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Page added on August 23, 2012
The Unlevel Playing Field for Energy
An editorial in last weekend’s Wall St. Journal led me to a recent analysis by the US Energy Information Agency (EIA) summarizing the costs of the federal government’s various “subsidies” for energy from different sources. This is both useful and timely, since discussions of specific subsidies such as the expiring wind production tax credit inevitably lead to questions about how incentives for renewable energy compare to those for oil, gas, nuclear, and other more traditional sources. As the Journal noted, the EIA stopped short of comparing these incentives on the basis of the relative productivity of different energy sources, but even without that it’s still apparent that the category of new renewable electricity–excluding hydropower–received 21% of the federal energy benefits for 2010, while accounting for less than 3% of domestic energy production that year, when oil and gas, which provided 49% of US energy production, received less than 8% of these benefits. Whether on an absolute or relative basis, renewables receive much more generous federal support than oil and gas.
Before digging further into the EIA’s analysis, I should point out an important distinction between the federal expenses and incentives covered in the report and the externalities that are frequently conflated with them. It is certainly true that many of these energy technologies involve significant impacts that aren’t reflected in their market prices, and that the production and especially the consumption of fossil fuels create serious environmental and security externalities. However, to whatever extent federal subsidies address externalities they do so indirectly, at best, and in many cases inefficiently. The focus of this posting, just like the EIA report’s, is on the federal government’s cash outlays and “tax expenditures”–deductions, credits, etc.–that have a direct bearing on the federal deficit and debt burden that are the subject of intense debate in this election cycle.
The tables in the report’s executive summary reveal several key facts. Between 2007 and 2010 federal energy subsidies in constant dollars more than doubled to $37.2 B, with most of the increase going to renewables and energy efficiency, except for a sizable bump in low-income energy assistance payments. $14.8 B of the increase originated with the 2009 stimulus bill, none of which was directed at oil and gas, but which appropriated nearly $8 billion to conservation and efficiency. Overall, renewables received $14.7 B, split 55/45 between electricity and biofuels, while nuclear received $2.5 B and oil and gas $2.8 B. The latter figure is lower than you’ll see elsewhere, because among other incentives that the EIA chose to exclude from its analysis was the Section 199 deduction for manufacturers, which is budgeted at around $1 B/yr for oil and gas firms. The logic behind that exclusion seems sound, because US manufacturers of biofuels, wind turbines, solar panels and other renewable energy equipment qualify for the same tax credit, and at a higher rate than oil companies.
I was also struck by the fact that oil and gas received just $70 million out of the more than $4 B spent on R&D. If there’s one category in which federal expenditures on renewables should be expected to dwarf those for conventional energy, this is it, and they did so by a factor of more than 20 times. (Coal R&D received more than $0.6 B, presumably for clean coal technologies.)
It’s also the case that while the growth of renewable energy output from 2000-10 was dramatic, the relatively smaller net changes in oil and gas output in that period masked the substantial replacement of depleting resources that would have otherwise resulted in a large drop in output, especially for natural gas. This is precisely the aspect of the mature oil and gas industry at which these federal incentives are aimed, to enable US projects to compete with the international opportunities to which many of these companies have access.
The authors of the report suggested caution in comparing the allocations of incentives to the energy produced by each technology, because some of these incentives were paid for projects still under construction and in some cases represented the front-loading of what would otherwise have been a 10-year stream of tax credits. Fair enough. Yet even with the conservative assumption that the entire $4.9 B of non-R&D subsidies for wind power in 2010 came in the form of cash grants in lieu of the 30% investment tax credit for new wind turbines that would produce for 20 years at a 30% capacity factor, that still equates to a subsidy of more than 16% of the average present wholesale value of all the electricity those turbines will produce, using prevailing industrial sector electricity prices as a proxy for wholesale prices. By comparison, the $2.7 B of oil and gas tax incentives for 2010 represented just 1% of the wholesale value of US production of these fuels, before refining.
A serious debate about the appropriate level of US energy subsidies should begin with the facts, rather than with misperceptions. It should also focus first on the goals of such incentives, before jumping to the details of this tax credit vs. that one. What do we want these measures to achieve? If it’s simply the promotion of energy production, then the current incentive system looks too heavily skewed in favor of renewables. If it’s jobs, then we should be realistic about how many can be added by such a capital-intensive sector. If it’s the promotion of both energy security and innovation, then at least parts of the current system look directionally right, though I’d argue that we’d benefit from spending more on renewable energy R&D and less on the deployment of mature-but-expensive technologies like wind. However, if emissions and climate change are our primary concerns, then these incentives are not a terribly effective way to address them. My own expectation is that regardless of whether the wind tax credit is extended for another year, most of the tax incentives that the EIA assessed here will eventually be swept away by tax reform focused on reducing corporate tax rates to improve US competitiveness, while eliminating loopholes to make the changes revenue-neutral.
14 Comments on "The Unlevel Playing Field for Energy"
deedl on Thu, 23rd Aug 2012 11:42 am
Read Tom Murphys Post about the energy trap (http://physics.ucsd.edu/do-the-math/2011/10/the-energy-trap/) to understand why it is necessary to invest now in renewables although it may seem not economic. Compare this to the Hirschreport, that claims, transformation of energy should have been started some 10 or 15 years ago.
There is no alternative to subsidizing. Besides that, the calculation is flawed because it does not take scaling costs into account. The first investements in renewables are high, but with increasing implementation prices come down. So these investments help to create long term access to affordable renewable energy. Thus they are not just subsidizing the current RE projects, but indirectly every single future RE project.
For the same reasons the evaluation of these subsidies for the purpose of climate policies are flawed. Every implementation of renewables that is subsidized in one part of the world reduces the implementation costs of any following project anywhere else in the world. This way for comparing CO2 reduction per dollar spent, the general cost decrease of RE technology caused by any additional implmentation has to be considered too.
German subsidies of PV scaeld implementation and thus fallwing prices that made PV affordable for many additional customers worldwide. This way the C02 reduction caused by German PV subsidies goes way beyond the solar implementation in Germany. In the same way will subsidizing large scale RE implementation in the US cause further drops in RE prices. And with shrinking prices demand will increase.
BillT on Thu, 23rd Aug 2012 12:12 pm
BS! “… oil and gas, which provided 49% of US energy production, received less than 8% of these benefits…”
We spend $800 billion per year, 1/4 of the US annual budget to control oil countries. To protect oil interests all over the world. PLUS, subsidizing roads and bridges to the tune of many billions every year. Plus tax advantages and loopholes. Plus protection from legal suits by citizens against wanton pollution, plus…
This is obviously propaganda from the organization that bought up all the electric cars rights, tore up all the electric trolly lines, and pushed cars and buses on the unknowing brainwashed public. Big Petroleum. But, they are dinosaurs that have become extinct and just don’t realize it … yet.
SolarDave on Thu, 23rd Aug 2012 1:28 pm
Wait a minute – how did the $8B in conservation and efficiency “know” to only benefit renewables? To say that insulation and weatherstripping somehow benefits wind and solar more than coal and nuclear is laughable.
Hey – are government health programs subsidies for Human Power? Count me in!
Kenz300 on Thu, 23rd Aug 2012 2:12 pm
Competing with established monopolies like oil and coal is difficult at best. Established interests like the Koch brothers will spend a small fortune influencing the political process to protect their interests and profits. The oil companies love it when oil prices spike, they make huge windfall profits.
We need to diversify our energy sources and types.
Why the fossil fuel industry has a hold on energy policy.
Billionaires protecting their interests and profits.
The Koch brothers are bad for the climate and bad for the country.
http://www.smartplanet.com/blog/energy-futurist/energy-policy-follow-the-money/547?tag=nl.e660
SOS on Thu, 23rd Aug 2012 9:03 pm
There is no economy of scale in renewables. They already use the in-place grid so they have no start-up costs. What makes them expensive is their inefficiency. The only place you might be able to cure that is in the lab. A lot is being invested their now. O
There may be some cost improvements in the manufacturing if efficient techniques can be developed and raw materials can come down in price. These are secondary to the inherent inefficiencies in their power generation not easily fixed. Maybe the huge subsidies will not be good money after bad, but Solindra and all the other failed projects financed by you dont give me much hope.
Bob Owens on Thu, 23rd Aug 2012 9:38 pm
Why should oil and gas get any subsidies? These companies have been in operation for 100 years and making gigantic profits all that time! We owe them nothing! In a few years solar will be all we will have. Time to get real.
SOS on Thu, 23rd Aug 2012 9:43 pm
Actually the taxpayers owe nothing to any business or industry. Im all for letting the viable industries stand on their own and the non-viable industries do the best they can.
Solar and wind are among the most inefficient energy producers in the mix. These inefficiencies are related to physical laws, natural restraints, not political in nature. Politics cant fix these inefficiencies and neither can subsides or ramped up production. Thats why they are not economically viable. Thats why they have such huge subsidies when compared to other industries. They can only be deployed if the other cheaper energy sources can be used to soften the impact of their high uneconomical costs.
BillT on Fri, 24th Aug 2012 1:06 am
SOS, you do have a twisted vision of things. Solar is getting cheaper all the time. A solar panel lasts 20+ years after it is installed, it doesn’t have to be replaced every week at the local energy station like gasoline. Ditto for wind. Yes, they require maintenance, but so does everything else. And, in most of the world, they provide LOWER energy costs over their lifetime than ANY other energy source. Whereas, any energy coming from fossil fuels will get more and more expensive.
DC on Fri, 24th Aug 2012 2:03 am
Yea, right, oil, nuclear and coal and so hurting for subsidies. Its so unfair. Trillions of dollars in the last century, and that doesnt include all the car-specific subsidies, roads, police, and the sunk cost of car-dependent cities, which is off-the charts. But lets whine about the few nickels thrown at renewables.
400-600 billion every YEAR to fossil-fuel companies. Thats direct subsidies,a and like i said, does not include indirect subsidies to FF’s which are pretty much everywhere you look.
http://www.iisd.org/gsi/
Marquee on Fri, 24th Aug 2012 10:52 am
It s a good to see that there may be some cost improvements in the manufacturing if efficient techniques can be developed and also the site http://www.specialenergycorp.com which also have many good points for my projects so really thanks for this.
Marquee on Fri, 24th Aug 2012 10:53 am
It s a good to see that there may be some cost improvements in the manufacturing if efficient techniques can be developed and also the site specialenergycorp.com which also have many good points for my projects so really thanks for this.
Kenz300 on Fri, 24th Aug 2012 12:04 pm
Investments in renewable power continues to grow and the costs decline every year.
Renewable Power Trumps Fossils
http://www.bloomberg.com/news/2011-11-25/fossil-fuels-beaten-by-renewables-for-first-time-as-climate-talks-founder.html
SOS on Fri, 24th Aug 2012 9:39 pm
Solar and wind generators may be seeing some incremental cost improvement but the inherent inefficiencies of their systems will always make them significantly more expensive. Part of the folly can be seen in the numerous Salindra type scandals that has squandered about 1billion in the name of improved costs.
No phase of alternative energy is cost effective. That’s why it needs such huge subsidies. Subsidies will never lower the costs.
SOS on Fri, 24th Aug 2012 9:48 pm
Peak politics has caused the illusion that solar and wind can be cost competitive. Peak politics is constantly attacking conventional energy to artificially increase their cost. At the same time the peak politics=peak oil movement has increased subsidies to alternatives in a very significant way as shown in this article and use the subsides to give the illusion their costs are lower. Hence the illusion alternatives are getting more cost effective.