Ignoring Electricity Fundamentals


The lesson of the current mortgage upheaval is that market fundamentals matter. Leveraged to your eyeballs? Handing out home loans to folks with no money down? You’ll pay dearly in the long run.


So too with electricity, which is the point of Chris Horner’s excellent “Snake Oil” post below. Countries – and states — that succumb to green fads lacking in market fundamentals will pay. Take Michigan, a state that has already suffered from fundamental problems like auto manufacturing costs 25 percent above the national average, higher-than-average business taxes, and a 17-percent income hike last year in the midst of the worst state recession in the country.


A bright spot, however, is that Michigan’s electricity fundamentals are sound. So, naturally, the state’s green, Democratic leadership has decided to mess with them.


On Thursday, the state legislature passed an energy bill that re-monopolizes the state’s partially deregulated utilities and requires a Renewable Power Standard (RPS) of 10-percent alternative energy (read wind) by 2015 (up from a current 3 percent). As a result, state electricity prices will rise at a time that this manufacturing state is hemorrhaging jobs. Residents will pay a $3 monthly fee to subsidize the RPS – and businesses even more on a sliding scale pegged to their size.


Russ Harding, an environmental analyst for the Mackinac Center for Public Policy, panned the RPS, saying: “Anything we do to reduce our competitive position is not good.”


Myron Ebell of the Competitive Enterprise Institute says that an RPS standard would have less impact in Northeast states where “electricity rates are already high. But in a low-energy cost state like Michigan, an RPS is nuts.”


Harding adds that, relative to growing Midwest neighbors like Indiana (6.6 cents-per-kWh) and Ohio (8 cents), Michigan’s current 8.7 cent-per-kWh rate is already a regional negative.


Just as investors in the post-bubble mortgage market will shun paper lacking in financial fundamentals, so too will industry shun states that ignore electricity fundamentals. Michigan just hung up an even larger “NO BUSINESS WANTED HERE” sign.


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