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Is America’s Vision for Renewal Energy a Mirage?

May 23, 2016

We’ve seen it before. Tough talk in the early ‘70s for an energy independent America as OPEC’s oil embargo quadrupled the price of petroleum from $2.90 a barrel to $11.65 a barrel. Then, in close pursuit, came the second oil shock of 1980 as the Iranian Revolution halted oil shipments, skyrocketing prices from $13 to $34 a barrel. The same narrative unfolded as the oil crisis of 2000s forced crude prices to unseen thresholds, rising above $30 a barrel in 2003, peaking at $147.30 in July 2008. In all cases, the call for alternate and cleaner energy resources resonated throughout America.

The U.S. government responded by pumping research dollars into new energy and conservation technologies. According to Council on Foreign Relations, “some of these investments yielded little, including the billions of dollars that were sunk into synthetic fuel and nuclear fission. But other investments paid off. The remarkable growth in shale gas production in the 2000s can be partly traced to these federally funded programs and subsidies in the 1970s, 1980s, and 1990s, which led to breakthroughs in drilling, fracturing, mapping, and shale gas recovery. Of course, none of these policies or programs were designed to reduce carbon emissions.”

To the extent that energy consumption has global ramifications, it’s best to compare America’s energy inventory to the rest of the world. Enerdata’s study of the percent share of renewables (hydro, wind, geothermal, solar) by country, Figure 1, shows the U.S. trailing most developed and many developing nations. Of the 44 countries studied, America ranked #25 with a 12.3% share and #26 with a 13.7% in 1990 and 2014, respectively.

Figure 1: Percent Share of Renewables by Country – 1990 and 2014Figure 1c Percent Share of Renewables b y Country 1990 and 2014Source of Data: Enerdata

A recently released report from the U.S. Energy Information Administration gives further insight into the question – whether America is gaining or losing ground on renewable energy consumption (hydro, geothermal, solar, wind, and biomass) for electricity generation, Figure 2.

Over a 66-year period from 1949 through 2015, the U.S. showed negligible growth in renewable and nuclear energy generation. During the same time period, petroleum consumption grew at an erratic rate while natural gas and coal continued an upward trend until 2008 when natural gas consumption soared at the expense of coal utilization.

Figure 2: 1949 – 2015 U.S. Primary Energy Consumption by Source (Quadrillion Btu)Figure 2 1949 – 2015 U.S. Primary Energy Consumption by Source (Quadrillion Btu)Source: EIA Energy Overview

Furthermore,  as a percentage of total fossil fuel consumption (petroleum, natural gas, coal), total utilization of renewable energy (hydropower, geothermal, solar (PV and thermal), wind and biomass) never exceeded 14% of U.S. energy inventory. Excluding conventional hydro power, which is generally not considered a renewable source of energy, renewables (biomass, geothermal, solar, wind) constituted only 7% of America’s energy mix.

Figure 3 presents the U.S. consumption of renewable energy (in trillion Btu) by source from 1949 to 2015.  Over the 66-year period, hydropower and biomass (wood energy, waste energy and biofuels) were the bastion of renewable energy production, averaging a combined total of 96% of all renewable resources throughout the period. The remaining 4% consists of geothermal, wind, and solar.

The consumption of wind and bioenergy started to rise by mid 2000s, growing from less than 1% of renewable energy generation in 2000 to 19% of by the start of 2016. Solar production lagged behind until early 2010s when the influx of cheap modules started to come online.

Figure 3: 1949 – 2015 Renewable Energy Consumption by Source (Trillion Btu)Figure 3 1949 – 2015 Renewable Energy Consumption by Source (Trillion Btu)Source: U.S. Energy Information Administration

Nevertheless, by yearend 2015, the combined share of wind and solar power generation only amounted to 2.4% of the total primary energy consumption in the U.S., Figure 4.

Figure 4: U.S. Solar and Wind Energy Consumption to Total Primary Energy Consumption (%) 1988 through 2015.Figure 4 U.S. Solar and Wind Energy Consumption to Total Primary Energy Consumption 1988 through 2015Source of Data: EIA Energy Overview

The demand for wind and solar energy is driven by several factors? While, one can point to political survival, social awareness, economies of scale, and technological improvements; the answer lies in the levelized cost of electricity (LCOE). Here, the LCOE of renewable energy plummeted to levels on par with the price of purchasing power from the electricity grid, i.e., reached grid parity.

LCOE represents, the per kilowatt-hour cost of building and operating a generating plant over an assumed financial life and duty cycle. LCOE takes into consideration overnight capital costs, fuel costs, fixed and variable operations and maintenance costs, financing costs, and projected utilization rates for each type of facility.

Lazard’s Levelized Cost of Energy Analysis shows a decline of more than a 100% in the unsubsidized LCOE of wind over the past six years, reaching grid party with traditional energy sources such as coal, nuclear and gas in America by 2015, Figure 5.

Figure 5: 2014 Unsubsidized Levelized Cost of Energy GenerationFigure 5 2014 Unsubsidized Levelized Cost of Energy ComparisonSource: Lazard’s Levelized Cost of Energy Analysis – Version 9.0, November 2015

Much of the cost reduction in wind and solar power lies in more efficient wind turbines, an oversupply of PV solar panels from China, and federal and state incentives. The American Recovery and Reinvestment Act of 2009 provided three federal incentive programs for renewable electricity projects – Renewable Electricity Production Tax Credit (PTC), Business Energy Investment Tax Credit (ITC), and Section 1603 Cash Grant for Renewable Energy (1603 Grant).  Congress, however, enacted only temporary incentives for all renewable energy projects.

The EIA reported, “From fiscal year 2010 through fiscal year 2013, the largest increases in federal energy subsidies were in electricity-related renewable energy, which increased from $8.6 billion to $13.2 billion. Total federal energy subsidies declined 23%, from $38 billion to $29 billion due to the expiration of tax incentives for biofuels, the depletion of stimulus funds, and a decrease in energy assistance funds.”

Also, “Domestic wind farm development thrived under the PTC and ITC, resulting in a lowering of cost by more than half over the course of the past five years and driving the U.S. to become the top wind energy producer in the world. Expiration of wind tax credits in 2013 dropped construction of new wind farms by 92% and resulted in the loss of 30,000 industry jobs. Following the renewal of the PTC in 2014, U.S. wind energy jobs increased by 23,000,” according to Renewable Energy World.

The PTC is a per-kilowatt-hour (kWh) tax credit for electricity generated and sold by qualified energy resources during the taxable year. The PTC, first enacted in 1992, has been extended ten times. This Includes Congress’s December 2015 approval to extend the PTC through 2016, after which it will decline each year until it fully expires in 2020.

The ITC allows owners of PTC-eligible renewable projects to earn a one-time corporate investment tax credit (ITC) in lieu of claiming the PTC. The ITC is equal to 30 percent of the costs attributable to the facility, which typically excludes other project costs, such as transmission equipment or ancillary site improvements.

The 1603 program offered renewable energy project developers cash payments in lieu of the ITC. The value of a grant is equivalent to 30% of the project’s total eligible cost basis, in most cases. The program allows taxpayers to maximize the return and value of existing tax incentives.  The Federal government reported, as of December 31, 2015,

  • total number of projects funded under 1603 = 104,211
  • total 1603 funding = $24.9 Billion
  • total estimated private, regional, state, and federal investment in 1603 projects = $90 Billion
  • total installed capacity of funded projects = 33.3 GW
  • total estimated annual electricity generation from funded projects = 88.7 TWh (roughly equivalent to 8,110,000 homes).

Lesser-known are twelve fossil fuel tax incentives covering production and consumption tax incentives in the U.S. All subsidies are permanent provisions in the tax code.Combined, these fossil fuel provisions totaled USD 4.7 billion in annual revenue cost and include:

  1. Expensing of intangible drilling costs
  2. Percentage depletion for oil and natural gas wells
  3. Domestic manufacturing deduction for fossil fuels
  4. Two-year amortization period for geological & geophysical expenditures
  5. Percentage depletion for hard mineral fossil fuels
  6. Expensing of exploration and development costs for hard mineral fuels
  7. Capital gains treatment for royalties of coal
  8. Deduction for tertiary injectants
  9. Exception to passive loss limitation for working interests in oil and natural gas properties
  10. Enhanced oil recovery credit
  11. Marginal wells credit
  12. Low Income Home Energy Assistance Program.

These incentives are only part of the story. There exist hidden incentives with deeper pockets.

A  July 2014 report by Oil Change International, stated; “In addition to exploration and production subsidies to oil, gas, and coal companies, the U.S. government also provides billions of dollars of additional support to the fossil fuel industry to lower the cost of fossil fuels to consumers, finance fossil fuel projects overseas, and to protect U.S. oil interests abroad with the military. In 2013, the U.S. federal and state governments gave away $21.6 billion in subsidies for oil, gas, and coal exploration and production. President Obama has repeatedly tried to repeal some of the most egregious of these subsidies, but these attempts have been blocked by a U.S. Congress that has been bought out by campaign finance and lobbying expenditures from the fossil fuel industry.”

If America’s push towards alternate energy was to reduce greenhouse gas emissions, then it’s an apparent failure, Figure 6.  The good news, if any, is a slight decline in GHG emissions in recent years. The bad news is emissions in 2013 were somewhat higher than that in 1990.

Figure 6: U.S. Greenhouse Gas Emissions by Gas, 1990 – 2013Figure 6 U.S. Greenhouse Gas Emissions by Gas, 1990 - 2013 v0.02Source: U.S. EPA, 2015

In closing, energy security exists in the U.S. today not by a hefty diet of alternative energy but by increased production of domestic petroleum and natural gas. But energy security is only one part of America’s energy vision. The other is a cleaner environment. The fundamental issue is whether the U.S. can expand renewable energy production at a rate that significantly cuts into the inventory fossil fuels. As ideological divisions widen on Capitol Hill, America’s energy policy becomes more reactionary and untethered to any long-term strategic plan. That is of course if one believes the carbon footprint from the combustion of fossil fuels is an environmental asset.



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