Distorting the Wealth of Nature

Subsidies and Favoritism for Energy

By Thomas Tanton

There are too many forms of subsidies and favoritism to determine accurately which energy sources get the best treatment. But those who argue that their technology should receive more in order to compensate for another technology's subsidies are being disingenuous.

When Congress debates energy policy every few years, long-simmering battles over subsidies boil over. This year was no different as Congress put the finishing touches on the 2005 energy bill. One issue that consistently rises to the surface is the plea by renewable energy advocates to 'level the playing field' with respect to other forms of energy. Other sources, they contend, have been receiving special treatment and they deserve it, too.1 I have analyzed the history of subsidies and other forms of energy favoritism to evaluate whether any particular energy type is given special or advantageous treatment. As it stands today, there are too many forms of subsidies and favoritism to determine accurately which energy sources get the best treatment, although some interpretations can be made. In any case, those who argue that their technology should receive more in order to compensate for another technology's subsidies are being disingenuous. Congressional subsidies in the latest energy bill will only make matters worse.

In 1999 the Energy Information Administration (1999) published a compilation of then-current federal energy subsidies, including direct dollar amounts, as shown in Table 1. By that calculation, the subsidies to natural gas and renewables received the most support.

These figures are indicative but they are incomplete for several reasons. First, when subsidies are identified this way, comparisons are difficult because each form of energy produces different levels of energy output. Second, the Energy Information Administration has not updated these figures. Third, these figures exclude indirect subsidies.

Table 2 provides a summary that compares the subsidies in a more meaningful way. They have been converted to dollars per million BTUs. New subsidies authorized by the 2005 energy act and indirect subsidies are also included. The table reveals that when measured on a dollar-per-energy-output basis, renewables are receiving more direct federal subsidies than are petroleum, coal, and nuclear.

Non-monetary government support is difficult to measure and compare. For example, renewable energy advocates consider military expenditures to be a significant subsidy protecting Middle East oil imports, but this argument illustrates a lack of understanding of world oil markets. If U.S. military forces were not in the region, it is unlikely that oil production would be reduced; the revenues would simply go to dictators. And allocating some portion of the military budget as a subsidy to oil would require heroic efforts to attribute costs to a myriad assortment of jointly produced outcomes' including protection against terrorism.

Another example of non-monetary support is the Price- Anderson Act, which protects developers of nuclear power from unlimited liability in the event of accidents; it is correctly characterized as a subsidy. Because there have been no nuclear accidents where Price-Anderson has been invoked, the actual dollar value of this liability limitation is not known. The act has made it possible to obtain financing for nuclear power plants in the past, but the actual dollar value is not calculable. Making such a calculation would require knowing what finance rates and conditions would have been without the act.

Renewable energy receives non-monetary benefits as well. As just one example, the U.S. Bureau of Land Management (BLM) has proposed amending 52 of its land-use plans in nine western states to encourage wind energy development on public lands. It has also released its final programmatic environmental impact statement (PEIS) for wind energy development on BLM-administered lands in the West. The PEIS proposes to speed up the permitting of wind energy in the West. The Federal Energy Regulatory Commission (2005) is amending its interconnection regulations to require public utilities to follow special rules to interconnect wind energy facilities. Wind energy is allowed to behave differently, while other kinds of electricity generation continue to act according to the old rules designed to protect the reliability of the electrical grid.

Upcoming Subsidies

The Energy Policy Act of 2005 will substantially add to the subsidies. With the strong support of Sen. Harry Reid (D-NV), the act has revived tax incentives to make geothermal, solar, and wind power more competitive with oil, gas, and coal. The law continues the production tax credit of 1.8 cents per kilowatt-hour to renewable energy development companies. It also allows developers to claim the tax credit when electricity contracts are signed with utilities, a step taken before a plant is built. Under the previous system, owners didn't know whether the tax credit would be in effect when a new plant went online. Reid promoted his plan by saying, 'Our dependence on imported oil poses a risk to our national security and our economic well-being' (Young 2005, 4B). But renewable generation of electricity does little to reduce oil imports, since hardly any oil is used to produce electricity.

The energy act includes tax incentives for energy totaling more than $18 billion over ten years, according to the Joint Committee on Taxation. Assuming that all revenue enhancers, intended to offset some of the tax breaks, are implemented, the total cost will be $14.055 billion over ten years. The tax incentives include a credit for advanced nuclear facilities that could cost taxpayers as much as $6 billion; $2.858 billion in tax breaks for clean coal and clean coke; and $452 million for public utilities using natural gas.

The act also includes subsidies for not-for-profit utilities that invest in renewable energy and clean coal generation through socalled tax credit bonds. These are municipal utilities and co-ops that already benefit from tax-free status. The proposal places a $2 billion limit on use of the clean energy bonds, equally divided between renewables and clean coal technologies.

Congress eliminated a proposed national renewable portfolio standard (RPS) that would have required 10 percent of electricity to be generated by renewables, but nineteen states have some form of RPS. Such requirements make consumers pay a higher price for energy than they would otherwise, and the price differential of renewables is often above 2 cents per kilowatt-hour.

The cost to ratepayers of such standards is difficult to quantify, but is surely massive. On a national level, 3,680 billion megawatt-hours of electricity were generated in 2003. Assuming a conservative price premium of 2 cents per kilowatt-hour (not including the already available production tax credit of 1.8 cents per kilowatt-hour for renewables), the standards in those nineteen states cost consumers more than a billion dollars per year. Some proponents have claimed (Union of Concerned Scientists 2005) that the RPS actually reduces consumers' total energy bills, but the assumptions they use are questionable.

States Have Their Own Subsidies

In addition to RPS standards, many states subsidize renewable energy in other ways. The Fresno Bee reports that California farmer Pat Ricchiuti is installing in his fruit packing house what is believed to be the largest 'privately' financed solar-energy system in the state (Nax 2005). The $6.4 million system features 7,730 solar panels on the roof of his 150,000- square-foot facility. Ricchiuti paid $6.4 million for the system, but after state rebates, his cost was $3.2 million. With the 50 percent rebate, Ricchiuti will recoup his investment in about eleven years. With no rebate, it would have taken twenty years, and Ricchiuti said he would not have done the project. California taxpayers would have been better off.

Preferential infrastructure treatment and use of eminent domain are also forms of subsidy. The California Public Utility Commission has pressured Southern California Edison to build a new transmission line in the Tehachapi area east of Los Angeles so that it can tap into proposed wind energy development. The proposed route of the project has run into opposition from a housing developer because the proposed line would run through private property where a school is already planned. Eminent domain has been considered for taking the property for the transmission line.

Evidence shows that most forms of energy receive some subsidy, and those subsidies show no signs of declining. But if energy technologies are to compete fairly, it's time to start eliminating special treatment in any form. Leveling the playing field by digging deeper holes and building bigger mounds does not lead to fair competition.

Note

  1. For example, Ronal W. Larson (2005, 22), chair-elect of the American Solar Energy Society and a founder of the Colorado Renewable Energy Society, has observed that the production tax credit for wind energy 'is at 1.8 cents only to balance the existing subsidies for conventional sources.'

REFERENCES
Energy Information Administration. 1999. Table ES1: Federal Financial Interventions and Subsidies in Energy Markets 1999: Primary Energy, September . 2003. Table 1.2: Energy Production by Source, 1949'2003. Report No.
DOE/EIA-0384, Annual Energy Review, September 7.

Federal Energy Regulatory Commission. 2005. Interconnection for Wind Energy. Federal Register Vol. 70, No. 115, June 16, 34993.

Larson, Ronal W. 2005. Poor Advice on Wind Power. PERC Reports, March.

Nax, Sanford. 2005. Rebates Encourage Businesses to Try Alternative Sources of Energy. Fresno Bee, June 10.

Union of Concerned Scientists. 2005. Studies Show a National Renewable Electricity Standard Could Save Billions of Dollars. Fact Sheet. Online: www. ucsusa.org/clean_energy/renewable_energy/page.cfm?pageID=1222.

Young, Samantha. 2005. Reid's Energy Bill Seeks Tax Incentives. Las Vegas Review-Journal, June 14.

Thomas Tanton is a principal of T2 Associates, an energy consulting firm in Lincoln, California, and a senior adjunct fellow with the Institute of Energy Research.

 

 

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