Thursday, November 3, 2011

How important are subsidies for the solar/energy industry?

To answer this question let's take a look at a british newspaper article first:

Ministers have been accused of destroying 25,000 jobs and “bankrupting a whole industry”, after the Government unveiled plans to slash subsidies for green energy. Hundreds of solar companies are likely to go bust by Christmas after the Department for Energy and Climate Change confirmed it is looking to halve subsidies for new panels.—Rowena Mason, The Daily Telegraph, 1 November 2011

I commented on the trade wars between the US and china, which is accused to subsidize the local industry beyond any international trade agreements. This helped them become the worlds biggest producer of solar panels and leads to hard times at companies outside of china. Many solar producers in the US had to close their doors in 2011.

This leads to the question, what do federal subsidies actually mean to an industry? So let's make up a rational comparison of historical U.S. energy incentives. In fact, there is no free market in energy, since subsidies are necessary to be competitive on a globalized market. Coal, oil, gas and nuclear energy did not emerge as fully matured, low-cost energy sources. Instead, they were the beneficiaries of decades of permanent and significant federal government incentives and supportive regulation. As part of a larger push to create jobs, support expansion, and fuel economic growth, the U.S. government has used a variety of financial and regulatory incentives to support energy innovation for over 200 years. Here are some of them:

Throughout the 19th century, timber and coal interests benefitted from below market land grants, state sponsored geological surveys identifying resources, federal support to build out railway and waterway transportation systems to enable the extraction of these energy resources as well as a host of policies to spur growth.

In 1950, Congress passed a subsidy that allowed owners of coal mining rights to reclassify income traditionally subject to income tax as royalty payment, for which a lower capital gains tax rate is paid. This special tax treatment is still available to members of the coal industry today and totaled well over $1.3 billion in forgone tax revenue between 2000 and 2009.

And the nuclear industry got a huge boost when Congress passed the Price-Anderson Act in 1957, which provided federal indemnification of utilities in the event of nuclear accidents. At the time, the Edison Electric Institute testified that without such immunization from the risk, “no utility company … will build or operate a reactor.”

So how do those incentives compare to current investments in renewables?

The level of support in the early days of the coal, oil, gas and nuclear industries, as a percentage of the overall federal budget, dwarfs what is being spent to promote renewables. The report concludes that nuclear subsidies accounted for more than one percent of the federal budget over the industry’s first 15 years (as a percentage of inflation-adjusted federal spending). Oil and gas subsidies comprised 0.5 percent of the federal budget from 1918-1933. Meanwhile, support for renewables constituted only 0.1 percent of the federal budget since 1994. As you can see on the chart below, in inflation adjusted dollars, nuclear spending averaged $3.3 billion over the first 15 years of the subsidy life, oil and gas averaged $1.8 and renewables clocked in at less than $0.4 billion.

 What’s even more surprising is that 50 percent of the Department of Energy’s research and development spending from 1948-2010 supported the nuclear industry. During that same period, 25 percent was spent on fossil fuels, 12 percent on renewables and nine percent on energy efficiency.

Equally important is the fact that support for oil, gas, coal and nuclear has made its way in the permanent tax code, whereas tax incentives for renewables have traditionally been short term and renewed or not renewed on a sporadic basis. That causes a boom/bust market where investors fear making long term bets.


If we want to insure leadership in the transition to the next predominant energy source — a transition underway in every major economy in the world — we need to use rational policy and sound regulation to steer us in that direction.

found on

What do you think? Looking forward to read your comments.

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