Wednesday, December 16, 2015

A Grand Compromise on Energy?

The idea of  a Congressional "grand compromise" on energy has been debated for years. A decade ago, such an agreement might have opened up access for drilling in the Arctic National Wildlife Refuge, in exchange for "cap and trade" or some other comprehensive national greenhouse gas emissions policy. By comparison, the deal apparently included in the 2016 spending and tax bill is small beer but still worthwhile: In exchange for lifting the outdated restrictions on exporting US crude oil, Congress will respectively revive and extend tax credits for wind and solar power.

Anticipation about the prospect of US oil exports seemed higher last year, when production was growing rapidly and threatening to outgrow the capacity of US oil refineries to handle the volumes of high-quality "tight oil" flowing from shale deposits. Just this week Michael Levi of the Council on Foreign Relations, citing a study by the Energy Information Administration, suggested that allowing such exports might now be nearly inconsequential in most respects.

Although little additional oil may flow in the short term, given the current global surplus, it's worth recalling that the gap between domestic and international oil prices hasn't always been as narrow as it is today. The discount for West Texas Intermediate relative to UK Brent crude has averaged around $4 per barrel this year, but within the last three years it has been as wide as $15-20. Oil traders will tell you that average differentials between markets are essentially irrelevant. What counts is the windows when those gaps widen, during which  a lot of cargoes can move in short periods.

No matter how much or little US oil is ultimately exported, and how much additional production the lifting of the export ban will actually stimulate, the bigger impact on the global oil market is likely to be psychological. Having to find new outlets for oil shipped from West Africa, for example, because US refiners are processing more US crude and importing less from elsewhere is one thing; having to compete directly with cargoes of US oil is going to be quite another. That's where US consumers will benefit in the long run, from lower global oil prices that translate into lower prices at the gas pump.

Finally, if OPEC can choose to cease acting like a cartel--at least for the moment--and treat crude oil as a normal market, then it's timely for the US to follow suit and end an oil export ban that originated in the same 1970s oil crisis that put OPEC on the map.

How about the other side of this deal? What do we get for retroactively reinstating the expired wind production tax credit (PTC), along with extending the 30% solar tax credit that would have expired at the end of next year?

We'll certainly get more wind farms, along with some stability for an industry that has been whipsawed by past expirations and last-minute extensions of a tax credit that has been a major driver of new installations throughout its 20+ year history. Wind energy accounted for 4.4% of US grid electricity in the 12 months through September, up from a little over 1% in 2008.

However, this tax credit isn't cheap . The 4,800 Megawatts of new wind turbines installed in 2014 will receive a total of nearly $2.5 billion in subsidies--equivalent to around $19 per barrel--during the 10 years in which they will be eligible for the PTC, and 2015's additions are on track to beat that. The PTC is also the policy that enables wind power producers in places like Texas to sell electricity at prices below zero--still pocketing the 2.3¢ per kilowatt-hour (kWh) tax credit--distorting wholesale electricity markets and capacity planning.

As for solar power, it's not obvious that the tax credit extension was necessary at all, in light of the rapid decline in the cost of solar photovoltaic energy (PV). In any case, because the tax credit for solar is calculated as a percentage of installed cost, rather than a fixed subsidy per kWh of output like for wind, the technology's progress has provided an inherent phaseout of the dollar benefit. Solar's rapid growth seems likely to continue, with or without the tax credit.

The big missed opportunity from a clean energy and climate perspective is that these tax credit extensions channel billions of dollars to technologies that, at least in the case of wind, are essentially mature and widely regarded as inadequate to support a large-scale, long-term transition to low-emission energy. I would have preferred to see these federal dollars targeted to help incubate new energy technologies, along the lines of the Breakthrough Energy Coalition announced by Bill Gates and other high-tech leaders at the Paris climate conference.

The current deal, embedded within a $1.6 trillion "omnibus" spending bill, must still pass the Congress and be signed by the President. It won't please everyone, but it is at least consistent with the "all of the above" approach that has been our de facto energy strategy, at least since 2012. It also serves as a reminder that despite the commitments at Paris to reduce emissions of CO2 and other greenhouse gases, renewable energy will of necessity coexist with oil and gas for many years to come.

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