its income or otherwise feed the bureaucratic maw with its own product.

Does the government provide any valuable service?

Sure, preventing its own replacement by other states may have value, depending on whether a competing state would be better or worse.

I suppose courts of last resort are valuable to some people, but such courts should be able to charge fees for such service.

Help me here, I'm struggling to come up with value provided by the government.

Well, if you don't have a productive job, then the government is very valuable in that it may allocate resources produced by others to yourself.

This is really hard.

Ooh, ooh, if you are an established business, the government can make it more difficult for competitors to take your market share, and, if your company is really big, the government can bail you out.

I'm sorry. It seems that the government is more valuable to some people than to others.

Bob Smith May 28, 2009 at 7:42 pm

Bob, you can't just install wind turbines and forget about it.

Your point? If expanding human presence across the earth is a Bad Thing, as many lefties claim, why should one support solar and wind power?

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