All energy is subsidized, so why single out renewables?

Any intellectually honest discussion about energy markets requires acknowledging that all energy is subsidized, a fact that experts sometimes forget.

In a Sept. 8 column for The Hill, for instance, one author argued that eliminating renewable energy incentives was key to increasing prosperity and that, short of eliminating renewable energy subsidies, our nation would suffer “through energy poverty … in the future.”

But as Ronald Reagan said, “facts are stubborn things.”   

{mosads}The coal and nuclear plants supposedly harmed by increasing amounts of renewable energy are also beneficiaries of government subsidies. And rather than renewables, cheap, abundant and subsidized natural gas is of much more concern to coal and nuclear facilities because these “base load” plants cannot react quickly to market signals like a new, efficient gas-fired energy facility, as the Department of Energy’s grid study recently concluded.

Let’s look at some of the implicit incentives for fossil fuels and nuclear energy.

Coal plants, for example, do not bear the full cost of the byproducts they create to generate electricity (e.g., emissions, solid waste, cooling water discharge, etc.). Experts can disagree on the cost of these, but no one disagrees that the profits from these investor-owned coal plants go to the shareholders.

Furthermore, only “mineral or natural resource” businesses such as oil, natural gas and coal (but not wind or solar energy) are able to use a government-subsidized financing structuring called a “master limited partnership” (MLP). These publicly-traded vehicles are not subject to corporate taxation and are extremely tax efficient, which allows those privileged businesses to access investment capital at low rates for large infrastructure projects. This implicit tax subsidy lowers the cost of gas-fired electricity, in addition to other implicit subsides available only to oil and natural gas.

Finally, the nuclear industry is the beneficiary of the Price-Anderson Act, which became law in 1957 (and is regularly renewed—most recently in 2005 for 20 years) as an incentive for the private production of nuclear power. In short, because investor-owned utilities cannot acquire insurance in the marketplace to cover its potential exposure in case of a nuclear disaster, the act covers liability from nuclear incidents above $13.6 billion—with the remaining cost covered by taxpayers. The Japanese government has estimated the cost of the Fukushima nuclear disaster to be $188 billion. Should such a tragedy befall a nuclear plant in the United States, in addition to the untold social and emotional loss, the Price-Anderson Act means taxpayers would be on the hook for $174.4 billion. 

In reality, the key to increasing prosperity would be to eliminate all energy subsidies, which are often buried deep in government statutes for the benefit of fossil fuels and/or nuclear energy. The production tax credit (PTC) for wind energy and the investment tax credit (ITC) for solar face fierce opposition from special interests that derive their wealth primarily from oil and gas, which state their opposition to the PTC and/or ITC because they want “the market, not government, to pick winners and losers.”  Yet their concern doesn’t extend to the subsidies discussed above, which are at least equal to the tax subsidies for renewable resources. 

As for concern over the intermittent nature of renewable energy and its supposed impact on grid reliability, grid operators constantly balance fluctuating electricity supply and demand for energy. Why single out renewable energy technologies when the grid is built and operated for a rare event such as a massive coal or nuclear plant tripping and going offline? The amount of redundancy built into the grid for this contingency in the form of operating reserves (both spinning and supplemental) is breathtaking. This extra cost was there long before renewable technologies starting injecting energy into the grid. Because the grid has been built to support these massive “base load” plants, the incremental cost of integrating renewables is marginal.

And the men and women charged with keeping the lights on say the grid is as reliable as ever. “The state of reliability in North America remains strong, and the trend line shows continuing improvement year over year,” according to the CEO of the Norther American Electric Reliability Corporation, a regulatory group charged with monitoring grid reliability and security. 

Growing wind and solar energy fosters energy independence and a diversified energy portfolio. Renewables reduce air pollution and save water, which is heavily used in other forms of energy production. Renewables also employ hundreds of thousands of Americans across all 50 states. Many of those workers have 21st century manufacturing jobs, with more than 500 U.S. factories now building parts for wind turbines. Renewables like wind energy provide a drought-resistant crop to farmers in the form of lease payments totaling $245 million annually for hosting turbines, and wind vastly boosts revenue in rural areas for local town budgets through increased property taxes.

These societal benefits might just be worth incentivizing.

Andrew Fales, CPA is an energy investment professional and a senior fellow at Conservatives for Responsible Stewardship, a nonprofit organization dedicated to environmental stewardship.