Blog post reprinted with permission from Southern Energy Management:
Lately I have heard and read in the media a general questioning of the need for renewable energy subsidies. Many of these critiques come at this conversation from a pro “free market” perspective. While I agree with many on the value of the free market, I’m often amazed by how little understood the energy market is. The world energy markets and the US energy markets are anything but free: energy is one of the most anti-competitive, regulated and subsidized markets around. Given the current dialogue, I got to thinking it could be worthwhile to share a “US Energy Subsidies 101” overview to spark greater understanding and move the discussion forward.
There are 5 basic types of subsidies:
- tax credits and deductions,
- R&D funding,
- direct expenditures to specific energy resources,
- general sector subsidies (transportation/electric generation),
- and risk transfers (such as loan guarantees and liability limitations).
Altogether, the low end of estimates of total US energy subsidies from the federal government is $16.6 billion per year, while other analyses approach a staggering $75 billion per year.
The Devil is in the Details
With all data, it depends how you slice it as to what conclusions you arrive at. For example, many estimates of subsidies to renewable energy overstate the subsidies because they include those to ethanol production, which is really an agricultural subsidy. And some of this stuff is so esoteric … have you heard of the Tariff Act of 1913? This almost 100 year old law is a subsidy to oil exploration which allows drillers to take a deduction for lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights. It also depends what expenses are being subsidized. If you are looking at R&D, then renewables get proportionally more subsidies. If you are looking at subsidies to operating expenses, though, oil and coal dwarf everyone else.
One whopping subsidy is the Price Anderson Nuclear Industry Indemnity Act’s cap on private firms’ liability for nuclear accidents. Although the de facto cap is high by conventional standards (more than $12 billion), we are seeing what the true potential costs of a nuclear accident is now in Japan — and the US government is assuming much of this financial risk. While this doesn’t show up in much of the subsidy reporting, a 1992 US DOE Energy Information Agency report estimated the value at $3 billion per year (in 1991 dollars) or more than $100 billion to date. There are also subsidies that are for general electricity generation activities; while they are not specific to fuel type, those types of subsidies benefit the incumbent energy generation sources far more than renewables. My favorite subsidy is the General Mining Act of 1872 which benefits, among other industries, uranium mining. Because of this 139-year old law, a federal lease costs $5/acre, which is less than the price of a normal – not supersized! – combo meal at McDonalds.
Breaking Down the Numbers
Looking at a recent Environmental Law Institute study, from 2002-2008, fossil fuel production (which excludes general sector subsidies and nuclear energy) received $72.5 billion in subsidies, while renewables got $29 billion. If you exclude ethanol production from renewables (because like I said, it is essentially an agricultural subsidy), you get $12.2 billion for renewables. That tallies out to 6 times more subsidies for fossil fuel production versus renewables; this is not the story that we are hearing in the press or on talk show radio. Oil and Coal receive the most energy subsidies in total dollars.
Admittedly, renewables get more on a per-Megawatt Hour basis, but this is more a factor of the incumbent technologies having almost a century to develop and grow while renewables is just getting started. Additionally, this metric completely ignores the size of fossil fuel subsidies — and let’s face it, $72.5 billion is a LOT of money for an industry that doesn’t exactly need start-up capital any more. I like this study for its clarity and how it defines energy resources, but below I will list a number of alternative studies that you can reference to study the issue ranging across the ideological spectrum.
Why Do We Need Subsidies, Anyway?
I think that the right question to ask is what is the point of subsidies to begin with? The classic economic argument for subsidies is for: 1) “public good” or positive economic externalities and 2) “to support emerging industries in the early stages of market development” or infant industry justification. The latter is especially critical in a regulated, anti-competitive market such as energy.
The truth is that most of the subsidies go to mature industries that have been around for awhile and shouldn’t need a leg up anymore. And worse, in many cases, those subsidies actually stymie competition from renewable energy; they help reduce these incumbent energy companies’ operating expenses versus new investment or new technologies.
A Level Playing Field
Solar is an emerging market that is fast driving down cost and becoming increasingly competitive with traditional generation resources. That’s a vital piece of this puzzle, and I want to make sure my point is clear: the Levelized Cost of Energy (LCOE) — which measures the total cost of energy over the life of every generation plant — of new solar generation is increasingly competitive with the LCOE for new gas, coal and nuclear.
Quite frankly I’m tired of pundits comparing the cost of existing, already depreciated, coal, nuclear and gas plants with newly built solar plants and confusing peak and baseload energy pricing. More relevant is the direction of cost trends: solar is rapidly declining in price, while traditional generation resources, such as coal and nuclear, are getting more expensive.
In the solar industry, the current internal industry conversation is how to become competitive with traditional generation before the federal solar tax credit runs out in 2016. Our industry subsidies are on the back end and are very transparent, unlike the traditional generation resources that have managed to embed subsidies throughout the energy supply chain and are also institutionalized into our economy’s standard operating procedures. Solar fits the definition of an infant industry, but we are quick becoming a competitive industry … and we won’t need another 70 years of support to do this, like some energy industries.
My plea for energy sanity here is that if we are going to start attacking renewables for being subsidized energy, we need to stand back and look at the overall energy industry and total US energy subsidies. Our energy market desperately needs subsidy reform, but I believe that we need to start focusing on the main culprits and not just the new kid on the block.
Blog post reprinted with permission from Southern Energy Management: www.southern-energy.com
Written by: Blair Kendall, Director of Business Development for Southern Energy Management
With experience in marketing consulting and international business, Blair’s primary focus is expanding the market for sustainable energy in the Southeast. As director of business development, he is responsible for mapping out SEM’s geographic expansion strategy as well as developing new marketing programs and lines of business.