U.S. Support for Renewables is Miniscule…and Erratic

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It’s time to ponder a rational comparison of historical U.S. energy incentives. In a thoughtful analysis called “What Would Jefferson Do?” authors Nancy Pfund and Ben Healey of DBL Investors offer some revealing insight to inform the debate.

There is no free market in energy … and calls to action for renewables “to stand up to competition without any government support” would be better informed by a look at historical efforts to promote energy transitions in the U.S.

Coal, oil, gas and nuclear energy did not emerge as fully matured, low cost energy sources. Instead, they were the beneficiaries of decades of permanent and significant federal government incentives and supportive regulation. As part of a larger push to create jobs, support expansion, and fuel economic growth, the U.S. government has used a variety of financial and regulatory incentives to support energy innovation for over 200 years. Here are some of my favorites:

• In 1789, to promote the nascent domestic coal mining industry, the federal government enacted a tariff on imported coal, insuring that domestically produced coal would have a major cost advantage. The goal? To incentivize development of this strategic and emerging energy resource. The result? Higher short term prices for consumers.

• Throughout the 19th century, timber and coal interests benefitted from below market land grants, state sponsored geological surveys identifying resources, federal support to build out railway and waterway transportation systems to enable the extraction of these energy resources as well as a host of policies to spur growth.

• In 1950, Congress passed a subsidy that allowed owners of coal mining rights to reclassify income traditionally subject to income tax as royalty payment, for which a lower capital gains tax rate is paid. This special tax treatment is still available to members of the coal industry today and totaled well over $1.3B in forgone tax revenue between 2000 and 2009.

• And the nuclear industry got a huge boost when Congress passed the Price-Anderson Act in 1957, which provided federal indemnification of utilities in the event of nuclear accidents. At the time, the Edison Electric Institute testified that without such immunization from the risk, “no utility company … will build or operate a reactor.”

So how do those incentives compare to current investments in renewables?

The level of support in the early days of the coal, oil, gas and nuclear industries, as a percentage of the overall federal budget, dwarfs what is being spent to promote renewables. The report concludes that nuclear subsidies accounted for more than 1% of the federal budget over the industry’s first 15 years (as a percentage of inflation-adjusted federal spending). Oil and gas subsidies comprised 0.5% of the federal budget from 1918-1933. Meanwhile, support for renewables constituted only 0.1% of the federal budget since 1994. As you can see on the chart below, in inflation adjusted dollars, nuclear spending averaged $3.3B over the first 15 years of the subsidy life, oil and gas averaged $1.8 and renewables clocked in at less than $0.4B.

What’s even more surprising is that 50% of the Department of Energy’s research and development spending from 1948-2010 supported the nuclear industry. During that same period, 25% was spent on fossil fuels, 12% on renewables and 9% on energy efficiency.

Equally important is the fact that support for oil, gas, coal and nuclear has made its way in the permanent tax code, whereas tax incentives for renewables have traditionally been short term and renewed or not renewed on a sporadic basis. That causes a boom/bust market where investors fear making long term bets.

So what’s the take-away?

Energy policy is intricately related to government strategy for economic development. In the 1800s, the U.S. favored expansion and development of coal resources. In the 1900s, it promoted development of oil and gas resources in the first half of the century and hydro-electrical and nuclear energy sources in the second half.

If we want to insure leadership in the transition to the next predominant energy source – a transition underway in every major economy in the world – we need to use rational policy and sound regulation to steer us in that direction.

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Comments

There is no energy transition underway

Submitted by Edward on Tue, 11/01/2011 - 12:01.

The assertion that there is a transition to "the next predominant energy source" (presumably solar) underway in every major economy in the world is simply false. The "big solar" industry survives only by dint of government subsidy. Britain and Germany are already talking about cutting their unsustainable subsidies. Here are current levels of government energy subsidies in the United States, per megawatt-hour:
Coal: $0.25
Natural Gas: <$1.00
Solar: >$20 and rising

I recommend this piece by Andrew McKillop: "Silicon Valley's Green Geek Scenario Goes Belly Up" at ttp://tinyurl.com/3lv7zmp. His article spells out the brutal reality of the utter failure of the various green energy schemes. That failure is happening before my eyes at various Silicon Valley companies which I won't name here, beyond the disaster called Solyndra. The really sad part is the loss of the truly innovative and productive enterprises that would have otherwise flourished absent this massive waste of capital, both public and private, on politically correct energy fantasies. Meanwhile we can thank George Mitchell, cited in the article, for developing fracking technology, which has more than doubled the world's known reserves of natural gas. So far, the push for so-called renewable energy has given us nothing but more debt and higher energy prices.

I agree that renewable

Submitted by Cathy Boone on Thu, 11/03/2011 - 12:25.

I agree that renewable subsidies today are much more expensive per MMBTUs produced than subsidies for oil, gas, and nuclear. But that’s not the point. Today, renewables are competing in a commodity market (the sale of electrons) against traditional, fully depreciated generation sources. And the point of the research is to illustrate the size of the subsidies required to move those sectors to the low cost fuel sources they are today were enormous compared to the support renewables receive. That’s why it is critical to compare the subsidies received as a percentage of budget in the first 15 years of the subsidies. In the VC world, everyone talks about the “Valley of Death” where companies frequently fail in moving early stage research and development to commercialization. In energy, that’s more like a Mountain of Death because immense scale is needed to achieve costs that enable you to penetrate the traditional energy markets and displace entrenched sources … and that’s not even accounting for the fact the renewables are working to access a grid that is rarely designed to support new entrants.

With respect to natural gas, I absolutely think it needs to be a part of the mix but in addition to being a carbon emitting fuel, the long term environmental and seismic impacts of hydraulic fracking are unknown. So I’m not ready to say that it’s the ultimate solution to the world’s energy needs. But for the record, neither are renewables. They can and should become a significant part of the global energy mix by getting the same sort of boost that traditional (but -- at the time – unproven) energy sources got over the last 200 years. It was those investments that enabled the scale that drives down costs to where they are today.

As far as my contention that the major economies in the world are transitioning to renewable energy sources, China, Japan and Germany all have significant renewable energy feed-in-tariff programs combined with ambitious carbon emission reduction goals. The train is leaving the station and we aren’t on it.