Group 7, Week 2, Topic: Why Renewable Energy Subsidies Should Be Eliminated

Welcome to the continuation of the 'Energy in Depth' series.  This time we discuss the topic: Why Renewable Energy Subsidies Should be Eliminated.

Over the last 30 years, the alternative energy industry has been reliant on subsidies to make the technology economically competitive with fossil fuels.  The reasoning behind these subsidies is to promote R&D development, lower component pricing, and achieve economies of scale to reduce the price per kilowatt hour to be in line with fossil fuels.  The subsidies were established to create a self-sustaining, competitive renewable energy market. 

As a signature initiative for his administration, President Obama passed the American Recovery and Reinvestment Act (ARRA) in 2009 that increased government subsidies to spurn the growth of these renewable technologies into the 21^st century and minimize our dependence of fossil fuel power generation.  Under the ARRA, the U.S. government essentially became the market maker in the renewable energy industry.  The government started providing assistance in each stage of renewable project financing.  It subsidized part of the upfront capital, lowered marginal costs and allowed accelerated tax depreciation to promote healthy free cash flows and return on investments (ROI) for renewable energy projects. 

As a result, much of the growth in renewables since 2009 has largely been dependent on these subsidies and government policies, like renewable energy mandates.  These subsidies did provide a means to increase innovation and lower the cost of components to the point where renewable energy like wind and solar are cost competitive with fossils fuels in recent years.  Yet, renewable energy still only accounts for about 15 percent of the electricity generated in the United States (as shown in the below chart).^{[1] [2]}

With all this investment into the renewable space, the technology has not proven to be a viable competitor in the energy sector.  Natural gas consumption has and is projected to increase dramatically.  The reason is:  it is an economically viable and reliable source of power generation.  No matter how much investment into the sector, renewable energy is not a reliable form of energy currently to justify substantial public funding.

Since 2009, our national debt has increased 79% or $8.4 billion.^[3]  Our national debt now totals an astounding $19.9 billion.^[4]  Additionally, the federal spending on renewable energy in 2015 was approximately $10 billion, nearly twice as much as subsidies for fossil fuels.^[1]  We need to make hard decisions on government spending and I believe renewable energy subsidies can be eliminated as it has shown an inability to create a self-sufficient and independent renewable market free of government assistance. 

The main reason for this inability is intermittency.   Any electrical system needs to respond to energy demands and must be able to accommodate unanticipated changes in the availability of generation.  Unfortunately, wind and solar are non-dispatchable, meaning they can only generate power when the wind is blowing or the sun is shining.  This intermittency (i.e. low capacity factor) creates a high cost of total generation for renewables as shown below: ^[5]

Coupled with a high capital investment, these projects are not economically viable to stand alone in a market with low priced, reliable and available forms of fossil fuel power generation.  The only way for renewable energy to become independent from government subsidies is to develop resources to improve power storage.  This will allow transportation of energy across the country from areas were the wind and sun are prevalent and capacity factors are high.

These are the reasons why you are not seeing private investment into the sector.  These projects lack the availability and flexibility to serve the needs of peak generation demands which minimizes revenue potential and incurs low ROI.  We have seen “market pull out” occur every time renewable energy incentives are set to expire.  This occurred in 2012 when the wind subsidies, like the 2.2 cents / Kwh, were set to expire.  Developers were skittish investing or going forward with projects.  That reluctance rippled through the supply chain and caused substantial layoffs in the sector.  The American Energy Alliance summed this situation the best: “the government shouldn’t be continuing to prop up an industry that never seems to be able to get off their training wheels…without the tax credit in place, the wind business ‘falls off a cliff’.”^[6]

Overall, in a free market, healthy companies depend on sound business models in a competitive environment.  If a product is well designed and meets the needs of a consumer, it will find success in the market.  Government subsidies transfer costs onto the taxpayers, enabling artificially low prices and inflated profits for renewable energy companies.  The government needs to focus on demand creation, rather than trying to manage the supply of alternative energy.  Public investments in research that yields licensable technologies, like better energy storage capabilities, is a more prudent path for allocation of public resources.  This can be achieved through targeted research and technology investments and not a blank check to any alternative energy project regardless of its economic viability.^[6]

Sources:

[1] Bussewitz, Cathy and Mulvihill, Geoff. “Trump’s victory creates uncertainty for wind and solar power”. Phys Org. 22 January 2017.  https://phys.org/news/2017-01-trump-victory-uncertainty-solar-power.html

[2] EIA 2017 Annual Energy Outlook. https://www.eia.gov/outlooks/aeo/

[3] “Total U.S. Debt Surpasses $19 Trillion; Rises $8.4 Trillion Under President Obama”. ZeroHedge. 1 February 2016.        http://www.zerohedge.com/news/2016-02-01/total-us-debt-surpasses-19-trillion-rises-84-trillion-under-president-obama

[4] www.usdebtclock.org

[5]  Ritchie, Earl. “The Cost of Wind and Solar Intermittency”. Forbes. 24 January 2017.  https://www.forbes.com/sites/uhenergy/2017/01/24/the-cost-of-wind-and-solar-intermittency/#62eb4f5068de

[6] Cardwell, Diane. “Tax Credit in Doubt, Wind Power Industry Is Withering”. The New York Times. 20 September 2012.  http://www.nytimes.com/2012/09/21/business/energy-environment/as-a-tax-credit-wanes-jobs-vanish-in-wind-power-industry.html