Before I begin to justify the use of subsidies for renewables it is important to understand how renewables became a part of the electricity generation conversation. In 1978 the Public Utility Regulatory Policies Act (PURPA) was passed as a part of the National Energy Act in response to the 1973 energy crisis. The main goal of PURPA was to promote energy conservation, and promote greater use of domestic and renewable energy. (1) Twenty-nine states have adopted renewable portfolio standards (RPS) to mandate an increase in renewables and a decrease in fossil fuels for electricity generation. With this goal in mind, renewable subsidies like the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have been very successful in increasing the presence of renewable electricity generation.
The figures below from the U.S Energy Information Administration report called “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013” provide context into the subsidies provided for both fossil fuels and renewable generation methods.
Figure 1:
Figure 2.
Although renewables are receiving the majority of subsidies as a percentage of total subsidies and as a percentage of total electricity generated, it is worth noting from Figure 2 that fossil fuels are still receiving more money in subsidies.
As with any technology that is set to disrupt the status quo, many stakeholders in the electricity value chain have good reason to be frustrated with the subsidization of renewables. The current grid and business model is not flexible enough to handle the changes that arise with integrating distributed sources onto the grid. This however does not mean that the grid and business model cannot be updated such that current players remain profitable and the presence of renewables increases.
As of 2011 distributed solar customers represented less than one percent of the U.S retail electricity market, but these customers are highly concentrated within ten utilities. Additionally, as retail electricity prices increase the share of renewable generation is expected to increase. (3)
There are technical, financial and strategic challenges associated with integrating renewables onto the grid. One example is the addressing the intermittency and imperfect forecasting of solar and wind as shown in figure 3 below. Although difficult, it can be mitigated successfully as seen in with solar in California and wind in Texas utilizing such practices as time of use peak rate pricing.
Figure 3
During the “Getting Subsidies Right for Renewable Energy” Episode by The Energy Gang podcast, Katherine Hamilton, a regular contributor proposed that there are three phases to integrating renewables on the grid:
- Phase 1: Early commercialization
- New technology needs subsidies to support R&D
- Phase 2: Policy changes
- As the price of renewable technology decreases and becomes more competitive, policies (and associated funding) such as net metering, and tariffs are needed to bridge the cost gap between renewables and fossil fuels
- Long-term policy frame work
- Additional policy to support the continued scale up of renewables (4)
In conclusion, the beginnings of the unraveling of the current electricity utility business model began with the passing of PURPA in 1978. Until the RPS goals have been sustainably met, subsidies-in some form-are necessary. Subsides alone are not driving the need for new business models in the industry instead they are merely accelerating what is inevitable.
Sources:
1. https://en.wikipedia.org/wiki/Public_Utility_Regulatory_Policies_Act
2. https://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf
3. http://www.eei.org/ourissues/finance/Documents/disruptivechallenges.pdf
4. https://soundcloud.com/the-energy-gang/getting-subsidies-right-for-renewable-energy
Thank you for the informative post.
ReplyDeleteI understand what you want to argue however I would suggest you narrow down the topic: i.e. what kind of subsidy or policy support on specific type of electricity such as solar PV or wind is effective or not, otherwise the topic can be vague to discuss.
Considering conventional fossil fuel power generations have “external cost” such as greenhouse gas emission while “renewables” do not, it is fair for the latter to be supported from public sector to adjust the externality.
If you want to deal with “renewable” and “intermittency”, I would argue “geothermal power” has no issue in “intermittency” but “renewable”. Do they need to get more support? Yes, I think so. How public sector can support for geothermal? ...I wanted to hear such the depth.
The Figure 2 is very interesting that can highly capture readers’ attention. Paradoxically, the fossil fuels obtain much more subsidy than renewables. But I wanted to know more about this. How and what form of subsidy the fossil fuels obtain?
>>>As of 2011 distributed solar customers represented less than one percent of the U.S retail electricity market, but these customers are highly concentrated within ten utilities.>>>
I see this fact looks interesting. As a complete set of information, would be better if you list up the name of these ten utility companies.
>>> Although difficult, it can be mitigated successfully as seen in with solar in California and wind in Texas utilizing such practices as time of use peak rate pricing. >>>
I would suggest this point also should be elaborated more. Is the mitigation realized by the pricing enough for utilities to hedge the intermittency problem caused by solar & wind? For the past few years, Japanese utility companies have invested a lot for large scale battery to control frequency after increase of solar and wind in the grid.
http://www.rechargenews.com/solar/869689/toshiba-to-build-40mwh-li-ion-battery-system-for-tohoku-electric
>>> The current grid and business model is not flexible enough to handle the changes that arise with integrating distributed sources onto the grid.>>>
Agreed. To update the grid infrastructure in the US will be the most important challenge for related regulators and industry players, which relates to the discussion point above.
“Modernizing the U.S. Energy Grid”
http://www.cfr.org/united-states/modernizing-us-energy-grid/p36858
Candace,
ReplyDeleteI am struggling to make the jump from your post that renewable energy is inevitable.
I would like to first point out that your figure 2 does not show that Fossil Fuels are receiving more money in subsidies. Figure 2 shows the amount of money in total subsidies for each sector combined at the top and then it switches from dollars to british thermal units (BTUs). BTUs are a measure of energy. The rest of those numbers in figure 2 are showing how much energy we consumed in each year (97,296 and 96,584 trillion BTUs), and then how much energy we produced in each of those years (73,659 and 81,149 trillion BTUs). Every number under these last two numbers breaks down where we produced that energy from. Coal, natural gas, and crude oil produced the lion's share in each year. These numbers are not how much each sector received in subsidies.
It is interesting that we produced 24,000 trillion BTUs less than we consumed in 2010 and 15,000 less in 2013. You can see that gap closing down, which is good that we are importing less energy and producing more in the U.S. Your figure 2 also shows that Natural Gas and Oil are the main reasons that gap is closing, which you have to attribute to frac'ing.
Cheap electricity has many benefits for united State's citizens in that it allows people to live better lives. Renewable energy in its current form is more expensive than fossil fuel and can not compete on a fair playing field.
I can not agree that renewable energy is inevitable as our main source of energy anywhere in the foreseeable future. Fossil fuel production will remain the cheaper of the two. Also, with the amount of oil and natural gas reserves that we have right now in the Unites States, I honestly do not think that we will see renewable energy ever be the main source of electricity, in our lifetime.
I hit the limit so this is coming in two posts. Post 1:
ReplyDeleteRenewables are an interesting topic when it comes to federal subsidies – since without the subsidies the industry would be significantly smaller and growing much more slowly. Current government support for renewables is great in concept but, in my opinion, it distorts the free market beyond the intended outcome and only for as long as the subsidy lasts. Instead, the federal government should look at externalities associated with other forms of energy that are not captured and impose taxes to address those externalities. For example, renewables receive subsidies because they do not emit carbon dioxide or fine particulate pollution; however, natural gas and coal are not taxed for those externalities. In this subsidy approach, other forms of energy that do not emit pollution, such as nuclear power, do not receive equivalent financial support. Therefore, instead of propping up renewables for a brief period through incentives like the Investment Tax Credit (ITC), the federal government should tax pollution emitting forms of energy based upon the impact of the pollution.
Coal is the easiest fossil fuel to target for several reasons; however, due to the recent natural gas boom, not much attention is needed since it is losing market share without taxing its externalities. Coal is one of the – if not the most – dirtiest forms of energy on the planet. Even with “clean” coal technology, the pollution generated is still significantly more than natural gas. Even more shockingly, current coal plants release more radiation each year to the environment than operating nuclear plants. The mining of coal also has significant environmental impacts, many of which are never accounted for. Since the economic argument for coal is already weakening with abundant natural gas, any externality tax placed on coal will only hasten its decline.
Natural gas is the cleanest form of fossil fuel to use for electrical production. Since it is in gaseous form, it does not bring with it the impurities that coal brings. However, it still emits CO2 as part of the burning process to electricity and contributes to global warming. In addition, there are a lot of questions regarding what fracking does to the environment where the drilling occurs. The externalities associated with these two activities should be quantified and appropriately taxed such that the full cost to society reflects the market price. Reference 1 contains a long discussion of both the externalities associated with CO2 emissions and with respect to local impacts. If a $100 tax for every ton of CO2 is enacted as mentioned in Reference 1, it would be equal to a tax of $5.85 per an MCF of natural gas – or a tax of almost 200% at current prices (emission amount of 117 pounds per MCF taken from Reference 3). This would significantly slow down the expansion of natural gas for generating electricity.
Post 2:
DeleteThe final topic is with regards to the nuclear industry – which is left out of obtaining significant federal subsidies – but is required to pay for all its externalities. The US federal government has collected over $30 billion from nuclear plants to take the used nuclear fuel from the utilities; however, the federal government has never met that obligation. The fuel remains at nuclear plants scattered throughout the country. In addition, nuclear plants are required to have substantial decommissioning funds built up through plant life to return the site back to its original state, before the plant was built. By requiring fossil fuels to pay for the externalities associated with its use, it levels the playing field for all forms of energy and not those that receive special treatment.
In addition, nuclear power is left out of the Investment Tax Credit; however, it provides the more benefits than solar or wind power. It produces power with no emissions but is available when the wind doesn’t blow or when the sun doesn’t shine. Nor does it require expensive – and currently technologically unavailable – storage systems. Using the price from last week’s class (4/13), the fair market value cost per a watt was $4.5; however, solar only works at a 16% capacity factor. The typical nuclear plant in the US operates at 92.1% - which includes planned refueling outages (Reference 2). Taking the ratio of this, means that on an equivalent fair market value for a watt of nuclear power is $25.9 when capacity factor is considered. Considering that a typical new nuclear plants has an installed operational power over 1,000,000,000 watts (1 gigawatt), the fair market value of a nuclear plant – on an equivalent capacity factor – would be worth $25 billion and receive a tax credit of $7.5, which is close to the construction cost of a plant.
Overall, I fully endorse supporting clean energy, renewables and nuclear power alike. However, I believe tax subsidies are short term fixed that will run out once support in Washington dries up. Subsidies for one part of the energy industry do not address the underlying concerns with the other segments of the industry. The federal government should identify the full cost of the externalities associated with all forms of energy and appropriately tax them. Only this way will the true maximum economic benefit be provided to society.
References:
1) http://oilprice.com/Energy/Natural-Gas/An-Economic-Analysis-of-Fracking.html
2) https://www.nei.org/Knowledge-Center/Nuclear-Statistics/US-Nuclear-Power-Plants/US-Nuclear-Capacity-Factors
3) https://www.eia.gov/environment/emissions/co2_vol_mass.cfm
4) https://en.wikipedia.org/wiki/Nuclear_Waste_Policy_Act
I’d characterize your post as more an informative list of facts and problems than a post that takes a clear position and tries to convince the reader. It is the latter that I’ve tried to make clear is what I’m asking for. At the start, you tell us that you will “justify the use of subsidies for renewables.” While you certainly make some valid justification points toward the end, I’m looking for more of an emphasis on convincing the reader of a stark position … like a good Op-Ed. Also, your views are what I’m most interested in, not K. Hamilton’s.
ReplyDeleteWell written. You write very effectively.
The historical perspective is a useful one.
*Interesting footnote … I guess that your graphic about “fraction of subsidies received” is limited to some sort of investment/production subsidies? Turns out that the Feds subsidized lots of R&D for fracking (see, for example, https://www.nytimes.com/2015/01/21/business/economy/washingtons-role-in-oil-prices-recent-fall.html?_r=1). Not sure how big the $$ are, however.
Grading Rubric (badly formatted because comments don’t allow formatting)
Possible “grades:” Excellent (E), Very Good (VG), Good (G), Could be Better(CBB)
Takes a clear position: VG
Substantiates the position: CBB
Informs the casual reader: VG
Clarity/quality of exposition: VG
Thank you for the useful and interesting information regarding subsidies for renewable energy sources. To be honest, while I'm fairly certain that your position is to support such subsidies, I'm also having trouble really pulling out of the post exactly what it is you're supporting, and also the economic justification for it.
ReplyDeleteRegardless, there certainly is a case to be made that renewables are economically worthy of subsidy, at least I personally think so. You briefly mention subsidies as R&D support for early stage commercialization. This is actually a rather strong point to be made that could be developed and expounded upon. Subsidization for early-stage commercialization can be thought of as "federal venture capital"... investment in high-risk ventures that could pay off in the long run, but for which near term pay offs are paltry, if even extant. Essentially, subsidies are a form or risk reduction to the technology developers, which could be phased out as sustainable, and profitable, development occurs. That risk reduction leads to increased investment, which increases chances of success, which increases chances of profitability, et cetera, and now you have an economic argument.
One criticism I might make is that I don't think comparing subsidies of renewables to other forms of generation is necessarily a fruit-bearing activity. "Those guys receive subsidies, and we're way more awesome than they are, so we should get more" isn't really a solid base upon which to craft an argument.
I'm also not sure the graphic in Figure 2 is making the point that you're trying to make.
I think there are other economic benefits to be made, such as the societal benefits of reducing CO2 and air-polluting forms of power generation, which would help demonstrate value created that's greater than the subsidies used to cover renewables as well.
Admittedly, as a (now former) nuclear engineer, I see that nukes are facing the same un-level playing field that renewables face in terms of competing in a market that just seems tilted towards fossil fuels. And because of that, I tend to lean towards "fixing" the nuclear competition first by sending more money that way. And renewables aren't going to be viable until a workable energy storage solution is developed, so I would lean towards increased investment in storage than generation. However, at some point, that problem will be solved, and then there will be very fertile and viable playing field for renewables (as well as nuclear). Until such time, renewables likely will require subsidies to stay afloat (and continue advancing), which justifies the federal dollars being invested.