Hidden costs revealed

Displacing commercial energy with non-commercial renewable sources will cost billions to the consumer and to the federal government.

Back in May of 2007, Senator Lamar Alexander asked the Energy Information Administration (EIA) to develop an analysis of Federal energy subsidies focusing on subsidies to elec- tricity production.

The analysis was limited to sub- sidies provided by the Federal govern- ment, those that are energy-specific, and those that provide a financial ben- efit with an identifiable budget impact. Federal energy subsidies and interven- tions discussed in the body of this re- port take four principal forms:

• Direct Expenditures. These are Federal programs that directly affect the energy industry and for which the Federal government provides funds that ultimately result in a direct payment to producers or consumers of energy.
• Tax Expenditures. Tax expen- ditures are provisions in the Federal tax code that reduce the tax liability of firms or individuals who take specified actions that affect energy production, consumption, or conservation in ways deemed to be in the public interest.
• Research and Development (R&D). Federal R&D spending focuses on a variety of goals, such as increasing U.S. energy supplies, or improving the efficiency of various energy production, transformation, and end-use technolo- gies. R&D expenditures do not directly affect current energy production and prices, but, if successful, they could af- fect future production and prices.
• Electricity programs serving tar- geted categories of electricity consum- ers in several regions of the country. Through the Tennessee Valley Authority (TVA) and the Power Marketing Administrations (PMAs), which include the Bonneville Power Administration (BPA) and three smaller PMAs, the Federal government brings to market large amounts of electricity, stipulating that “preference in the sale of such pow- er and energy shall be given to public bodies and cooperatives.”

The Federal government also in- directly supports portions of the elec- tricity industry through loans and loan guarantees made by the U.S. Depart- ment of Agriculture’s Rural Utilities Service (RUS). With the exception of the Federal electricity programs, this re- port measures subsidies and support on the basis of the cost of the programs to the Federal budget provided in budget documents. Support associated with Federal electricity programs is measured by comparing the actual cost of funds made available to these entities to EIA estimates of the cost of funds that they might otherwise have incurred in the absence of Federal support.

Total Federal energy-specific sub- sidies and support to all forms of energy are estimated at $16.6 billion for fiscal year 2007. Total energy subsidies have more than doubled in real terms (2007 dollars), increasing from an estimated $8.2 billion in FY 1999. Tax expen- ditures have more than tripled since 1999, rising from $3.2 billion that year to more than $10.4 billion in 2007.

Natural gas and petroleum liquids receive a lower level of support from electricity production-related subsidies and support than other fuel groups. Overall, electricity production-related subsidies are spread broadly across the various fuel groups, probably more so than in the past.

Electricity production subsidies and support per unit of production (dollars per megawatthour) vary widely by fuel. Coal-based synfuels (refined coal) that are eligible for the alternative fuels tax credit, solar power, and wind power receive, by far, the highest sub- sidies per unit of generation, ranging from more than $23 to nearly $30 per megawatthour of generation.

Subsidies and support for these generation sources are substantial in relationship to the price or cost of electricity at the wholesale or end-user level. The average U.S. electricity price was about $53 per megawatthour at the wholesale level in 2006 and about $92 per megawatthour to end users.

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