Group 7 Week 3: Renewable Subsidies

“Measure twice and cut once.”  This is what my father always used to tell me especially when I would help him with carpentry projects around the house.  The takeaway of the saying is to make sure you have gotten the measurement correct before you cut the piece of wood.  If you cut the piece too short, it becomes scrap; however, if you incorrectly cut it too long, you got lucky, and can go back and cut again.  It is a more conservative approach, but when you are working within a constrained budget, like the Unite State’s budget, it makes sense to make sure we get it right before we cut.  This approach is how the U.S. should approach subsidies for renewable energy sources.  Get the prices comparable to our other options via research and development prior to implementing the more expensive technology.

There are many forms of subsidies for renewable energy being given out at the moment.  In many cases, these subsidies incentivize businesses to build infrastructure and plants that produce electricity that cannot compete with fossil fuels.  A few of these subsidies will be explained.

The Investment Tax Incentive is a tax deduction incentive for any individual or business that builds and uses a form of renewable energy.  Think of this is a small company buying solar panels to put on its roof to produce electricity.  The company is permitted to take 30% of the cost of building the solar panels and write that off as a loss on its taxes.  Essentially, if the business profited $100k in the year, and the solar panels cost $200k to build, the business could reduce its profit by $60k ($200k * 30%).  The company will now be taxed on only $40k. [1,2]  This subsidy is incentivizing businesses to implement expensive electricity producing options.

Similarly, there is also what is known as the Production Tax Incentive.  In most cases, if the business owner or personal owner decide to forego the Investment Tax Incentive, the owner can opt into this form of payment.  This incentive gives the owner of the electricity producing unit anywhere from one to two cents per kWh for the first ten years of production.  This does not sound like a whole lot, but check your latest bill.  If you are in the northeast you will see generation charges are approximately seven cents per kWh.  This is essentially giving the producer of renewable energy a 29% markup (I don’t understand) to the rest of the electricity generating competition.  Again, this subsidy incentivizes businesses to implement expensive electricity producing options. [3]

The Production Tax Incentive is even more useful when you are in a state that permits Net Metering.  Net Metering allows those companies or individuals with solar installed to sell any unused electricity on to the grid.  When the meter reader comes by to determine how much electricity was used that month, the meter, in theory, could be less than the previous month.  In that instance, the electric utility would have to pay the electricity producer for the electricity they put on the grid.  The subsidy is logical; however, it again incentivizes implementation of more expensive electricity producing options.  [4]

The last subsidy we will cover is the Loan Guarantee Program.  This is exactly what it sounds like.  To ensure that large renewable projects can receive private funding, the federal government has guaranteed the loans.  If the company were to default on the loan at any time, the government will step in and ensure the payments are made.  Another incentive to build, even though it is a more expensive option. [5]

Those were some of the main types of subsidies that are offered to the renewable energy industry.  Now let’s take a look at what we are getting for those subsidies.  The scope of this discussion will be limited to subsidies in the United States.  The fairest way to look at these subsidies is on a per kWh basis.  There are many arguments that fossil fuels are subsidized more than renewable energy and that renewables could compete if they were on a level playing field.  Let’s dispel that myth right now.  Excluding externalities (talking only real money here), here is what the U.S. spent on subsidies in 2013 and what that comes out to on a per MMBtu basis:

[6]

We are spending a lot of money on a per MMBtu basis on wind and solar, which would be fine if that money was being spent on more R&D and less on implementing these technologies that clearly need large amounts of subsidies to compete.  We are simply not getting the bang for our buck.

When you look at all the programs available for renewable energy, and the amount of energy the United States currently gets from renewable subsidies compared to other options, there is a lopsided incentive for businesses to continue building these expensive renewable infrastructure projects, with less of an incentive to take a step back and really drive down the cost.  Renewable energy will struggle for the foreseeable future unless the costs are driven down through subsidies/R&D spending incentivizing such actions.   

[1]  Energy.gov. Business Energy Investment Tax Credit. https://energy.gov/savings/business-energy-investment-tax-credit-itc

[2] SEIA. Impacts of Solar Investment Tax Credit Extension. http://www.seia.org/research-resources/impacts-solar-investment-tax-credit-extension

[3] Energy.gov. Renewable Electricity Production Tax Credit. https://energy.gov/savings/renewable-electricity-production-tax-credit-ptc

[4] SEIA. Net Metering. http://www.seia.org/policy/distributed-solar/net-metering

[5] SEIA. Loan Guarantee Program. http://www.seia.org/policy/finance-tax/loan-guarantee-program

[6] Forbes. 2015-12-02. The Real Numbers on Energy Subsidies. https://www.forbes.com/sites/michaellynch/2015/12/02/energy-subsidies-2-real-numbers/2/#12a5c8a66450