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The Unlevel Playing Field for Energy

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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.

Image: American Money via Shutterstock

Geoffrey Styles's picture

Thank Geoffrey for the Post!

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Paul Ebert's picture
Paul Ebert on Aug 23, 2012

I agree that our discussion should focus on goals.  I also feel that what should be a quick and easy discussion - concluding that addressing climate change is our highest priority - is, unfortunately, made all but impossible by obfuscation and disinformation.

I, personally, find the situation all the more interesting in light of this:

http://www.scientificamerican.com/article.cfm?id=china-to-spend-372-billion-on-cutting-energy-use-and-pollution

In my opinion, this should be causing a sputnik type of reaction in this country.  But, it won't, will it?

Geoffrey Styles's picture
Geoffrey Styles on Aug 23, 2012

Whether it should cause a "Sputnik reaction" here depends on whether we think the result will move China ahead of us, competitively.  In fact, when it comes to measures of energy intensity China still has significant ground to make up to match the US and the rest of the OECD.  We tend to focus on the large numerator for the US (total energy use) while neglecting the even larger denominator (GDP at market rates.) Upshot: While there's still ample room for further efficiency gains in the US, the opportunity in China is bigger because they are starting from a higher point.  Likewise for air pollution.

See:

http://www05.abb.com/global/scot/scot316.nsf/veritydisplay/e22257539f67437248257a24004e8c91/$file/the%20state%20of%20global%20energy%20efficiency_final.pdf

John Miller's picture
John Miller on Aug 23, 2012

For years we have heard politicians preach that renewables will be affordable and sustainable.  The question of Government support is not that it is overly generous, the question is has it become excessively wasteful.  Historically, the Federal Government has been reasonably effective in supporting the ‘research stage’ of new technology development.  We have experienced some reasonably successful Government support programs in the development and production of  various energy sources and technologies, such as basic domestic energy supply (fossil fuels, hydro, nuclear, etc.), energy efficiency and possibly some level of ethanol fuels (significantly under E-10).  The success of any energy program is measured by how economically sustainable they truly become once all State and Federal Government subsidies are discontinued.

For political reasons the Federal Government decided to provide subsidies for clean energy at all stages of the technology development through commercial production (research, production facilities design & construction, and final production).  This process appears to have almost totally removed free market checks-and-balances that would normally prevent a large waste of capital investment if a project has a very low probability of becoming economic in the longer term.  Due to the apparent lack of Federal Agencies’ ability to reasonably evaluate clean energy projects or the possible political influence that has interfered with the project review process, the overall clean energy project review-approval process appears to have become somewhat dysfunctional.  One of the most publicized examples has been the $500+ million dollars loss from the Solyndra bankruptcy.  Although Solyndra ‘tubular’ solar panels were innovative and more efficient (10-20% > flat panels), they also cost 50-100% more to produce than competing flat panels.  A basic business investment review process of Solyndra’s potential profitability in an obviously over-supplied and falling market (price) would not likely attract private capital unless some other investor (i.e. the taxpayer) was willing to hedge the risk.  This poor investment decision process can readily be avoided by eliminating the capital subsidies (free capital, tax benefits, loan guarantees, etc.) and reintroduce free market venture capitalist’ checks-and-balances back into the overall clean energy investment decision process.

Geoffrey, You are probably aware the (Falmouth, MA) Cape Wind project has been recently approved by the FAA (one of the last large permit issues).  Based on my recent analysis of wind power actual costs, I’ll bet you lunch that if the Congress does not extent the power subsidies past the end of this year the Cap Wind off-shore power project will shutdown.

John Miller

Rick Engebretson's picture
Rick Engebretson on Aug 24, 2012

It is very simple to outline a successful renewable energy technology.

We all know solar energy is globally abundant in a hotter world. And we all know it is intermittent, and costs a lot when used as PV glass panel electric source. So we chat about batteries and variant solar electric systems.

And we all know cellulose is a product of keeping O2 in the atmosphere. Then we chat about fermentation, and fertilizer. and ethanol as "biofuel."

Further, we all know partial burning of wood alters the chemistry of cellulose. The first volatile compounds are not cellulose, and the final charcoal is quite pure carbon. So we know somewhere in between are aromatics that are roughly drop in fuels for aromatic gasoline.

A simple person would ask why we could not store solar/thermal energy in reaction chemistry using cellulose, with fuel products suitable for liquid or gas systems.

But we chat round and round to show what experts we are. All the while we are falling behind in a world that is not dumb anymore.

The government can spend the money or not, and they will still make sure no successful renewable energy is developed. But not every government shares our policy goals.

Geoffrey Styles's picture
Geoffrey Styles on Aug 24, 2012

John,

We haven't found a good way to backstop renewable energy's technology risks--the kind that the various tax credits, loan guarantees and other perks were notionally aimed at--without also covering project risks of the type that took down Solyndra and ought to remain with developers.  I've argued previously that Solyndra was a failure of due diligence; the price of the polysilicon raw material for competing silicon-based modules was in free fall when the loan guarantee was in final review, and the DOE either missed it or ignored it.  Would a bank or private investor have made the same blunder?  Perhaps, but at least it wouldn't have been with taxpayer (and federally borrowed) funds. 

As for Cape Wind, if this article is correct the project's two Power Purchase Agreements were based on the assumption of continued tax credits, so I don't think I'd take the other side of the bet you're offering.  I take no satisfaction in that, because there are several reasons we ought to prefer offshore wind to onshore, including its higher expected output per MW of capacity and reduced environmental impacts. 

The biggest problem with simply extending the existing subsidies is that we're in such a muddle about what they are intended to achieve.  Recentlly the President said (about renewable energy in general and wind energy in particular) "It's helping us to reduce our dependece on foreign oil.  That's not imaginary." Has none of his advisors from DOE or EPA explained to him that the US derives less than 1% of its electricity from oil, and that the energy sources with which wind, solar and geothermal compete are mainly domestic?

Geoffrey Styles's picture
Geoffrey Styles on Aug 24, 2012

Rick,

You should take some comfort in knowing you're not the only one asking such questions.  "Solar fuel" is becoming a hot topic, and various teams are working on artificial photosynthesis and other aspects of the challenge.  I'll take your comment as a suggestion that this would be a good topic for a future post.

Mike Dicello's picture
Mike Dicello on Aug 24, 2012

  The point is really moot when you look at what europe is doing in the wind generation offshore, while we debate and wring our hands and politicians talk about what they know not europe will be providing over 50% of power from renewables by 2020. between wind, tidal and solar.

 When will the USA once again become the leader? Instead we allow china to dump photovoltaic cells on the us when our local manufactures can not compete then the opposition stands and says see it is not profitable. WHy does everything need to turn a profit is not breaking even good enough?

 I also did not see it this article where the royalties that ioil and gas producers get forgiveness for when they drill offshore no royalties on the first x amounts of oil produced for x amount of years for production from specific fields if they meet certian rules, Ie water depth. How mmany billions do they recieve from that caveat in the offshore mineral managment, onshore also has their caveats in their leases on government lands. This amount should have been figured in also.

Dan Gerst's picture
Dan Gerst on Aug 29, 2012

One thing we consumers can do immediately, is stop investing in fossil fuel (oil, gas, and electricity production from coal and nuclear) companies. 

Most equity mutual funds in 401K programs are at least 5% invested in these companies. It is very difficult to nearly impossible to find a large, mid or small cap mutual fund that does not invest at least 5% in these dirty energy companies.  Just look at the Annual Report in the prospectus of your 401K investments to see how much you are investing in these companies.  I have asked the leaders of my company's 401K plan to at least offer investment options that don't require their employees to invest in fossil fuels.

One way to avoid investing in these companies without putting your 401k portfolio at risk, is to transfer out of these funds and into sector funds like Real Estate, Technology, Health Care, Telecommunications, Financial Services, Consumer Staples, etc. 

We can all try to level the playing field for clean energy companies by investing in them through our 401Ks (providing them with the financial resources they need) and starving the dirty energy companies. 

 

John Miller's picture
John Miller on Aug 24, 2012

On-shore vs. off-shore wind power projects both have their overall pluses and minuses.  One major issue with off-shore wind is that the wind turbine capital costs (salt water envrionment) are up to double on-shore wind farms.  Whether the directionally increased capacity factor for off-shore vs. on-shore will actually overcome these added capital costs?, I assume these details have been taken into account in the Cape Wind project review and economics evaluations.  The cost of the cross-water power lines is another added cost issue.  My rough estimate of Cape Wind shows the project is breakeven at best with the 2.2 cent/KWH subsidies.  Possibly the tax and other subsidies will make this project reasonably profitable in the longer term.

As we are both aware, replacing fossil fuels with non-fossil fuel/clean power only saves oil if the electric power is used to supply a significantly large EV fleet (displacing an ICE fleet).  Unless the politicians and the public view the small amount of electric power we import from Canada as an energy security risk (you know it’s not), this political plank of clean power saving oil will continue.  Hopefully someday the DOE will be allowed to present more complete facts related to your posting rather than providing partial information in support of whatever political agenda has been dictated to them.  Naïve comment? Probably.

John Miller

Nathan Wilson's picture
Nathan Wilson on Aug 25, 2012

It sounds like Rick is refering more to gasifier type biofuel production than artificial photosynthesis type solar fuels.

As I understand it, when biomass (or coal for that matter) is burned in a gasefier with steam and limited oxygen, the gas that comes out is not complex hydrocarbons, but CO and H2 (plus CO2 which is easy to separate), which together are called syngas.  The syngas can then be used to make other fuels like synthetic diesel or methanol.  The methanol can be further processed into gasoline, but of course each step decreases the efficiency and raises the cost.

The whole gasifier route to fuel production is plagued by cost questions.  Will that expensive plant pay off?  Why use biomass when coal and natural gas are so cheap?

Here is a description of a coal gasifier project that makes ammonia, and captures and sells the CO2: http://nh3fuel.files.wordpress.com/2012/05/fagerstrom_2008.pdf Dakota Gasification Company

Nathan Wilson's picture
Nathan Wilson on Aug 25, 2012

I don't see how artificial photosynthesis can be more efficient than thermo-chemical hydrogen production (using technology being developed in the national nuclear labs) coupled with concentrated solar power (CSP).  

The sulphur-iodine process for hydrogen production is suposed to be up to 50% efficient, using 900C heat.  Of course, CO2 or nitrogen must be added to make a liquid fuel, but that's just a 8-15% efficiency decrease in the case of ammonia fuel.

But maybe the photocatalyst approach will get the capital cost down?

Rick Engebretson's picture
Rick Engebretson on Aug 25, 2012

Thanks Geoffrey and Nathan for giving it some thought.

You both might be right. Either Quantum PhotoChemistry (Photosynthesis), or ThermoChemical (Gasification) might be exploitable. The oil industry produces both very specific products, and enormous quantities of bulk products.

SolarThermal is very interesting because a much higher temperature can be attained than by almost any other bulk heating method. Using fuel to create fuel brings us back to the corn ethanol problem.

Perhaps my ancient enzyme theories apply. Enzymes are giant globs that contain nanoscale (optical) devices. The glob can change shape to point just the right color and intensity at just the right spot of a bound reagent to cause a reaction that would otherwise not occur.

Enzymes, catalysts, activation energy are the value added step. Chemical processing and solar energy might have many forms.

Alain Verbeke's picture
Alain Verbeke on Aug 25, 2012

" 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."

Oh, what a pleasure to read the regular US whining about renewables being so expensive.

The facts are that where I live (Belgium, Europe), since 2004, I do receive 100% renewable sourced electricity provided by my new utility EcoPower.

They asked me first to become a member of their 100km away based cooperative, for the small sum of 250 euro (US $ 300), before allowing me to receive their clean electrons. They compensate it with a given 6% dividend each year, on the 250 euro membership fee.

They also are CHEAPER than Electrabel per purchased kWh, who as the previously monopoly state utility, still owns the majority of the other installed power generation plants in Belgium, who are mostly based on nuclear / coal / natural gas fuels.

Therefore I have to laugh about the US "debate", since I already achieved what I wanted, which is to save money by switching to renewable sourced electricity generation, as a home owner.

And I did that simply by being a capitalist : scanned the local deregulated market for a clean electricity supplier, paid less for what I needed compared to what I had first, while decreasing pollution and Belgium's 100% energy imports as an anciliary.

Geoffrey Styles's picture
Geoffrey Styles on Aug 25, 2012

Alain,

I'm not familiar with the market structure in Belgium, but if it's anything like Germany's your "capitalist" choice has been underwritten by renewable energy subsidies much larger than those in place or contemplated in the US.  So while your power might be cheaper, it's courtesy of your neighbors and fellow taxpayers paying for the difference in cost between conventional and renewable energy.  So perhaps the difference between the US and there isn't "whining" but whether the costs are visible or obscured.

Geoffrey Styles's picture
Geoffrey Styles on Aug 25, 2012

In fact the EU target is 20% by 2020, and they won't all meet it: http://www.renewableenergyworld.com/rea/blog/post/2012/03/will-eu-countries-reach-their-2020-renewable-energy-targets

Meanwhile, Germany will have more fossil generation in a few years than today, as a result of its decision to abandon its nuclear reactors before they reach the end of their lives http://www.bloomberg.com/news/2012-08-19/merkel-s-green-shift-forces-germany-to-burn-more-coal-energy.html

As for the royalty waiver you're referring to, it was granted during the oil price collapse of the late 1990s, and without it deepwater drilling would have ground to a halt, resulting in even higher oil imports than we had.  And it we're counting royalties, it's worth noting that at the typical rate of 12.5% onshore and 18.5% offshore, they would offset most if not all of the oil & gas tax incentives tallied by the EIA.

Geoffrey Styles's picture
Geoffrey Styles on Aug 25, 2012

Nathan,

What's the primary energy source for that 900 C heat? It's all a question of how best to replicate in close to real time the processes that produced the fossil oil and gas we rely on.  If you're gasifying biomass, you're still relying on the natural photosynthetic conversion rate, which is less than a typical PV panel today.  Artificial photosynthesis might beat that, or at least beat the low rate of the natural version, with implications for the surface area required to generate meaningful fuel production.  Algae is another angle on the same problem.  From what I see, it's too early to rule out any of these possible pathways. 

Steven Moultrup's picture
Steven Moultrup on Aug 27, 2012

I'm currently living in the midst of 250 Industrial Wind Turbines in up-state NY. Every story you have ever heard about environmental, health, noise, social issues and political conflicts of interest regarding industrial wind turbines are saddly TRUE. As the issue is now on the front burner of national politics everyones primary concern is about the fact that America is Broke. Foreign companies are buying American power (renewables and fossil fuel) companies at an astounding rate leaving some of us wondering about the future of homeland security. Future generations will have more to worry about than the $16 trillion dollar debt. We need to rethink the American Energy policy. America needs an "All of the Sensible" energy policy. See www.PTCFacts.Info

Geoffrey Styles's picture
Geoffrey Styles on Aug 28, 2012

"All of the Sensible" is catchy, and I suspect it's what most advocates of the blander "All of the Above" have in mind, but it's also very much in the eye of the beholder.  And unfortunately those who justify the PTC and similar measures as a proxy for the unpriced negative externalities of fossil energy often fail to value--or under-value--the negative externalities of "clean energy" such as those you cite.  The government wouldn't have to put its thumb on the scale if the value of the power these facilities generate, including the market value of the resulting renewable attributes in a state like NY with an aggressive Renewable (electricity) Portfolio Standard, were sufficient to provide a return on the investment.

Quentin Prideaux's picture
Quentin Prideaux on Aug 29, 2012

Come on, you have to think a bit more clearly than that (and more clearly than the WSJ if you're going to make any sense.

 

Why give any subsidies at all, ever?  

Because you expect something from it, that wouldn't happen if you didn't do it

What do we still expect from coal, oil and gas?  To destroy our country, planet and way of life.  For that we are giving them money?  After they've been burning coal for 300 years they need money to do it?  It's like giving someone money to go to college for the 14th time.

"(Coal R&D received more than $0.6 B, presumably for clean coal technologies.)"

'scuse me while I throw up.  Be a journalist.  Research, don't asusme, especially when you are going to assume unicorns and faries.  There is no such thing as clean coal.  If there WAS any money for this then it was a payback / payoff.

Numerous other erros - let's grab a paragraph:

"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.  "

Mature but expensive.  Think about that for a moment.  Got it?  Oh well - consider the cost curve for wind.  Now rewrite your article.

"not terribly effective" - the entire point behind 8Bn in investment is dismissed in three words with no facts, logic or reason.

Give me strength. 

Geoffrey Styles's picture
Geoffrey Styles on Aug 29, 2012

Sebb,

Or could it be that someone who has been writing about energy and working in energy--not just oil and gas but across a very broad spectrum--for decades might have some insights and perspectives you lack?  Your comment is rife with unexamined assumptions and assertions.  Two examples:

"What do we still expect from coal, oil and gas?" Nothing more than supplying 83% of the energy used by our economy, while new renewables (excluding large hydro) supply less than 3%.  That might grow to 10% by the end of the decade, but the transition away from fossil energy will take additional decades.  That means we have to continue exploring for and producing oil and gas, to keep the economy running.  The incentives currently in the federal tax code are there to make US oil & gas projects more competitive with those elsewhere, and comprise only a small adjustment to a total revenue stream for the government that includes corporate income taxes at one of the highest rates in the world, excise taxes, royalties and lease payments. 

"Mature but expensive" Yes, I've thought about it.  More, I've got data and logic to back it up. One look at the cost curve for wind turbines makes it clear that this technology has matured in the 30+ years that it's been deployed.  Check out Figure 20 in the latest Wind Technologies Market Report from the DOE, showing the trend for installed wind project costs since 1982: http://www1.eere.energy.gov/wind/pdfs/2011_wind_technologies_market_report.pdf  Unless, like Monty Python's parrot the technology is just "resting", it looks like wind's big cost reductions have already been achieved.  That's the mature part.  As for expensive, although the unsubsidized levelized cost of electricity for wind at $50-90/MWh is the lowest among renewables, wind remains intermittent and non-dispatchable, competing mainly with baseload and other dispatchable, non-peak fossil sources, which are low-cost.  Would the wind industry be in such a panic about the possible expiration of the production tax credit if wind projects were fully competitive without it? Having said that, as I've stated previously I think the right policy is neither status quo extension or flat expiration of the PTC, but a final, planned phaseout over 2 years or so.

Mark Lazen's picture
Mark Lazen on Aug 30, 2012

Thanks for the heads up about the comment line break problem Geoff.

If this is two paragraphs, it's fixed :-)

Geoffrey Styles's picture
Geoffrey Styles on Aug 30, 2012

Thanks, Mark.

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