Response to Wall Street Journal Opinion on Energy Subsidies

A friend of mine sent me a link to an opinion piece in the Wall Street Journal talking about subsidies for various forms of energy supply. I have a couple of thoughts on the issue and thought I would share them here.

The WSJ opinion piece is titled “Wind ($23.37) v. Gas (25 Cents)” and I reproduce the text here in its entirety (link to the source is at the end of this post):

Congress seems ready to spend billions on a new "Manhattan Project" for green energy, or at least the political class really, really likes talking about one. But maybe we should look at what our energy subsidy dollars are buying now.

Some clarity comes from the U.S. Energy Information Administration (EIA), an independent federal agency that tried to quantify government spending on energy production in 2007. The agency reports that the total taxpayer bill was $16.6 billion in direct subsidies, tax breaks, loan guarantees and the like. That's double in real dollars from eight years earlier, as you'd expect given all the money Congress is throwing at "renewables." Even more subsidies are set to pass this year.

An even better way to tell the story is by how much taxpayer money is dispensed per unit of energy, so the costs are standardized. For electricity generation, the EIA concludes that solar energy is subsidized to the tune of $24.34 per megawatt hour, wind $23.37 and "clean coal" $29.81. By contrast, normal coal receives 44 cents, natural gas a mere quarter, hydroelectric about 67 cents and nuclear power $1.59.
The wind and solar lobbies are currently moaning that they don't get their fair share of the subsidy pie. They also argue that subsidies per unit of energy are always higher at an early stage of development, before innovation makes large-scale production possible. But wind and solar have been on the subsidy take for years, and they still account for less than 1% of total net electricity generation. Would it make any difference if the federal subsidy for wind were $50 per megawatt hour, or even $100? Almost certainly not without a technological breakthrough.

By contrast, nuclear power provides 20% of U.S. base electricity production, yet it is subsidized about 15 times less than wind. We prefer an energy policy that lets markets determine which energy source dominates. But if you believe in subsidies, then nuclear power gets a lot more power for the buck than other "alternatives."

The same study also looked at federal subsidies for non-electrical energy production, such as for fuel. It found that ethanol and biofuels receive $5.72 per British thermal unit of energy produced. That compares to $2.82 for solar and $1.35 for refined coal, but only three cents per BTU for natural gas and other petroleum liquids.

All of this shows that there is a reason fossil fuels continue to dominate American energy production: They are extremely cost-effective. That's a reality to keep in mind the next time you hear a politician talk about creating millions of "green jobs." Those jobs won't come cheap, and you'll be paying for them.

In preparing to comment on the substance of the opinion piece, I thought it would be useful to look at their source of information. Though no specific citation was offered in the opinion piece, they did mention it came from the EIA. Some searching on the EIA website turned up this report, which I believe to be their source: “Federal Financial Interventions and Subsidies in Energy Markets 2007” (link at the end of this post). The WSJ are specifically quoting data from Table ES5 (you can find the data in the Executive Summary section).

The principal complaint that the WSJ piece presents is that the subsidy provided per unit of energy delivered (quantified as subsidy $/MWh within a given technology) is much higher for wind, solar, and clean coal than for other forms of energy—coal, oil, natural gas, hydroelectric, and nuclear; and that wind, solar, clean coal are getting plenty of subsidies, so they should stop “moaning.” They say in their opinion piece that “We prefer an energy policy that lets markets determine which energy source dominates.” No kidding; they’re the Wall Street Journal. But if that’s your logic, then they should be against all subsidies of every sort in the energy sector, and their next sentence does imply that that would be their preference (it starts “But if you believe in subsidies…”).

Do they really believe that subsidies are not warranted? Subsidies can be used to promote a fledgling industry or to provide for a social good that would be otherwise uneconomical, and therefore would not be undertaken (or, not undertaken to the extent deemed necessary). I certainly think there are good arguments for subsidies for renewable energy technologies. Promoting the fledgling renewable energy industry can provide a social good in the form of lessening our energy dependence, and providing energy without emitting carbon dioxide. If we just wiped out the subsidies, the free market might provide us power more efficiently (in the sense of more cheaply) in the near term, but we’d be woefully unprepared when energy sources suddenly become more expensive and/or less available.

And, I would argue (and others do as well) that the true costs of fossil fuel energy (and nuclear) are not being accounted for properly at present. These unaccounted for “externalities,” as they are referred to in economics, are various: for fossil fuels, the main ones are greenhouse gas emissions and military expenditures required to keep petroleum flowing. For nuclear, one externality is the liability of operating nuclear plants. You and I are on the hook for a great deal of this liability via the Price-Anderson Act. This is not, as far as I can tell, a direct subsidy in the sense of money currently being paid out to the nuclear industry from the government. Rather, the nuclear industry is being told by the government, “We’ve got your back. In the event of an incident resulting in massive liability, we’ll take care of it.” The nuclear industry is being told they don’t need an insurance policy because the government (i.e. the taxpayer) will pick up the tab for an accident. Another externality associated with nuclear is the cost of taking care of nuclear waste. At present, it’s not even really being taken care of—nuke waste is largely still stored in temporary storage at nuclear plants, in facilities not designed for long-term storage.

And why should oil, coal, and natural gas be subsidized at all at this point? These are certainly established industries; they have achieved economies of scale and there is massive infrastructure in place. They can’t be regarded as fledgling industries. I don’t think it’s realistic to argue for subsidizing them on the basis of energy independence at this point, as high energy prices are strong drivers for continuing exploration domestically already. So the whole notion of renewables getting plenty of subsidies compared to poor old fossil fuels doesn’t hold much water with me.

Perhaps this analogy is helpful. The fossil fuel industry could be compared to an educated and skilled working adult, while the renewable energy industry could be likened to a student in high school or college. The adult in the workforce is very likely to be making more money (“energy”) than the student, because the adult already has an education and experience. The student is still acquiring the education and skills necessary to be very productive. Do we expect the student to be able to make as much money per hour, or per week, as the adult? No, that’s not reasonable. A subsidy to the student would be analogous to offering him/her a grant to help pay for tuition, or guaranteeing a low-rate student loan; it will enable the student to finish their education and enter the workforce, buffering them somewhat against pure free-market competitive pressures while they are going through a vulnerable stage. The adult generally doesn’t need a similar subsidy, and shouldn’t expect one. What if we were to operate this system with no subsidies? Well, because we’re not paying any subsidies (we’re only paying wages) we get more work per dollar spent, in the short term. But, the adult worker will eventually retire, and without the subsidies, we have fewer and/or less-capable graduates entering the workforce to replace retiring worker. Operating this way is short-sighted.

The WSJ piece points to nuclear as the best bang for the buck of non-fossil fuel energy sources; maybe so, but nuclear certainly isn’t without its problems (waste, as discussed above, and nuclear proliferation come to mind). Going beyond whatever the magnitude of the externalities may be or may not be in strict dollar terms, I think these are important questions to be addressed about nuclear power, questions that warrant a great deal of discussion. I don't think we should take the WSJ’s one comment about “most bang for the buck” as the final word on the subject.

The WSJ opinion piece ends by stating that fossil fuels dominate the energy production industry because they are extremely cost-effective. That is true, but as I mentioned above, it’s partly because they are getting a free ride on a number of fronts (the externalities I talked about). But also, it’s partly true because fossil fuels are extremely energy dense solar energy that has been gathered together and concentrated over millions of years into rocks or liquid. It’s hard to compete against that when you’re trying to capture solar energy that is being generated “real time,” as it were. (Remember, wind energy still comes from the sun, as winds are generated by sunlight heating air masses.) So I think that long-term, even when renewables are well-developed, we probably will be looking at a higher cost per kWh than we currently enjoy, because wind and solar are just plain less energy-dense than the ancient stored sunlight we’re presently burning. There's no way around that (unless somebody really does figure out fusion power), but we need to take into account that we're going to need energy in the future, even if it is more expensive.

Lastly, I take issue with the tone of the opinion piece, which is decidedly anti-renewable energy. Now, if your position is anti-renewable energy, OK, that’s your position, and you’re certainly entitled to hold it; but I take issue with their use of quotation marks in a few cases, particularly in these two instances: “…given all the money Congress is throwing at "renewables."” And “…a lot more power for the buck than other "alternatives."” (Bold-face emphasis mine.)

Quotations in this context should be used when introducing an a new or not-widely-known term. Is it the position of the WSJ that the average reader doesn’t know what renewable energy means, or what constitutes renewable energy sources? Or, similarly, that we don’t know the meaning of the word “alternative” in the context of alternatives to traditional fossil-fuel energy sources? I highly doubt that is their reasoning, and I strongly suspect that their intention is to cast doubt on the reality of wind, solar, and other renewable energy sources as actually being renewable. They try to subtly (?) disparage renewable energy, implying it’s not real. It reads to me like shorthand code for “see, we’re with you, those aren’t really renewable, or realistic alternatives to fossil fuels anyway.”

And the title of their opinion piece, “Wind ($23.37) v. Gas (25 Cents),” does two dishonest things, in my opinion. First, it suggests that “wind costs about 100 times more than natural gas,” by not providing any information in the title that we’re talking about the subsidy, not the cost. Second, it suggests through the use of the “versus” that we should compare these two forms of energy directly; that somehow for these energy sources to be equally good, the values of the subsidies should be the same. In my opinion, and as I have argued above, the natural gas subsidy should properly be zero or near zero, and the wind subsidy should be substantially more.

Thanks for reading.

LINKS

WSJ opinion piece:
http://online.wsj.com/article/SB121055427930584069.html?mod=opinion_main_review_and_outlooks

EIA report “Federal Financial Interventions and Subsidies in Energy Markets 2007”:
http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html

A discussion of the true costs of oil. Google assures me many other such links exist:
http://www.triplepundit.com/pages/100-a-barrel-what-is-the-true--002824.php