Renewables and U.S. Energy
What are renewables?
Renewable energy sources are generally seen as those that are inexhaustible because they regrow or come from natural phenomena like sunlight or rain. Commonly, the term refers to hydropower plus electricity derived from solar, wind, geothermal, biomass, and municipal solid waste sources. Less commonly, tidal action and landfill or swamp methane are included.
The term "renewable" is, however, highly misleading. Geothermal resources are clearly not renewable; in fact, a number of U.S. geothermal sites are already close to exhaustion. Biomass exhausts land resources in ways similar to any agricultural or forestry cultivation, and significant amounts of petroleum are used in the planting and harvesting processes. Photovoltaic ("solar cells") manufacturing requires intense use of non-renewable chemicals and other materials.
Renewables advocates frequently cite the environmental
benefits of these energy sources and, as a consequence, sometimes reject
terming certain sources "renewable" because of their perceived harm to
the environment. Hydropower is sometimes omitted because it is seen as
harming wildlife habitat. Central-station solar has similar problems. Some
advocates omit biomass and municipal solid waste from the list because
of their high emissions.
Will use of renewables become a necessity given the depletion of U.S. fossil fuels?
The U.S. is not running out of fossil fuels.
In addition to a 50-to-80 year supply of natural gas from known reserves, for instance the United States has an estimated additional 12,000 trillion cubic feet of natural gas in deposits like geopressured aquifers, deep gas, and hydrates. (Source: National Petroleum Council, The Potential for Natural Gas in the United States, 1992 report to the Secretary of Energy.) That is enough to supply the U.S. for 600 years at today's consumption rates.
Because natural gas resources are so plentiful at today's
prices, only preliminary work has been done on ways to produce gas from
more challenging formations. Back-of-the-envelope assessments put production
from hydrates, etc., at between $5 and $15 per thousand cubic feet. (The
1997 wellhead price of natural gas is about $2 per thousand cubic feet.)
Were the gas from more expensive-to-produce formations produced today,
it would have no market because of its price. Should prices rise in the
future, however, or should producers have an incentive to develop more
cost-effective technologies to deal with these formations, this gas is
available, as are similarly higher-priced coal and oil deposits.
If the U.S. has so much energy, why do we import 50 percent of our oil from more than 20 countries and 10 percent of our gas, primarily from Canada?
There are two reasons.
First, fossil fuels are sometimes cheaper to import than to produce domestically. Given the central role energy plays in the U.S. economy, failure to use the cheapest possible energy sources would make U.S. products less competitive on the international marketplace and reduce citizens' standard of living.
Second, imports increase reliability. This is especially true in natural gas, where Canadian imports can compensate for any unexpected demands or supply disruptions elsewhere. (Similarly, we import oil from many different regions to avoid the economic threat realized in the 1970s when the U.S. depended for its imported oil almost exclusively on the Middle East.)
Additionally, the integration of the North American natural
gas system and the consequent movement of gas across borders is part of
a national commitment to North American free trade, which increases regional
security and boosts the continent's economy.
Is use of renewables growing in the United States?
Yes. A series of government policies and subsidies has enabled non-hydro renewables to command about three percent of the electricity marketplace (not including self-generation).
Several sources, including Resource Data International
and the National Renewables Energy Laboratory, project that, if current
policies are unchanged, renewables will fill four percent of the U.S. energy
market by 2010. The Energy Information Administration (EIA) estimates a
five percent share.
What problems would have to be overcome for renewables to fill a greater share of U.S. energy needs?
The problems involved in mandated increases in renewables use include:
- A need for government funding. Resource Data International, for instance, suggests that additional subsidies of $203 billion could boost non-hydro renewables' market share to 11 percent by 2010.
- Private property rights. Currently, only about four percent of U.S. land area is unused. But most renewables are land-intensive. It would take 60 percent of U.S. landmass, for instance, to supply all of our electricity needs from biomass. It would take more land than the U.S. currently has to supply all our electricity from solar. A mandate for increased use of these renewables could require the government to convert national and state parks and forests to energy use or to condemn private land for this purpose. Such actions are unlikely to be politically popular.
- Opposition from environmental advocates. Geothermal resources, for instance, are depleting. Wind towers have encountered strong opposition from the National Audubon Society because of their propensity to kill birds, including such endangered species as bald eagles. Wind and solar technologies have significant negative effects on wildlife habitat. Biomass emissions are higher than those from natural gas and, in some cases, higher than those from coal.
- Cost overruns that could lower gross domestic product and standards of living. Costs are likely to escalate significantly above today's estimates as remotely located renewables are linked to the national electricity grid, at costs up to $1 million per mile, and as the most desirable sites are used up.
Are there ways to increase the use of renewables without using mandates and subsidies?
Yes. "Green energy marketing" is a concept with great potential to increase the use of cleaner fuels, including renewables.
"Green marketers" offer customers an option to choose their generation fuel and to pay more for it. The success of these programs demonstrates Americans' willingness to support environmental initiatives with financial commitments.
There have been only a few limited "green energy marketing" programs that have emerged during the era of highly regulated electric utilities. But some have reported remarkable success. Traverse City, Michigan, for instance, found enough subscribers to both pay for its first wind tower and build a second.
Additional competition in the electricity industry opens the door to a major expansion of "green energy marketing." A July 1997 Wall Street Journal article, for instance, discussed a wide variety of programs now being developed by both utilities and major energy corporations, including Enron and Enova.
A competitive approach to renewables means that costs will be absorbed by those able and willing to pay. Landowners will have options to participate and will be appropriately compensated. Companies using "green energy" will be able to use that fact to attract consumers equally committed to environmental quality, and those using more polluting forms of energy might come under pressure from dissatisfied consumers.
In short, the advantages of increasing renewables use
through competitive means rather than through government coercion appear
Cost of Renewables
How much does renewable energy cost?
In today's marketplace, electricity generation from renewable
sources costs between two and five times as much as electricity generation
from the lowest-cost fossil fuel alternative, natural gas combined-cycle
technology. The Energy Information Administration (EIA) cites the following
|Technology||cents/kilowatt hour (kWh)|
|Gas combined cycle||3.263|
Costs rise significantly if federal and state subsidies
are removed from renewables. Robert Bradley finds the cost of wind energy
close to 10 cents per kWh without such subsidies. And the cost of gas combined
cycle would be considerably lower without state severance taxes, which
currently add to the cost of electricity generated from gas but not from
electricity generated from renewables.
Are renewable energy costs declining?
Some renewable energy costs are declining. Proponents
of a renewables mandate often cite wind power's 80 percent reduction in
costs over the past 17 years. Yet Energy Information Administration (EIA)
figures show that, even with current high federal and state subsidies in
place, renewable energy costs at least three times as much as conventional
Subsidies for Renewables
What federal subsidies are available for renewables, and how do those subsidies compare with subsidies given to conventional fuels?
A report available from the Congressional Research Service ("Renewable Energy: A New National Outlook," Committee for the National Institute for the Environment) found:
|Fuel Type||Fed. Spending 1948-1972||Fed. Spending
|(in billions, $96)|
This same study notes that "studies of energy subsidies
have been performed on an irregular basis, making it difficult to analyze
the history and current character of subsidies and their effect on renewable
energy commercialization." The report cites two studies that found that
subsidies received were very roughly in proportion to their contribution
to the U.S. energy market, with renewables like ethanol receiving disproportionate
|Fuel Type||"Hidden Costs of Energy," 1984
% of subsidy
|EIA Report on FY92
"Federal Energy Subsidies" % of subsidy
% of Energy Market
|Total Subsidy Amount||$65 billion ($95)||$9 billion ($95)|
|* 1984: hydro = 6%
non-hydro = 3%
|** 1992: ethanol = 6% non-ethanol = 5%||*** electricity is derived from other fuels|
Following are examples of the way wind energy is subsidized:
- Investment tax credits.
- Five-year accelerated depreciation.
- Ten-year fixed-price energy payments.
- Thirty-year fixed-price capacity payments.
- Federal production tax credits.
- A $70 million allocation to wind developers with existing
utility contracts, to be made available through renewable funding production
tax credits set up by from California's AB 1890. AB 1890 makes a total
of $540 million available to all California renewables producers from revenues
received from utility customers.
Do states subsidize renewables?
Some do. In California, ratepayers are charged about 25
cents per day to subsidize renewables. Nevada recently passed legislation
requiring that, by 2010, one percent of all electricity consumed annually
in the state must be produced by Nevada renewable energy producers.
Will a few more years of subsidies enable renewables to become competitive?
A 1995 Resource Data International study, "Energy Choices in a Competitive Era: The Role of Renewable and Traditional Energy Resources in America's Electric Generation Mix" found that even a 50 percent subsidy for renewables would enable them to provide a maximum of only 11 percent of U.S. electricity by 2010--a level of subsidization that would cost $203 billion ('95$) above current alternatives.
The National Renewable Energy Laboratory countered that
estimate, predicting that an 11 percent market share for renewables would
cost only $1.9 billion above current alternatives. They achieved lower
numbers than RDI by increasing the estimate of the price of coal, assuming
that renewables will have high gains in efficiency but that coal generation
will have none, assuming high growth in geothermal and biomass, and projecting
more renewables growth for the period 2005-2010 rather than a steady growth
in renewables, as projected by RDI.
Are renewables viable without subsidies?
Hydropower is frequently the lowest-cost form of electricity generation and is thus obviously competitive without mandates. Additionally, 1995 Resource Data International study estimates that open and direct competition in the electricity sector would see generation from non-hydro renewables of about one percent of U.S. electricity in 2010.
It appears, however, that current studies have not assessed
the potential for renewables' market share to increase markedly through
voluntary, competitive "green energy marketing," which allows consumers
to choose their electricity generating fuel and pay its costs. Pilots in
this area have had marked success, and programs are mushrooming, fostered
by increasing competition in the electricity marketplace.
Why do federal and state governments subsidize renewable energy?
There are several reasons:
Some believe that "just around the corner" is a technological breakthrough that will dramatically reduce the cost of energy and thereby improve the economy. While the lack of such a breakthrough during the past 30 years of subsidies has discouraged some, others persist in this hope.
Some feel it is wrong to use up resources that cannot be replaced, even if potential shortages would be hundreds of years in the future.
Some fear that human beings are at the end of their ability to make significant technological achievements and that, centuries from now, when fossil fuels are less readily available, there will be no way to run equipment, heat homes, or otherwise maintain current standards of living.
Some believe that renewables are more environmentally benign than fossil or nuclear energy, despite evidence to the contrary (see below).
Some see renewables as a way to reduce the potential economic damage of the continued long-term imbalance of payments that results from fossil fuel imports.
Some see the pursuit of lower-cost renewables as an excellent
way to train students in creative problem-solving.
Could these objectives be achieved at less cost?
When government subsidies for renewables began 30 years
ago, the potential pay-off seemed great, and the goals did not seem unattainable.
But 30 years and billions of dollars later, some are beginning to question
the wisdom of continued funding. It may be time to consider alternatives
such as government research into lower-cost gas production methods for
the 600 years-worth of gas in less accessible formations, which might yield
the desired economic advantages of renewables. Similarly, additional research
into new forms of emission reduction might achieve the desired environmental
Renewables and the Environment
Do renewables offer environmental benefits?
Many renewables supporters cite lower emissions as a primary
benefit. However, according to a 1995 study by Resource Data International,
only 29 percent of renewables-generated electricity comes from non-emitting
renewables--solar, wind, and geothermal. About 71 percent of renewables-generated
electricity comes from combustible sources--biomass and municipal solid
waste--that can have as high or higher levels of emissions than fossil
Do renewables offer non-emissions benefits?
The non-emissions environmental problems posed by renewables may be greater than those connected with fossil fuels. For instance:
The manufacture of equipment for wind and solar involve significant toxic waste disposal problems.
Geothermal sites frequently have toxic waste emissions and may also produce corrosive acids that destroy machinery.
Geothermal has high water usage requirements that may threaten threats wildlife and habitat. Some geothermal-rich areas, such as California's Napa Valley, also have agricultural or other economic interests that may compete for use of this water.
Bird kills have been widely documented as resulting from solar equipment and wind turbines. One wind facility, Altamont Pass in California, has earned notoriety for its threats to endangered species--39 golden eagles per year killed, out of a population of only 500 breeding pairs in the U.S. Kestrels and red-tailed hawks are also at risk. The National Audubon Society has called for a moratorium on wind power projects in bird-sensitive areas. In contrast, offshore natural gas platforms in the Gulf of Mexico aid bird and butterfly migrations and have had a significant positive effect on these populations.
Solar facilities use densely spaced equipment that creates microclimatic changes, destroying habitat for desert tortoises and other species.
Noise pollution from wind turbines if frequently highly disturbing. A wind turbine designed to serve a single residence, for instance, produces about half the noise of a lawn mower.
Visual pollution results from residential wind towers 80 to 120 feet high and commercial towers up to 200 feet high. Solar facilities present similar problems.
Wind turbines require wide spacing--10 to 80 acres per megawatt, or up to 200 times more space than gas-fired facilities. (Wide spacing is required to avoid wake effects between wind towers.) The footprint required for natural gas production is also many times smaller than that required for either wind or solar.
Erosion and dust are problems encountered with the required
service roads to each wind tower.
What type of land use is required for renewables?
Projections of land requirements depend on assumptions about the mix of renewables, amount of rain, wind, and sun available, length of growing season, and efficiency of technology. Clearly, however, renewables require significantly more land than fossil fuels. The following scenario is instructive:
1. All Biomass
"An average of 3 tons of (dry) woody biomass can be sustainably harvested per hectare per year with small amounts of nutrient fertilizer inputs (Birdsey 1992).
This amount of woody biomass has a gross energy yield of 13.5 million kcal (thermal). The net yield is, however, lower because approximately 33 liters of diesel fuel oil per hectare is expended for cutting and collecting wood and for transportation, assuming an 80 kilometer roundtrip between forest and plant. . . . A city of 100,000 people using the biomass from a sustainable forest (3 tons/ha) for fuel would require approximately 220,000 ha of forest area, based on an electrical demand of 1 billion kWh (860 x 1099 kcal = 1 kWh) per year. Nearly 70 percent of the heat energy produced from burning biomass is lost in the conversion into electricity, similar to losses experienced in coal fired plants. . . . Biomass could supply the nation with 5 quads of its total gross energy supply by the year 2050 with the use of at lease 75 million ha (an area larger than Texas, or approximately 8% of the 917 million ha in the United States." (Pimentel et al., "Renewable Energy: Economic and Environmental Issues," BioScience, Sept. 1994)
In other words, it would take 60 percent of our land to
produce enough biomass to fill U.S. energy needs. Unfortunately, as the
article goes on to say, "with approximately 75% of the total US land area
exploited for agriculture and forestry, there is relatively little land
available for . . . biomass production."
Would the use of crop residues that are currently wasted reduce biomass costs?
Crop residues are an essential part of the agricultural
cycle, adding nutrients to the soil and maintaining the soil's organic
matter, biota, and water-holding capacity. Removing these residues irreparably
damages the soil.
Is turning biomass into liquid fuels a practical form of renewables?
Ethanol is the most common form of biomass-to-liquids production in the U.S. It results in a net energy loss. According to Pimentel et al., "The total fossil energy expended to produce 1 liter of ethanol from corn is 10,200 kcal, but note that 1 liter of ethanol has an energy value of only 5,130 kcal." ("Renewable Energy: Economic and Environmental Issues," BioScience, Sept. 1994)
The same source notes that "although ethanol has been
advertised as reducing air pollution when mixed with gasoline or burned
as the only fuel, there is no reduction when the entire production system
is considered." In conclusion, "ethanol produced from corn clearly is not
a renewable energy source. Its production adds to the depletion of agricultural
resources and raises ethical questions at a time when food supplies must
increase to meet the basic needs of the rapidly growing world population."
Other Potential Benefits of
Does use of renewables aid national energy security?
No. Renewables are used to generate electricity that would otherwise be generated by domestic fuel--coal and gas. Should U.S. electricity requirements increase, the production of both could be easily and rapidly increased in response to demand, and Canadian gas producers are eagerly seeking additional U.S. markets.
U.S. energy imports are centered on oil. The amount of electricity generated with imported oil is minuscule; its disappearance would scarcely be noticed, and it could be readily replaced by slight increases in generation from domestic natural gas or coal.
It is also interesting to note that much of the technology
and equipment connected with solar and wind generation is imported.
Do renewables protect consumers against fossil fuel price spikes?
Historically, coal prices have fluctuated very little, and no reputable economist predicts future fluctuations of any magnitude.
Changes in demand affect natural gas prices, but these
fluctuations can be avoided through long-term contracts. Should electricity
generators choose to play the spot market, price fluctuations can be handled
effectively through a variety of risk management tools available in the
financial market, including futures. And even without the use of these
tools, price spikes tend not to affect annual bills to the extent that
they would be affected my mandatory inclusion of renewables, which cost
two to five times as much as electricity from gas combined-cycle generation.
What benefits do advocates of renewables mandates hope to attain?
Arguments for mandates tend to focus on the possibility that mandates might:
- Increase economies of scale and so reduce the cost of renewable-derived power.
- Generate profits that could be plowed back into renewables
The Cost of Mandates
How would a renewables mandate affect electricity costs and prices?
A renewables mandate would result in increased electric
costs to consumers, restrict customer choice, and cause the electric industry
to operate less efficiently. In short, a renewables mandate would eliminate
most of the reasons Congress gave when it first began considering electric
How much would a renewables mandate cost?
There are many different estimates. A recent Charles River
Associates study projects generation costs eight percent higher under a
10 percent renewables mandate. A Resource Data International study suggests
a necessary investment of more than $200 billion before renewables could
reach an 11 percent market share. A National Renewable Energy Laboratory
counter to RDI suggests only $2 billion would be needed.
Why are NGSA's cost estimates for a renewables program so much higher than estimates from renewables groups?
First, NGSA commissioned a report that posited a mandate of 10 percent--less than half-way between the Schaeffer and Jeffords bills, but higher than the estimates now being used by some. Because the capacity does not exist to address this level of mandate, considerable new capacity would have to be built.
The cost to consumers suggested by the study--an eight percent increase in generation costs--are probably much too low. The study uses, for instance, biomass figures that are based on the cost of today's biomass generation, which involves burning wood chips and similar waste that would have to be otherwise disposed of were it not for biomass generation. In other words, this fuel is essentially free. A significant rise in demand for biomass, however, would necessitate aggressive development of new biomass sources. Fiber farms have been widely suggested to meet this need; but the costs of land acquisition, fertilizer, planting, irrigation, and harvesting would have to be added to the cost equation.
There is no clear answer to the question of how much a
renewables mandate would cost. Most estimates use the Energy Information
Administration's (EIA's) Annual Energy Outlook 1997, which is in
itself an estimate. Then economists must determine how many variables to
look at, and estimates must be made for each. Some needed information,
such as the use of various fuels for baseload vs. peaking, are simply unavailable.
Capacity utilization (the number of megawatts of capacity needed to generate
a specific number of kilowatt hours) is not a set figure. Additionally,
market behavior must be projected: How much trading might take place? Would
inclusion of hydropower encourage more efficient use of existing facilities?
All these questions will impact the final cost of a renewables mandate.
Would mandates help reduce the cost of renewables long-term?
Such declines are highly speculative. In fact, costs would undoubtedly rise for some renewables:
Wind and solar costs would experience upward pressure as the most favorable areas were put into service and as facilities were built in less favorable regions.
Biomass costs would likely rise precipitously as waste sources were exhausted. Biomass advocates suggest growing fuel on "fiber farms," which adds costs such as land acquisition, agricultural machinery and labor, seed, fuel for planting and harvesting, and transport to the generating site. And the acquisition cost of even marginally productive land would be high on the scale needed. An article in the September 1994 issue of BioScience points out that 75 percent of U.S. land is already used for agriculture and forestry, but that even this is not enough to supply domestic needs for forest projects. Given that, as the article also notes, it would take a fiber farm the size of Texas to fill just under 6 percent of U.S. electricity demand, it is difficult to imagine a scenario in which increased use of biomass becomes practical.
If electricity suppliers are forced to use intermittent production fuels like wind and solar and are also held to today's standards of reliability, they will have to build additional capacity as back-up for the periods when wind and solar are unavailable, thus multiplying their costs.
There is unlikely to be a requirement for renewables suppliers to invest in the quest for lower-cost renewables. Profits are more likely to be placed in stockholder hands.
The cost of currently available renewables would experience
upward price pressure as electricity suppliers without renewables capacity
attempted to control costs by contracting for existing, partially depreciated
capacity rather than building new and higher-cost renewables capacity.
(Many have found it difficult to resist reference to the "windfall profits"
owners of current renewables capacity could enjoy under a new federal mandate.)
The Union of Concerned Scientists forecasts that a renewables mandate that permits the trading of credits, such as the Schaeffer bill, would cost Americans only 16 cents per month.
In fact, the Union's figure is .03 cents per kilowatt
hour, or $1.2 billion annually, for a mandate that is very close to today's
non-hydro production. Each percentage of mandate above the current 3 percent
of generation is likely to increase costs precipitously because additional
capacity would be required.
Mandates and Technology
Would mandates make a technological breakthrough more likely?
Unfortunately, the mandatory deployment of high-cost, less-effective technology would make it less likely that a cost-effective technological breakthrough would produce the desired objectives.
Companies have an incentive to seek better technology when it would help them compete. Today, renewables compete against fossil and nuclear electricity generation; a lower-cost technology could help them wrest market share away from conventional fuels.
Under mandates, renewables will compete only with other renewables. Much of the cost-incentives for improving technology would vanish.
Even worse, once electricity suppliers have invested in high-cost renewables technology, they will have incentive to achieve a return on their investment. Thus, as long as the marginal cost of generating electricity from an out-of-date facility is lower than the total cost of generating electricity from the new, better-technology facility, suppliers will continue to use the old technology. (Marginal costs are those incurred to keep an existing facility operating--fuel, operation, and maintenance. Total costs include initial capital investments in equipment, land, and buildings as well as initial training and other start-up costs.)
The energy industry currently has an outstanding example of the way deployment of poor technology blocks better and lower-total-cost technology. Breakthroughs in turbine design have made gas combined-cycle electricity the lowest-cost type of generation other than hydropower. But the large number of existing high-initial-cost, low-marginal-cost coal-fired facilities severely limits current use of gas combined-cycle to less than 15 percent of the total U.S. generation market.
Similarly, if mandates result in the investment of billions
of dollars in wind and solar "farms," industry is unlikely to abandon those
investments and replace them with a lower-cost renewables technology unless
the cost breakthrough is so great that the total cost of electricity from
the new technology is lower than the marginal cost of running the wind
or solar farm.
Mandates and Politics
Why has the federal government promoted the development of renewable energy sources?
The emergence of the environmental movement in the early
1970s combined with Americans' cultural approval of "waste not, want not"
conservation, resulting in a strong voting block supporting government
investments in renewable energy. In the 1990s, the failure of these programs
to produce promised pay-offs have led to congressional questions about
and some reductions in federal funding. But it appears that a combination
of hope and inertia will keep these programs in operation for some time.
Why have states promoted the development of renewable energy?
States like California, with serious air quality problems
and a climate favorable to renewable energy, have invested in renewables
programs to attempt to reduce pollution. But costs have been high. A California
public utilities commissioner recently told Congress that every consumer
in his state pays 25¢ a day to subsidize renewable energy.
Would adoption of Renewables Portfolio Standard (RPS) make use of renewables' mandates less expensive?
The Renewables Portfolio Standard (RPS) is a regulatory scheme in which Congress sets minimum renewable energy production standards, then allows renewable energy producers to trade renewable energy credits. Viewed by proponents as a way of encouraging the development of cost-effective renewable energy sources, the RPS:
- Serves as a reminder that renewable energy is
not currently cost-effective.
- Is a cumbersome, ineffective regulatory system that invites fraud, waste, and mismanagement, and will add unneeded layers of bureaucratic regulation.
- Results in the transfer of billions of dollars annually to regions that are climatically favorable to renewables production, at the expense of states with high populations or with extensive fossil fuel resources.
It is also significant that, contrary to the arguments
of some proponents of a renewables mandate, the RPS does not require utilties
to make a certain percentage of renewable energy available to consumers.
Rather, utilties must ensure that consumers purchase the mandated amount
of renewable energy or face stiff penalties. Additionally, bills now before
Congress specifically exclude renewable energy purchased volunartarily
from counting toward the mandate requirements. Thus, a renewables mandate
would hit hardest those who don't choose, or can't afford, to buy renewable
Are there other types of trading programs that could reduce costs?
In general, trading programs have a strong potential to raise costs, not lower them.
Many trading advocates assume that, under a mandate, currently existing renewables-capacity owners would continue to price their electricity at today's prices. That is unlikely to be the case.
Competition means that all electricity will be sold at
market prices. Electricity retailers would attempt to fill their requirements
at the lowest possible cost. This means that, under a renewables mandate,
existing producers of renewable power will be able to charge monopolistic
prices for their power until new capacity comes on-line. And there is no
guarantee whatsoever that renewables facilities owners would turn these
windfall profits into new renewables capacity; a stockholder bonanza is
But isn't it true that oil and gas producers receive a variety of federal tax credits and tax breaks?
Like the rest of the energy industry, oil and natural gas producers receive tax and other financial incentives from the federal government.
Initially, it should be noted that there is a major difference between mandate and tax incentives. Tax incentives are a tool used by the federal government to achieve important social, economic, or other benefits. Prime examples include the mortgage deduction available to homeowners, or the tuition tax credits recently approved by Congress.
In the case of a mandate, however, consumers are forced to buy goods or services that they may or may not want. This runs contrary to the notion of a free marketplace, where consumers "vote with their dollars," buying the items that best meet their needs. Many regard the notion of a free marketplace as the key to a sound economy--an idea that underlies Congress' stated intent to increase competition within the electric industry.
Three major tax incentives are available to producers. The first, percentage depletion, applies only to small producers that operate marginal wells and is intended to promote optimum use of our nation's oil and gas resources. The second, sometimes referred to as the "Section 29" incentive, encourages exploration and production in difficult areas. Set to expire in 2002, the measure applies only to old wells. Finally, gas producers are able to deduct "G&G" expenses, which are similar to the operating expenses deducted by most domestic businesses. These deductions are in keeping with the government's policy of promoting a competitive, healthy energy industry.
It's also important to note that natural gas more than "pays its way." Gas production results in substantial revenues for the federal and state governments, more than offsetting the costs of tax incentives provided to the gas industry. During 1995, for instance, the federal government alone received $1,462,764,791 in natural gas royalties. In addition, natural gas producers paid a substantial portion of the $622,703,689 in rents and other fees charged for energy production on federal lands during that time. Further, many state governments receive considerable revenue from oil and gas royalties.
In fact, since oil and gas are typically produced from
the same facilities, some argue that the oil industry's negative tax subsidy
also effects natural gas producers. Under that scenario, government figures
|Type of Subsidy||Tax Expenditures||Direct Expenditures||Excise Taxes Without Offsetting Liabilities||R&D||Total|
|Total, Oil and Gas||1460||1132||-3132||96||-444|
This is in stark contrast to the effect of government
subsidies to the renewable energy industry, which results in a net loss
to taxpayers and the federal government.
Some renewable groups say that the Schaefer and Bumpers bills would require little or no new renewable energy generation. If that is true, why is there a problem?
Clearly, if hydropower is included, as in the Bumpers bill, current generating capacity probably exists to meet even a fairly high renewables mandate, even if all other currently used renewables were shut down. And given the large number of dams now in place but not used for generation, it is clear that even very high targets that include hydropower could be met with relatively little cost.
Non-hydro renewables are also currently used to generate
electricity. If a mandate is close to today's generation, then it is clearly
true that little or no new generation would be needed. But that statement
ignores the real problem: today's high-cost renewables production is one
of the elements driving up today's electricity prices. Costs would be even
higher if state and federal subsidies were withdrawn. Today, consumers
are frequently forced to buy this high-cost electricity, to their disadvantage
and to the disadvantage of the economy. A mandate perpetuates this injustice.
Are pro-renewable provisions inevitable as part of a federal electricity restructuring bill?
Not in the least. While many members of Congress support
renewables in the abstract, and while they are likely to continue to favor
research funding for renewables, they are only now confronting the very
high costs of a renewables mandate for their constituents. In addition,
members of Congress increasingly recognize that a mandate would result
in massive cash transfers to states like California, where climate, geography,
and state policy have created extensive renewable power production capacity.
These factors, the possibility that a renewables mandate will wipe out
the savings of electric restructuring, and state and local unease over
big government-based "solutions" to social issues, are all causing members
of Congress to reconsider.
Will use of renewables grow without mandates?
The Energy Information Administration (EIA) estimates that renewables will have five percent of the electricity market in 2010 with a continuation of current conditions. The Solar Energy Industries Association projects a doubling of the use of renewables by 2010.
An increasing number of utilities and energy companies believe that "green energy marketing" will significantly increase the use of cleaner fuels, including renewables. Under these programs, consumers can choose electricity generated from specific sources and pay its costs. Pilot programs have been highly successful.