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Subsidies to Electricity Generation in the United States

Dr John Constable: GWPF Energy Editor

A new white paper from the “Full Cost of Electricity” research programme at the University of Texas at Austin provides valuable empirical information on the scale and character of Federal government subsidies and other support mechanisms to electricity generators in the United States. The study reveals that levels of support per unit of renewable electricity have been very high relative to support for fossil fuelled MWh, but are now declining, a trend that began as long ago as 2013.

With vilification of the United States’ record and current direction on climate policy reaching fever pitch in the Bonn Conference of the Parties (see Rupert Darwall, “At the U.N. Climate-Change Conference, the Two Minutes Hate”) it is timely to reflect on the precise details of the Federal Government’s track record in supporting low carbon electricity such as renewables and on its current direction of travel. Are President Trump’s declared intentions really the radical betrayal that the critics claim, or is he merely continuing accelerating the pace on a course already selected by the previous administration? And just how generous was Federal government support for green energy, as contrasted with support for the fossil fuel industries?

Answers to these questions, and many others, can be found in the numerous tables and charts of a new study, Federal Financial Support for Electricity Generation Technologiesfrom the Energy Institute of the University of Texas at Austin.  The paper is part of the Institute’s Full Cost of Electricity research initiative.

The limited scope of this particular white paper should be noted immediately to prevent confusion. The study concerns itself with Federal support for electricity generation, and does not cover policies applied at the individual state level. As a result the support and subsidies discussed here are confined to Federally administered direct grants, tax credits, and government guarantees. State level market coercions such as portfolio standards are not considered, so the sums described here are only part of the story and are inherently conservative. (State level analyses would be very informative, and we can hope that the Institute will publish such work in due course.)

Bearing the restricted scope of the present study in mind, we can turn to the results. Figure 1 (p. 6) records annual tax preference expenditure in the United States from 1985 to 2015.

It can be seen that there has been substantial Federal spending on both fossil fuels and renewables over the period. Spending on fossil fuels has fluctuated over the years, but has remained relatively steady, at approximately $3 billion to $5 billion per year (in 2015 dollars). Spending on renewables was historically lower, at a few billion dollars a year, but increased very significantly after 2005, with the American Recovery and Reinvestment Act (ARRA) of 2009, generally known as the Stimulus, causing a sharp jump in expenditure. Indeed support for renewables peaked in 2009 at $17 billion, and though it has been steadily declining since that time it still stands at about $8 billion.

The study authors correctly point out that such figures are a relatively small fraction of US GDP, but that truth should not be allowed to obscure the fact that they are in absolute terms very large. Indeed, the cumulative figure between 2005 and 2015 stands at not far off $100 billion (in 2015 dollars), representing a redirection of resources that must be counted as major even by American standards. It is hard to imagine that anyone reading this study could come away with the impression that the United States has done little or nothing for renewable energy. They have a long track record of generous support, and in the last decade have done an enormous amount.

Equally, no one should think that Mr Trump’s reluctance to continue high levels of support is a reversal of the trend. It is quite clear from this chart that the previous Federal administration had begun to scale back preferential tax treatment. Had she become President, Mrs Clinton would not perhaps have withdrawn from the Paris Agreement, but she would have almost certainly had to continue to reduce the levels of support for renewables.

Put simply, assistance at ARRA Stimulus levels could not continue, largely, one suspects, because it was not tax expenditure in the strict sense of taxation foregone. ARRA grants were fully “refundable”, meaning that developers receiving section 1603 grants under the scheme were entitled to claim direct cash funding from the Federal Government of up to 30 per cent of a project’s costs. Extremely generous treatment of this kind is inherently unsustainable.

Interesting though the collection of such information, together with relevant details fo the measures is, this study’s most original contribution is to calculate an estimate of support per unit of electricity (megawatt hour) generated, so that the relative scale of the support offered to renewable energy, particularly solar, can be compared to that given to coal, hydrocarbons (HC in the chart), and nuclear. The authors find that “renewables spending is modestly higher in absolute terms but several orders of magnitude higher on a per-MWh basis” (p. 25 ), as can be seen in the following chart:

Much of this very high level of support, both absolute and relative, results from the Stimulus funding, the wisdom of which must now be under question, particularly since the growth in the shale gas industry seems to have delivered emissions reductions at a much lower cost, and without comparable market distortions in its favour.