Energy subsidies have proven fertile ground in the debt-ceiling debate now raging before Congress.
Congressional lawmakers arguing over how best to rein in spending, have set their sights on eliminating ethanol subsidies and oil and gas tax breaks. Renewable energy subsidies are also under pressure. Earlier this year, the Department of Energy's Section 1705 loan guarantee was cut. The popular Section 1603 cash grant program created under ARRA is expected to expire later this year. And some industry insiders indicate the federal production tax credit, in effect since passage of the Energy Act of 1992, will be allowed to sunset at the end of 2012.
Our recommendation to Congress: Eliminate all of the energy subsidies. Let the economics of a freer market prevail.
Doing so will create winners and losers, for sure, but the public is far better served when industries compete for market share and profits rather than fight for political favoritism and handouts.
If you doubt this economic truism applies to the energy industry, consider the US wind market, which has relied on public funding since its inception over 30 years ago.
Wind -- a trail of broken promises
The history of governmental handouts to the wind industry dates back over 30 years to the Carter Administration. Billions in public dollars have poured into the wind industry since that time and more is obligated every year for the next decade. Yet for all the promises made, we have little to show for the money spent.
Promise #1: Meeting US Electricity Needs. A 1976 study by the Department of Energy estimated that wind power could supply nearly 20% of all U.S. electricity by 1995. By the end of 1995, wind represented only one-tenth of 1% of the US market. Today, wind delivers about 2% of the US electricity market. DOE now claims we will reach 20% wind power by 2030. Moving the goal post does not address the logistical and cost barriers to reaching the 20% goal. These barriers are significant and it's time DOE considers the realities of what a 20% wind world would look like. It's unlikely the scenario will ever be realized.
Promise #2: Reducing Cost. In the mid-1980's wind power sold at around 25 cents per kilowatt hour. By 1995 prices dropped dramatically but were still double the cost of gas-fired generation, even after allowing for the production tax credit (1.5 cents per kwh in 1995). Today, wind pricing is even higher relative to natural gas, despite continued federal support (figure 22, 2010 Annual Wind Market Report). Promises of technology improvements that could drive down costs have not translated into energy price improvements.
Wind's intermittency still means that high upfront capital costs are spread over fewer hours of operation which places upward pressure on the price of the energy sold. Cost pressures are also tied to policies on renewables. Aggressive renewable policies have placed developers in strong negotiating positions relative to energy buyers. They know full well that state regulators will approve their pricing demands and pass through the higher costs to ratepayers (footnote 50, 2010 Annual Wind Market Report). And with power purchase agreements now a requirement in order to attract investor financing, above-market energy prices are locked in for extended terms ranging between 10-20 years.
Promise #3: Improved Performance. In 1994, ninety percent of the US wind energy capacity was located in the State of California and operated at a 24% annual average capacity factor. In 2010, the capacity-weighted average capacity factor for Californian projects in 2010 was only 27.2%. In most regions of the US, wind operated at under 30% capacity factor. New York State wind performed at 22.7% last year. While newer technology has resulted in modest production improvements, US wind has failed to meet the promised 35% capacity factor
Promise #4: Jobs creation. Over eighty-percent of the nearly $6 billion in Section 1603 grants paid out in 2009 and 2010 went to wind energy projects. Yet by the end of 2010, the American Wind Energy Association reported jobs declined from 85,000 to 75,000. When installations dropped in 2010, it was no surprise that jobs dropped as well. And since growing the manufacturing base is predicated on installing more wind turbines it's hard to see where job growth is sustainable.
The perpetual 'infant industry'
Fourteen years ago, energy expert Robert Bradley wrote "Wind power has proven itself to be a perpetual 'infant industry' with its competitive viability always somewhere on the horizon."
This week GE's ecomagination VP Mark Vachon said this: "Without clean-energy mandates or tax subsidies, wind struggles to compete with cheap natural gas. And there's uncertainty about those subsidies, particularly in the U.S. where Congress is looking to manage budget deficits."
The American Wind Energy Association insists wind is now a mainstream energy resource but blames the 50 percent drop in US installations between 2009 and 2010 on a lack of long-term, predictable federal policies. After 30 years of paying the way for this infant industry, apparently the public has still not done enough to create a market for its product.
Has anything changed?
Call Congress. Remind your representatives that wind energy has yet to deliver on any of its promises. And history has shown we have no reason to believe things will change.
Eliminate all wind energy subsidies as part of the debt ceiling compromise. Let's finally move on to energy solutions that can deliver on their promises.