Pitting Wind and Solar Against Nuclear Power

• With US electricity demand stalled, expanding wind and solar power is increasing the economic pressure on equally low-emission nuclear power.
• New state incentives for nuclear plants are facing resistance from the beneficiaries of renewable energy subsidies, as both battle for market share.

It's an old adage that a growth market has room for all participants, including new entrants. The US electricity market is now experiencing the converse of this, with increasing competition for static demand leading to headlines like the one I saw earlier this week: "Lifeline for Nuclear Plants Is Threatening Wind and Solar Power."

The idea behind that headline is ironic, considering that for more than a decade renewables have depended on government mandates and incentives to drive their impressive expansion. Along with recently cheap natural gas, they have made conditions increasingly difficult for established generating technologies like coal and nuclear power. In the case of coal, that was an entirely foreseeable and even intentional outcome, but for nuclear power it has come as a mostly unintended consequence.

Much as the slowdown in gasoline demand brought on by the recession created a crisis for biofuel quotas, stagnant electricity demand has hastened and  intensified the inevitable fight for market share and the resulting shakeout in generating capacity. US electricity consumption has been essentially flat since the financial crisis of 2008-9, thanks to a weak economy and aggressive investment in energy efficiency. More generation serving the same demand means lower prices for all producers, and fewer annual hours of operation for the least competitive of them.

At the same time abundant, low-priced natural gas from soaring shale production has made gas-fired turbines both a direct competitor in the 24/7 "baseload" segment that coal and nuclear power formerly dominated, and the go-to backup source for integrating more renewables onto the grid.

The US is essentially swimming in energy, at least when it comes to resources that can be turned into electricity. The only rationale left for the substantial subsidies that wind and power still receive--over $3 billion budgeted for wind alone in 2017--is environmental: mainly concerns about climate change and the emissions of CO2 and other greenhouse gases linked to it.

That's the same reason why some states have become alarmed enough by the recent wave of nuclear power plant retirements to consider providing some form of financial support for existing facilities. Nuclear power isn't just the third-largest source of electricity in the US; it is by far our largest producer of zero-emission power: 3.5 times the output of wind in 2016 and 22 times solar. A large drop in nuclear power is simply not compatible with the desire to continue cutting US emissions. Environmental groups like EDF are reaching similar conclusions.

Nuclear's scale is even more of a factor when it comes to considering what could replace it. For example, it takes the output of about 2,000 wind turbines of 2 megawatts (MW) each--roughly half of the 8,203 MW of new US wind installations last year--to equal the annual energy production of a single typical nuclear reactor. An infographic I saw on Twitter makes that easier to visualize:

I can appreciate why utilities and others that are investing heavily in wind and solar power might be convinced that providing incentives to keep nuclear power plants from retiring prematurely is "the wrong policy." After all, we have collectively pushed them to invest in these specific technologies, because it has been easier to reach a consensus at the federal and state levels to provide incentives for renewables, rather than for all low-emission energy.

As long as we are promoting renewables in this way, though, we should recognize that nuclear power is no less worthy. The biggest benefit of renewables is their low emissions (including non-greenhouse air pollutants,) an attribute shared with nuclear power. Yet because of their much lower energy densities, requiring much bigger footprints for the same output, and their lower reliability, incorporating a lot more renewables into the energy mix requires additional investments in electricity grid modernization and energy storage, along with new tools like "demand response." Nuclear power is compact, available about 90% of the time, and it works just fine with the existing grid.

By experience and philosophy, I'm a big fan of markets, so I would normally be more sympathetic to the view expressed by the American Petroleum Institute that states shouldn't tip the scales in favor of nuclear power over gas and other alternatives. However, we don't have anything resembling a level playing field for electricity generation, even in states with deregulated electricity markets. The existing federal incentives for wind and solar power, together with state Renewable Portfolio Standards, are already tipping the scales strongly in their favor. These subsidies will remain in place until at least 2022, consistent with the most recent extension by Congress. Why do renewables merit such subsidies more than nuclear power?

Wind and solar power are key parts of the emerging low-emission energy mix, and we will want more as their costs continue to fall, but not at the expense of much larger low-emission energy sources that are already in place. Less nuclear power doesn't just mean more renewables. It also means more gas or coal-fired power. That's the experience of Germany's "Energiewende", or energy transition.

As long as that is the case, and without corresponding incentives for equally low-emission nuclear plants, as well as for fossil-fuel plants that capture and sequester their CO2, we will end up with an energy mix in the next few years that is less diverse, less reliable, and emits more CO2 than necessary. I wouldn't consider that progress.

2015: A Turning Point for Energy?

• 2015 was certainly an eventful year in energy, with plummeting oil prices and a widely anticipated global climate conference in December. It's less clear that it was a turning point. 

When I sifted through the major energy developments of 2015, I was surprised by the number of references I found to last year as a turning point, whether for the oil industry, the response to climate change, coal-fired electricity generation, or renewable energy. To this list I am tempted to add the decision to allow unrestricted exports of US crude oil for the first time in 40 years.

Major turning points are best identified with the passage of time. With so many legitimate candidates it might seem a bit deflating to note, as the chart below reflects, that the growth pattern for US energy supplies in 2015 looks a lot like the one for 2014. Despite low prices, oil and gas output posted solid gains, at least through October, while wind and solar power contributed modestly, when compared on an energy-equivalent basis.

There are sound reasons to think that next year's graph may look quite different, starting with oil. The petroleum industry is still in turmoil from its turning point in late 2014, when OPEC declined to cut its output quota to restore the global oil market to balance. In North America and much of the world, drilling and investment in new projects are down sharply, and US oil production is retreating from the 44-year peak it reached in April. The subsequent decline would have been even more pronounced without the contribution of new deepwater platforms  in the Gulf of Mexico that were planned long before oil prices fell.

However, anyone identifying 2015 as the start of a global shift away from oil, rather than another cyclical low point, must contend with some contrary statistics. Global oil demand appears to have increased by around 2%--equivalent to the output of Nigeria--in response to a 70% drop in oil prices. And despite a lot of media attention, electric vehicles--the leading contender to replace the internal-combustion cars that are the main users of refined oil--have yet to catch on with mainstream consumers.

Based on data from Hybridcars.com, US sales of battery-electric vehicles (EVs) grew slightly faster than the 6% pace of the entire US car market in 2015 but still accounted for less than 0.5% of all new cars. In fact, the combined US market share of hybrids, plug-in hybrids and battery EVs fell by 18%, compared to 2014, to below 3%. This is a respectable start for vehicle electrification, but it's not much different from the beachhead that hybrids alone occupied in 2009.

Although we might look back on this situation in a few years as a turning point, I believe that will depend on the condition of OPEC and the global oil industry, as well as the level of global oil consumption, when supply and demand come back into balance and today's high oil inventories are drawn down.

At the launch of API's latest State of American Energy report earlier this month I had the opportunity to ask Jack Gerard, the President and CEO of API, how he thought the current situation might change the oil and gas industry, and whether it would push it even farther towards shale development, including outside the US. His response focused on ensuring that policies will allow US producers to compete globally and build on the advantages of US resources, capital markets and rule of law to increase their share of the market.

As for US natural gas production, rising per-well productivity and growth in the Utica shale and Permian Basin offset less drilling in general and output declines in the Marcellus shale and elsewhere.  The continued expansion of gas is remarkable, considering that natural gas futures prices (front month) averaged just $ 2.63 per million BTUs for the year and dipped below $2 in December. The LNG exports set to begin this month look very timely.

Renewable energy, mainly in the form of wind and solar power, continues to grow rapidly as its costs decline. US renewables got an unexpected boost in December when the US Congress extended the two main federal tax credits for wind, solar and other technologies, including retroactively reinstating the lapsed wind Production Tax Credit (PTC).  Renewables should also benefit from the implementation of the EPA's Clean Power Plan, and from the effect of the Paris climate agreement on the investment climate for these technologies.

We may not know for years whether the Paris Agreement was truly a turning point for climate change, as many have suggested. Another prescriptive agreement with legally binding targets, along the lines of the Kyoto Protocol, was never in the cards. However, the Paris text is replete with tentative verbs, along the lines of, "requests, invites, recognizes, aims, takes note, encourages, welcomes, etc. "  It remains up to the participating countries whether and how they fulfill their voluntary Intended Nationally Determined Contributions and financial commitments.

The Paris Agreement could turn out to be the necessary framework for firm steps by both developed and developing countries to reduce emissions and adapt to climatic changes that are already "baked in", or it might shortly be overtaken by other events, as previous climate change measures were in the aftermath of the 2008 financial crisis. The current financial problems of the world's largest emitter of greenhouse gases--arguably the most important signatory to the Paris Agreement--are not a positive signal.

With so many uncertainties in play, we should consider all of these potential turning points as signposts of changes that depend on other interconnected factors, if they are to lead to a future that breaks with the status quo. There are enough of them to make for a very interesting 2016, even if this wasn't also a US presidential election year.

 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

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.

Energy and the New Congress: Beyond Keystone

• The Keystone XL pipeline is likely to get another opportunity for approval once the new Congress is sworn in next January.
• However, it will not be the most important part of a new Congressional energy agenda, and it might not even be the most urgent.

Voters in the US mid-term election earlier this month might be forgiven for assuming that its result assures quick approval of the Keystone XL pipeline (KXL), notwithstanding the drama over a Keystone bill in the "lame duck "session last week. The pipeline has been under review by the Executive Branch for six years, yet despite its symbolic importance to both sides of the debate, and an apparent majority in both houses of the newly elected Congress favoring its construction, its future remains uncertain. Nor is KXL necessarily the most urgent or important energy issue that the new Congress is expected to take up.

It's worth recalling that the Senators who just lost their seats  were elected in the aftermath of the oil-price shock of 2007-8, amid great concern about increasing US dependence on imported oil and natural gas. They took office in 2009 with a President whose main energy policies focused on addressing global warming, with energy security inescapably linked to climate change. Largely as a result of the shale revolution, the new class of Senators will begin their jobs in an entirely different energy environment. That will have a bearing on both the priorities and approach of the new Congressional leadership.

The energy agenda for the two years of the 114th Congress will most likely include not just the status of KXL, but also restrictions on US crude oil exports, reform or repeal of the Renewable Fuel Standard (RFS), the extension of renewable energy tax credits for solar power (expiring at the end of 2016) and wind power (already expired),  regulation of greenhouse gases by the Environmental Protection Agency under the Clean Air Act of 1990, expanded oil and gas drilling on federal lands and waters, and a stalled piece of energy efficiency legislation that might be the least controversial energy bill, on its merits, that either chamber has considered in years. Support for nuclear power and the disposition of nuclear waste could get another look, too.

Tax incentives for both renewable and conventional energy may also be swept up in efforts to reform the US corporate and individual tax systems, a high priority for some incoming committee chairmen. The least likely measures to be considered, however, are comprehensive energy legislation along the lines of the Energy Independence and Security Act of 2007 or climate legislation similar to the Waxman-Markey bill of 2009 that subsequently died in the Senate.

It is also possible that the 113th Congress could clear some of its backlog of energy measures before handing off to the new Congress in January. The dynamics of the lame duck session will be different from the pre-election period, and the outgoing leadership could be motivated to strike deals on measures such as the restoration of the wind power tax credit (PTC) within a larger package of expiring tax measures called the "extenders bill."

Aside from KXL, perhaps the most pressing energy matter for the new Congress is to address is the question of US oil exports, which are restricted under 1970s-era laws and regulations. The urgency of debating oil exports is twofold: One company has already indicated its intention to export condensate, which is treated as crude oil under current regulations, without government approval. And with oil prices having fallen by 20-25% since summer, oil exports and related shipping regulations could provide a crucial relief valve as US producers of light tight oil (LTO) from shale deposits seek to reduce their costs and find higher-priced markets.  Senator Lisa Murkowski (R-AK) is slated to chair the Senate Energy & Natural Resources Committee, and this is one of her big issues.

However, the cooperation Sen. Murkowski will receive from the other party in getting export legislation to the Senate floor could depend on the result of December's runoff in Louisiana.  If Mary Landrieu, current chair of Energy & Natural Resources, falls to Representative Bill Cassidy (R-LA), her replacement as ranking member for the minority on that committee is expected to be Maria Cantwell (D-WA). Senator Cantwell appears to be more skeptical about oil exports, as well as on other issues the oil and gas industry might hope would advance next year. 

For that matter, while gaining approval of KXL and reining in the EPA are clearly part of the incoming Republican agenda for energy, other issues cut across party lines in ways that make their outcomes less easily predictable. For example, proponents of reforming or repealing the RFS may have as much difficulty getting traction in the 114th Congress as in the 113th. Geography, rather than party affiliation, seems like a better predictor of whether new Senators like Joni Ernst (R-IA) or Mike Rounds (R-SD) would support or oppose changing the rules for biofuels. That could apply to the wind tax credit, too.  Even an oil export bill might similarly split both parties.

That brings us back to Keystone XL. The election result put both chambers of Congress on the same page on this issue for the first time and has apparently increased support for KXL to the crucial 60-vote threshold. That would be sufficient to obtain "cloture" and prevent a filibuster, though not to overturn a presidential veto.

Before Senator Landrieu's bill came up short last week, the President's real position on KXL began to emerge from the opacity he maintained through two elections. Nor does the fallout from his recent actions on other issues bode well for striking a deal with the new Congress on Keystone, short of it being attached to some essential piece of legislation like the budget or defense authorizations. Other parts of the likely Congressional energy agenda could fall into the same gap, and I'm less optimistic than I was after November 4th about opportunities for cooperation on energy between the White House and a unified Congress. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

An Expensive Subsidy, Twisting in the Wind

• The expired federal Production Tax Credit for wind energy has missed another opportunity for renewal in the US Senate.
• If renewed at the proposed level and extended repeatedly, its annual cost could eventually exceed US tax breaks for oil and gas by a factor of 9:1.

I see that the 2014 "tax extenders" bill, S.2260, failed to pass a cloture vote in the US Senate yesterday. That has spoiled for now the chances of reviving the Production Tax Credit (PTC) for wind and other (non-solar) renewables that expired at the end of last year. The bill might get another opportunity in revised form, but in coming up 7 votes short, it calls into question the Senate majority's preferred approach of tackling the entire package of dozens of tax breaks en masse.

I've written about the PTC at length, most recently just prior to the expiration of its latest version last December. Long-time readers know I am convinced that reform is overdue for this excessively generous subsidy for what amounts to a mature industry. Here's a different way to put both of those aspects of the PTC into context.

First, consider its cost if applied to all current and future wind power installations. As a benchmark, the highly controversial tax benefits received by the oil and gas industry amount to around $4 billion per year in the federal budget.

If all US wind-generated electricity received the PTC at the rate offered in the current extenders bill, the annual cost would approach the oil and gas "subsidy", at $3.9 B/yr based on last year's actual US wind generation of 168 billion kWh, which equates to less than 3% of US oil and gas production in 2013.

If wind and similar renewable sources reached 30% of US electricity generation, as many hope and the Department of Energy has concluded is feasible, then the annual subsidy would exceed $28 B/yr, based on 2013 US net generation. US electricity demand is expected to grow by as much as 29% between now and 2040. That would bring annual PTC outlays to $36 B.

This looks like a reductio ad absurdum argument, because it is. Simply put, is it reasonable, after twenty years of such support, for the wind industry to expect to continue to receive an extremely generous subsidy, compared to other forms of energy, until wind power reaches market saturation?

As for arguments that wind power is not yet mature, other mature industries have exhibited similarly impressive growth and cost reductions in recent years. Natural gas production comes readily to mind. The fact that wind developers assert they still need this subsidy at this level speaks more to the competitiveness of the technology than to its maturity.

Ultimately, the PTC must be seen as a proxy for the comprehensive carbon policy we don't have and may never have. If there's a consensus in the government to support low-emission energy technologies, in lieu of a carbon tax on all energy, shouldn't it at least reward technologies on the basis of their actual emissions reductions, rather than merely for deployment (the 30% solar Investment Tax Credit, which expires in a few years) or operation (the PTC)? At $0.023/kWh, the tax credit for wind power displacing gas-fired power from a combined cycle power plant results in an implicit cost of around $65 per metric ton of CO2 avoided. That's far higher than the price at which emissions credits trade in any of the regional US or international markets.

The perils of the PTC are a microcosm of the provisions included in this bill, which might still eventually be passed. It includes measures with nearly universal support, like the Research and Development tax credit, which has also expired, and a grab bag of narrower and in some cases bizarre tax breaks, such as providing three-year depreciation for race horses. PTC supporters are now left to hope that enough additional legislative favors can be squeezed into the next version of the bill to carry the whole bunch over the top.

Is the Wind Energy Tax Credit About to Expire for Good?

• The expiration of the federal subsidy for wind power on 12/31/13 provides an opportunity to replace it with a smaller benefit, more focused on innovation.
• Comprehensive tax reform is the best way to approach this, including making tax incentives for energy consistent across the board.

With the end of the year fast approaching, the US wind power industry faces yet another scheduled expiration of federal tax credits for new wind turbines. The wind Production Tax Credit, or PTC, was due to expire at the end of 2012 but was extended for an additional year as part of last December’s “fiscal cliff” deal. With the PTC and other energy-related “tax expenditures” subject to Congressional negotiations on tax reform, it was looking like this might truly be its last hurrah in its current form, until Senator Baucus, Chairman of the Senate Finance Committee, released his draft proposal yesterday. Unfortunately, from what I have seen so far it falls short of sunsetting this overly generous subsidy and replacing it with a new policy emphasizing innovation.

In its 20-year history, minus a few year-long expirations in the past, the PTC has promoted tremendous growth in the US wind industry, from under 2,000 MW of installed wind capacity in 1992 to over 60,000 MW as of today. For most of its tenure, the PTC did exactly what it was intended to do: reward developers for generating increasing amounts of renewable electricity for the grid at a rate tied to inflation.

However, unlike the federal investment tax credit for solar power and some other renewables, the amount of the subsidy didn’t automatically decrease as the technology improved, with wind turbines growing steadily larger, more efficient, and cheaper to build. Instead, the PTC’s subsidy for wind power increased from 1.5 ¢ per kilowatt-hour (kWh) to its present level of around 2.3 ¢. That figure equates to up to $39 per oil-equivalent barrel, depending on which conversion from kWh to BTUs you choose.

It's also roughly one-third of today’s average US retail electricity price for industrial customers and exceeds most estimates of typical operating and maintenance costs for wind power. The latter point has serious implications for the impact of wind farms on other generators in a regional power grid.

If wind turbine installations continued at their remarkably depressed rate of just 64 MW in the first three quarters of this year, the cost of extending the current PTC for another four years and beyond, as Senator Baucus seems to be proposing, would be negligible. However, it’s evident from industry data that a major reason installations are so low in 2013 is that the uncertainty over last year’s scheduled expiration caused developers to accelerate projects into the record-setting fourth quarter of 2012. The American Wind Energy Association cites over 2,300 MW of new wind capacity under construction as of the end of September, while installations over the last three years averaged just under 8,400 MW annually.

At that rate, a one-year extension of the current PTC would add around $5 billion annually to the federal budget over the succeeding 10 years that each year's new wind farms would receive benefits. Congress’s Joint Committee on Taxation apparently came up with a slightly higher estimate of $6.1 billion for a one-year extension.

Before reflexively supporting or opposing another status quo PTC extension, we should ask what we’d be getting for that $5 or $6 billion a year. One of the commonest rationales I encounter justifying the continuation of the current PTC is that conventional energy still receives billions of dollars in subsidies each year. Without getting bogged down in arguments over the definition of a subsidy, or the real and imagined externalities associated with using fossil fuels, it is certainly true that the US oil and gas industry benefits from deductions and tax credits in the federal tax code to the tune of around $4.3 billion per year, based on figures in the latest White House budget.

If we compare these benefits on the basis of the energy production they yield, the PTC starts to look pretty expensive. For example, wind capacity additions in 2012 of over 13,100 MW increased wind generation by 20 billion kWh over the previous year. That’s the energy equivalent of about 140 billion cubic feet of natural gas in power generation, or 66,000 barrels per day of oil. (Although less than 1% of US oil consumption is used to generate electricity, oil is still an easily visualized common denominator.)

By comparison, US oil production expanded by 837,000 bbl/day, while natural gas production grew by the equivalent of another 606,000 bbl/day. So on this somewhat apples-to-oranges basis, oil and gas added more than 20 times as much new energy output to the US economy as wind power did, for roughly the same cost to the federal government.

Now, it’s true that domestic oil and gas both had banner years in 2012, in terms of growth, reversing longer-term decline trends in earlier years, but US wind had its biggest year ever last year. Another factor making this comparison more reasonable than it might otherwise seem is that these are all essentially mature technologies. Wind turbines are still improving, but these improvements are mainly incremental at this point. Nor do they or the billions in annual subsidies for wind address the single biggest obstacle to the wider adoption of wind energy, arising from its fundamental intermittency and disjunction with typical daily and seasonal electricity demand cycles.

When the PTC was first implemented in 1992, by its very existence it fostered innovation in a technology that was still in its infancy as a commercial means of generating meaningful quantities of electricity. That’s no longer the case. I’ve seen various ideas for reforming the PTC to make it more innovation-focused, but while these might be preferable to the status quo, they strike me as overly narrow. We don’t just need wind innovation, but energy innovation, and in fact innovation across the whole US economy if we want to remain globally competitive, and if we want to make more than incremental reductions in our greenhouse gas emissions.

It’s ironic in that context that the federal 20% research and development tax credit is also due to expire at the end of the year. If it came down to a choice between extending the R&D tax credit and extending the PTC, I’d hope that even the wind industry would opt for the R&D credit. That’s not entirely a false choice, considering the scale of ongoing federal deficits and debt, and the need for the government to borrow around 20% of what it spends.

Now is the ideal time to rethink the Production Tax Credit. Its expiration now wouldn’t be as abrupt as was foreseen at the end of 2011 or 2012, because last year’s extension redefined how projects qualify for the PTC. Any wind project that has either started significant work or spent 5% of its budget by year-end could still qualify for the current PTC in 2014. I have seen analysis suggesting a project begun now might even qualify after 2015, as long as work on it had been continuous.

That sets up a smoother transition, while Congress and the wind industry reevaluate what role, if any, specific wind-energy subsidies have in a national energy economy that looks very different than the one in which the PTC was first conceived in the 1990s. Making tax incentives more uniform across competing energy technologies, as Chairman Baucus's draft would do, is a good start, but instead of locking in a perpetual subsidy for current wind power technology at 50 times the rate of today's disputed oil & gas tax incentives, Congress should focus on making the tax incentives for all energy production consistent across the board, at levels that taxpayers can afford no matter how much these energy sources grow in the future.

A different version of this posting was previously published on Energy Trends Insider.

A Late Christmas Gift for Renewable Energy

The US Senate's "fiscal cliff" package wasn't exactly eight maids a-milking--the traditional gift for the eighth day of Christmas--though it did apparently resolve the impending "milk cliff".  Of greater relevance, the "tax extender" portion of the American Taxpayer Relief Act of 2012 passed by both the Senate and House of Representatives represented a gift to renewable energy producers and developers worth around $18 billion.  Two-thirds of that is attributable to the extension and modification of the Production Tax Credit (PTC) for wind and other renewable electricity projects. Renewable energy technologies have gained another year of generous support from US taxpayers.  What remains to be seen is whether this win represents a last hurrah for the current US approach to renewable energy subsidies as lawmakers focus on shrinking an increasingly unsustainable federal budget deficit.

Based on the analysis of the bill provided in the Wall St. Journal, other energy-related beneficiaries  included producers of cellulosic and algae-based biofuels, blenders of conventional biodiesel and other alternative fuels, purchasers of 2- and 3-wheeled electric vehicles, as well as various energy efficiency investments including efficient homes and appliances.  Renewables should also benefit from other provisions of the bill, including a one-year extension of 50% bonus depreciation on project investments and a two-year extension of the 20% R&D tax credit. 

Of course the problem with all of this is that it sets up additional cliffs at the end of 2013 and 2014, and thus perpetuates the expiration-anxiety roller-coaster that has confounded both manufacturers and investors in these technologies. Part of the blame for that rests with the process by which the Congress drafts and enacts such legislation.  However, it's also a function of the unwillingness of current beneficiaries to shift their lobbying efforts to support realistic and predictable phaseouts of these subsidies, in light of renewables' improving competitiveness with conventional energy and the magnitude of future US fiscal problems.  Considering that the current PTC for wind power is worth the equivalent of about 90% of today's futures price for natural gas, a proposal by the wind trade association for a six-year phaseout ending at 60% strikes me as too much like St. Augustine's plea for chastity.

The high-pressure negotiations to avert the fiscal cliff provided a poor venue for producing genuine tax reform, while giving supporters of the status quo a golden opportunity to attach measures such as these "extenders" that couldn't be amended before the expiration of the current Congress.  The non-partisan Congressional Budget Office estimated that this bill actually increased federal spending by a net $330 billion over 10 years and added nearly $4 trillion to the deficit, compared to going over the cliff.  It's not clear that the even higher-stakes debt-ceiling debate slated for early in the new Congress will be any more conducive to solving these challenges. But whether then or later in the session, it's going to become harder to avoid some form of tax reform and spending discipline that considers all energy subsidies in the context of their direct costs and indirect revenues. I'll be surprised if the current subsidies for renewables can escape again without major adjustments to reduce their high effective cost per unit of energy produced and increase their long-term bang for the buck. 

2012: The Year in Energy

As in most recent years, energy was constantly in the news in 2012. A post attempting to catalog every noteworthy story or event would be quite long.  However, a few big trends stand out. For starters, it's a near-certainty that the average US gasoline price will set a new record for the second year running, in both real and nominal terms. Americans are responding by choosing more fuel efficient cars. Meanwhile, fundamental shifts emerged from obscurity into the awareness of policy makers and the public.  US energy exports have become a mainstream topic of conversation, and the goal of energy independence--a concept with debatable meanings--has acquired renewed respectability after spending a couple of decades on the fringes of energy policy debate.  Perhaps more significantly, our views of climate change and future oil supplies--once aligned--have diverged. 

For renewable energy it has been the best and worst of years.  Global overcapacity in solar equipment manufacturing drove down the costs of solar panels, at least partly counteracting reductions in government incentives, especially in Europe, and making solar power more competitive.  The US is on track to add a record 3,200 MW of solar capacity this year, while China could add 5,000 MW.  However, solar manufacturers' rapid expansion depressed their margins and extended last year's string of solar bankruptcies, with firms like Abound Solar, Konarka, Solarwatt, Q-Cells and others forced to restructure or liquidate in 2012.  A similar, if less dramatic wave is working through the more mature onshore wind industry, which faces the expiration of a key US incentive, the Production Tax Credit, or PTC on December 31.  In anticipation of that loss, wind developers have added 4,728 MW of new capacity in the US through the first three quarters of 2012, the most since 2009.

Energy played a complex and possibly decisive role in the US presidential election.  Remarkably, President Obama successfully co opted his opponent's energy platform by embracing an oil and gas revival that his administration had done little to help and much to hinder, even though it appeared to conflict with his emphasis on renewable energy and climate change mitigation.  Meanwhile, the shale gas revolution was creating hundreds of thousands of direct and indirect jobs and lowering energy costs across the economy, contributing to US manufacturing competitiveness.  The resulting economic growth, while still below the level of other post-war recoveries, apparently helped the President make his case for a second term.

The inherent tension between surging US oil and natural gas production and concerns about climate change--fanned by Hurricane Sandy--reflects a major shift that occurred this year, at least as an influence on future energy policy.  Recall that until recently, memories of past energy crises, combined with the influential Peak Oil perspective, shaped our expectations of resource availability and future production.  This narrative of hydrocarbon scarcity complemented prescriptions for a rapid transition away from fossil fuels as the only viable solution to climate change, supporting a shared goal of a more sustainable energy economy based on renewable energy, smart grids and electric vehicles.   The exploitation of unconventional oil and gas resources in previously inaccessible source rock--shale gas and "tight" or shale oil--poses significant challenges to both strands of that argument.

First, it undermines the notion of energy scarcity for at least the next decade, and probably well beyond.  US natural gas production set a new record this year, and US oil production returned to levels not seen since 1997, putting increased pressure on OPEC's control over global oil pricing. Nor does the US have a monopoly on these unconventional resources. Canada looks like the next big shale gas play, with China and South Africa possibly not be far behind.  The technologies that enabled the US shale gas revolution and its oil offspring are being transferred around the world.

Yet we also learned that US energy-related CO2 emissions have fallen back to 1992 levels, largely because of a dramatic reduction in the use of coal in power generation.  While renewable energy sources like wind and solar power deserve some of the credit, natural gas-fired turbines--driven by cheap shale gas--have added three times as much net generation since 2007 as non-hydro renewables.

Shale gas and oil might not provide a long-term solution to global warming, but they could at least buy us the time to develop the innovations like improved electric vehicle batteries and low-cost grid-storage that will be necessary if renewables are to displace fossil fuels across the entire spectrum of their use--and dominance.  They could also provide the time to develop and deploy the next generation of nuclear power, including small modular reactors.

I'd like to thank my readers for your continued interest and encouragement and wish you a happy holiday season.

Push-me/Pull-you: Post-election Energy Policies

I've seen numerous commentaries on the energy implications of President Obama's narrow, 51%/49%  victory. One of the most intriguing of these, from Reuters, concerned the prospects for exporting a portion of the growing output of natural gas produced from US shale deposits.  This issue doesn't only affect gas drillers and their residential and industrial customers, but also developers of renewable energy projects, because of the way that gas and renewables compete in electricity markets.  As much as the President's reelection, the failure of Republicans to capture control of the US Senate might turn out to be a key factor in determining the fate of potential gas exports, and by extension the environment within which renewables like wind and solar power must compete.

A variety of energy issues has been in limbo for months, pending the outcome of Tuesday's election.  That includes approval of the Keystone XL crude oil pipeline from Canada, which might have gotten a favorable nudge as a result of Senate wins by pro-pipeline Democrats in North Dakota and Montana.  Environmentalists are committed to blocking the pipeline, so the President must soon choose which part of his winning coalition he will disappoint.  By comparison, the question of natural gas exports has received much less attention in the media, although it's been discussed extensively within energy and manufacturing circles.  The likely incoming chairman of the Senate Energy and Natural Resources Committee, Ron Wyden (D-OR), appears to have strong views on the subject.   

If Senator Wyden does replace the outgoing chairman, Senator Bingaman (D-NM), as expected, this would represent a shift in constituencies from a state with significant oil and gas production to one with essentially none.  Senator Wyden thus brings mainly an end-user perspective to his Energy and Natural Resources role, and from that standpoint his concern about the potential price impact of gas exports, whether in the form of LNG or otherwise, is understandable, although I would argue it is also short-sighted and potentially detrimental to renewable energy, which he strongly supports.

On the surface, restrictions on the export of US gas should result in lower domestic natural gas prices than if large quantities of gas were shipped offshore.  After all, low US natural gas prices, compared to those in Europe and Asia, are the main driver behind the desire to build export facilities, such as the Sabine Pass project of Cheniere Energy.  Natural gas is cheaper in the US than elsewhere for several reasons, including the high and growing output from shale gas resources, as well as the epic disconnect between the natural gas price and crude oil prices, which are the basis for most international LNG contracts. US gas at the wellhead is currently trading for the oil equivalent of $21 per barrel, compared to UK Brent Crude at $107 per barrel.  The extent to which exports might increase domestic prices is a matter of much speculation and study, and I wouldn't venture a guess.  However, we can't just look at demand in gauging the impact of export restrictions.

The efficacy of holding down US prices by keeping more gas here also depends on the response of producers.  If legislators or regulators turn the US gas market into a capped bottle, why would producers be content to supply steadily increasing quantities of gas at prices that don't provide them an attractive return?  To some degree the low prices we've seen this year were the result of the combination of a weak economy and a supply glut created by contractual commitments on the part of drillers to develop gas leases at a specified pace.  My understanding is that most such commitments have lapsed, and that a significant proportion of current gas supply is coming from wells that depend on the economics of their liquids output (crude oil and gas liquids), with the associated natural gas effectively a byproduct.  It's not clear how rapidly gas production can continue to grow without natural gas prices that make gas-only wells economically attractive.  So a US gas market with no export outlets would likely produce less gas in the long run, and that would constrain opportunities to use our abundant gas resources to support new industries, displace oil from transportation, and further reduce the use of coal in power generation.

Moreover, keeping a lid on the US gas market would compound the obstacles for renewable sources of electricity.  Wind power developers and turbine manufacturers now face the expiration of the Wind Production Tax Credit (PTC).  Even if it is extended, the output of wind farms competes with the output of gas turbines, while the grid relies on gas-fired power to provide a back-up for the intermittent output of wind and solar power.  The cheaper the gas, the tougher it will be for renewables to make a profit. Market competition with gas will become an even bigger issue for renewables as they expand beyond the capacity of a cash-strapped federal government to continue to subsidize them.  The one-year extension of the PTC under consideration could cost as much as $12 billion, an annual price tag that would only grow as renewables scale up--as they must if they are going to matter.

Navigating the complexities of allowing or restricting natural gas exports, and balancing the various constituencies involved, could provide an early test of the administration's commitment to an all-of-the-above energy strategy.  That's because "all of the above"--if not merely a slogan--implies more than just producing energy from a variety of sources.  It also entails competition among all these sources within a market in which some sectors of demand are declining, others growing, and new ones--including exports--are appearing all the time.  Pushing back on one part of this market will have large consequences in other parts, and regulators could soon be overwhelmed by unintended consequences. 

Last Hurrah for the Wind Power Tax Credit?

Ahead of Thursday's meeting of the Senate Finance Committee, a bipartisan deal has apparently omitted the expiring production tax credit (PTC) for wind power from a package of "tax extenders"--various expiring federal tax provisions, including the annual "patch" for the Alternative Minimum Tax.  This development might surprise some of the industry's supporters, but the politics of wind have changed since I last examined this issue in February.  A measure that once enjoyed solid bi-partisan support is now caught between two presidential campaigns that hold diametrically opposed views on its fate. 

A quick review of the PTC seems in order.  This tax credit, which covers a variety of technologies but with wind as the main beneficiary, dates back to 1992--interrupted by several past expirations but then revived in essentially its present form. That's significant, because during the same 20 years in which the PTC has been escalating annually with inflation--from 1.5 ¢ per kilowatt-hour (kWh) to the present level of 2.2 ¢/kWh--the cost of wind turbines and their output has fallen significantly. In the same period, US installed wind capacity grew from 1,680 MW to nearly 49,000 MW as of the first quarter of 2012.  So in effect, we're subsidizing today's relatively mature onshore wind technology by a larger proportion than we did when it was in its infancy. That makes no sense, especially in the current environment.

The US wind industry has received substantial government support in recent years.  When the long-standing tax credit against corporate profits proved to be much less beneficial during the financial crisis, the administration gave wind developers a better option within the stimulus: a 30% investment tax credit that could be claimed as up-front cash grants, instead of having to wait until power was generated and sold over the normal 10 year period of the PTC.  From 2009-11 the wind industry received a cumulative $7.7 B, in addition to ongoing tax credits on older projects, manufacturing tax credits for new wind turbine factories, and loan guarantees for selected wind farms.  And even with new turbine installations in 2012 running well below their record rate of 10,000 MW in 2009, the wind projects that qualify for the PTC this year could receive a total of $4.5 B over the next decade. 

Many people seem to want to equate the tax breaks that wind and other renewable energy technologies receive with the controversial tax benefits for the oil and gas industry, without realizing how unfavorable that comparison truly is for renewables.  Subsidies for technologies such as wind are much higher per unit of energy produced, consistent with their intended purpose of bridging the competitive gap vs. conventional energy.  Yet since the total output of new renewables is still relatively small, the disparity in total subsidies is much larger than it appears.  One way to illustrate that is that if the oil and natural gas produced in the US received tax credits at the same rate per equivalent kWh as wind power, then the annual oil and gas tax preferences that the Congress and President Obama have been sparring over for the last three years wouldn't be $4.8 B per year, but around $100 B per year. 

As the Reuters article makes clear, there will be other opportunities for the PTC to be reinserted in the extenders bill or other legislation.  However, by persistently arguing for extending the existing credit without modification, the wind industry and its supporters may be misreading the public's appetite for such generous subsidies in a period of protracted economic weakness, notwithstanding the recent Iowa poll.  Despite its rapid recent growth wind still contributes less than 4% of the nation's electricity and just 1% of our total energy consumption, and the green jobs angle is wearing thin. Last year's expiration of the ethanol blenders credit set a precedent for ending another large, generous subsidy before its beneficiaries agreed they were done with it. If congressional Republicans line up behind their party's standard bearer on this issue, the wind industry will have missed its opportunity for a graduated, multi-year phaseout of the PTC, instead of stepping off a cliff in 2013.

Does All-of-the-Above Energy Include Long Shots?

An article in Tuesday's Washington Post described the current funding woes of US research into nuclear fusion, focused on anticipated budget and job cuts at the Princeton Plasma Physics Laboratory, MIT and several other sites.  Aside from the general challenge of funding all of the Department of Energy's programs at a time of huge federal deficits and ballooning debt, it appears that domestic fusion research is being cut mainly to meet our commitments to the International Thermonuclear Experimental Reactor (ITER) being built in France.  The article goes on to suggest that fusion has been excluded from the list of "all-of-the-above" energy technologies that the administration has embraced.  That raises questions that would merit attention at any time but seem particularly relevant in an election year.

Before discussing its proper priority in US federal energy research and planning, it's important to recognize, as the article does, that fusion is very much a long-shot bet.  We know that nuclear fusion works, because it's the process that powers our sun and all the stars.  However, that doesn't guarantee that we can successfully harness it safely here on earth for our own purposes.  I've heard plenty of energy experts who think that the only fusion reactor we need is the one 93 million miles away, which remains the ultimate source of nearly all the BTUs and kilowatt-hours of energy we use, except for those from nuclear (fission) power plants and geothermal energy. 

Unfortunately, the challenges of harnessing the sun's energy bounty in real time, rather than via the geologically slow processes that produced fossil fuels or the faster but still ponderous growing cycles of biofuels, are distinctly non-trivial--hence the debate about whether and how to overcome the intermittency and cyclicality of wind and solar power through optimized dispersal, clever use of Smart Grid technology, or with energy storage that requires its own breakthroughs if it is to be an economical enabler of wind or solar. A working fusion reactor would provide an end-run around all those problems and fit neatly into our current centralized power grid, with what is expected to be negligible emissions or long-term waste.  Who wouldn't want that?

Of course fusion power isn't easy, either; it's the definition of difficult.  Scientists around the world have been chasing it for at least five decades.  I recall eagerly reading about its potential when I was in my early teens.  Then, it was seen to be 30-40 years from becoming commercial, and that's still a reasonable estimate, despite significant progress in the intervening decades.  I admit I don't follow fusion research nearly as closely as I used to, in all its permutations of  stellarators, tokamaks, laser bombardment chambers and other competing designs, all pursuing the elusive goal of "net energy"--getting more energy back than you must put into achieving the temperatures and pressures necessary to fuse the chosen hydrogen isotopes.

So where does a high-risk, high-reward investment like fusion fit into the concept of all-of-the-above energy that now dominates the energy debate on both sides of the political aisle, and in the trade-offs that must accompany any serious energy strategy or plan for the US?  After all, "all of the above" is an attempt to recognize the widely differing states of readiness of our various energy options, the time lags inherent in replacing one set of sources with another, and the need to continue to supply and consume fossil fuels during our (long) transition away from them.  While I've never seen an official list of what's in and what's out, my own sense of all of the above is that it's composed of technologies that are either commercial today or that have left the laboratory but still require improvement and scaling up to become commercial.  In contrast, fusion hasn't left the lab and it's not clear when or if it will, at least on a timescale that's meaningful either for energy security or climate change mitigation. No one can tell us when the first fusion power plant could be plugged into the grid, and every attempt at predicting that has slipped, badly. 

Fusion wasn't mentioned once in the Secretary of Energy's remarks to Congress concerning the fiscal 2013 Energy Department Budget, and it was only shown as a line item in his latest budget presentation.  Yet I can't think of any other new technology that's customarily included in all of the above that has even a fraction of fusion's potential for delivering clean energy in large, centralized increments comparable to today's coal or nuclear power plants.  We could spend all day arguing whether that's as desirable now (or in the future) as it was just a few years ago, but from my perspective it contributes to the option value of fusion.  No one would suggest fusion as a practical near-term alternative, but with the prospect of a shale-gas bridge for the next several decades, it might be an important part of what we could be bridging towards.

Overall, the DOE has budgeted just under $400 million for fusion R&D in fiscal 2013, out of a total budget request of $27 billion.  That's not insignificant, and devoting 1.5% of the federal energy budget to fusion might be about the right proportion for such a long-term endeavor that is decades from deployment, relative to funding for medium-term efforts like advanced fission reactors and near-term R&D on renewables and efficiency.  The problem is that DOE is cutting deeply into US fusion capabilities, not just at Princeton but also at Lawrence Berkeley Laboratory, Livermore, Los Alamos and Sandia, in order to boost US funding for ITER from $105 million to $150 million next year. Only the fusion budgets for Oak Ridge Laboratory, which is managing the US role in ITER, and for the D.C. HQ grew.

I'm certainly not against international cooperation in science, which has become increasingly important as the costs of "big science" projects expand.  However, even if ITER represented the very best chance to take fusion to the next level on its long path to deployment, the long-term implications of these cuts for US fusion science capabilities look significant.  As with the space program, once the highly trained and experienced fusion workforce and teams are laid off and broken up, it becomes enormously difficult to reconstitute them, if needed.  This is particularly true of those with advanced degrees in fields that have declined in popularity at US universities, or for which the majority of current graduates are non-US students who will return to their countries of origin in search of better opportunities.  I wouldn't support keeping these programs going just to provide guaranteed employment for physicists, but we had better be sure that we won't need them later.  I am skeptical that we can be sufficiently certain today of the likely deployment pathways for fusion to be able to make such an irreversible decision with confidence.

I understand that in times like these we must make tough choices; that's the essence of budgeting.  I'm also sympathetic to those who might think that fusion researchers have had ample time and support to deliver the goods, already.  Yet I can't help being struck by the contradiction of a DOE budget in which US R&D for such a long-term, high-potential technology is cut, at the same time that Secretary Chu and the President are pushing hard for multi-billion dollar commitments to extend the Production Tax Credit for renewable energy and reinstate the expired 1603 renewable energy cash grant program, a substantial portion of the past benefits from which went to non-US manufacturers and project developers. The total 2013 budget cuts for the US fusion labs are equivalent to the tax credits for a single 90 MW wind farm, which would contribute less than 0.01% of annual US power generation.  Although we clearly can't fund every R&D idea to the extent researchers might wish, I believe it is a mistake to funnel so much money--about 40% of which must be borrowed--into perpetual support for the deployment of relatively low-impact and essentially mature technologies like onshore wind, when the same dollars would go much farther on R&D.

Cleantech Firms Paying the Price for Subsidies

In observing the recent struggles of various segments of the global cleantech industry, including renewable energy and advanced energy technology firms, a pattern is emerging. Today's Wall St. Journal reports "Wind Power Firms on Edge," as the US wind industry hunkers down pending the renewal or expiration of a key subsidy at the end of 2012. A maker of electric-vehicle batteries that received a federal grant to build a factory in Indiana is reorganizing via bankruptcy, wiping out the equity of its original investors. Meanwhile, the US International Trade Commission may be on the verge of imposing retroactive tariffs on imported Chinese solar power equipment. Each of these stories has unique features, but what they share in common is the consequences of renewable energy policies around the world that promoted overcapacity in manufacturing and fierce competition in deployment, effectively setting up some of their past beneficiaries for failure or at least a period of very low margins. Depending on your perspective, this is either an indictment of such subsidies or collateral damage on our way to a brighter future.

One blogger from an advanced battery trade association noted that "Ener1 Is No Solyndra", and I tend to agree. As I've noted previously, the decision to award Solyndra a $535 million federal loan was ill-advised, not just because of competition from other solar manufacturers, but because at the time the government approved the loan the failure of Solyndra's business model was essentially already predetermined. Solyndra didn't contribute much to the global overcapacity in solar modules and panels, because its technology was never competitive. By contrast, Ener1's problems appear more fundamental. Like much of the global wind industry and solar industry, it was induced to invest in new capacity, the market for which depended almost entirely on subsidies and regulations that governments might not be able to sustain as these technologies scaled up, and that has gotten significantly ahead of demand.

The best examples of that are probably the various solar feed-in tariff (FIT) subsidies in Europe, which until recently were so generous that they not only supported the intended growth of an indigenous solar industry to capitalize on them, but also gave rise to an entirely unintended new export-oriented solar industry in Asia that had essentially no local market when it started, yet has since gone on to dominate global solar manufacturing and eat the lunch of the European solar makers and developers who got fat off the earlier stages of the FITs.

Or consider the US wind industry, including the imported equipment that still supplies around half of the US wind turbine value chain, according to the main US wind trade association. If the 2.2¢ per kilowatt-hour (kWh) Production Tax Credit (PTC) is renewed, and if wind generation grows from the current level of 115 billion kWh per year to 141 billion kWh by 2021, in line with the latest Department of Energy forecast, then over the next 10 years the wind industry would collect up to $30 B, with much of that locked in for projects that have already started up, less the amount generated by projects that opted for the expired Treasury cash grants in lieu of the PTC to the tune of $7.9 B from 2009-11. Yet based on these figures, wind would supply just 3.2% of US electricity in 2021. The industry now seems to be arguing that it needs just one more renewal of the PTC in order to become competitive. As of 2012, this benefit has been in place on an on-again, off-again basis for twenty years.

Although the theory that underpins such subsidies doubtless has some validity--that governments can help new technologies to develop quicker than markets alone would support, create markets for them by stimulating demand, and thereby move them down their learning curves to earlier competitiveness with conventional technologies--in practice such policies also have the serious shortcomings we are seeing. Because they do not operate in Soviet-style centrally planned economies, none of these governments can tell manufacturers precisely how much production capacity to build, or how much they will sell when it comes on-stream. In the absence of such powers--which in any case proved to be over-rated--companies and their investors are at the mercy of the boom-and-bust cycles such policies generate, with the normal, self-correcting mechanisms of industry consolidation dampened by continued intervention. Nor do the policies now in place seem very successful at creating industries that can survive without them. If you doubt that, ask the US wind industry for their forecast of new installations next year if the two-decade-old PTC is not renewed. According to the Journal, it would be somewhere between 0% and 30% of 2011's 6,810 MW, which was itself a third below the 2009 peak of 10,000 MW, despite the late-2010 extension of the cash grants to cover last year's projects.

The appropriate response to all of this depends on one's politics and the firmness of one's belief that these technologies are essential tools for combating climate change. Falling between the extremes of "just say no" and "look the other way" is the view that governments at least have an obligation to learn from the past and avoid the temptation to yield to demands that they leave existing subsidies in place until their beneficiaries decide they are done with them. If wind tax credits are extended, it should be at a level that recognizes the narrowing competitive gap with conventional energy and phases them out on a schedule. Electric vehicle subsidies should also be reassessed so that we don't find ourselves still providing upper-income taxpayers with incentives of $7,500 per car, even after sales have taken off and sticker prices fallen significantly. And solar subsidies ought to be fundamentally rethought to make it less attractive to install solar panels in regions with low sunlight, such as New York and New Jersey, than in those with abundant sun. And we shouldn't do that just for the benefit of taxpayers and in response to trillion-dollar budget deficits, but in the interest of producing healthy, globally competitive companies in these industries.

State of the Union: "All-Out, All-of-the-Above Energy"

Anyone expecting the announcement of big new energy initiatives in this year's State of the Union address was disappointed last night. What was new, however, was a welcome shift in the President's emphasis on conventional energy--the fuels he referred to as "yesterday's energy" in last year's speech. Never mind that the resurgent oil production for which Mr. Obama took credit is demonstrably the result of events and policies that preceded his inauguration, or that his administration has pursued policies that have held back faster development. If his remarks signal a return to federal energy policy that expends more than 10% of its effort on the sources that account for more than 80% of the energy we use, we should applaud him. The other new ingredient last night was an effort to ground the rationale for greater support for renewable energy in the argument that it took federally sponsored R&D to make the shale gas revolution possible--R&D that ironically wouldn't have occurred under the research priorities this President has set for the Department of Energy. I hope President Obama is serious about an "all-out, all-of-the-above strategy" for energy, because that's precisely what we need.

The best way to put that in perspective is with the figures in the 2012 Early Release of the Annual Energy Outlook from the Energy Information Agency of the DOE. It was released just in time for the President's speech, and there are few coincidences in today's Washington. The reference case of their forecast for 2035 shows the US consuming 10% more energy within 24 years--an improvement from the 16% predicted in last year's Outlook. It also shows the contribution of renewable energy in the mix increasing from 6.7% today to 8.3%, including mature hydropower. So even after two more decades of strong emphasis on clean energy, oil, gas and coal would continue to provide 80% of our energy. It's clear that there's a disconnect between the lofty rhetoric of last night's speech and the analysis of the government's energy experts. I'll leave it to you to assess whether the discrepancy is due to unrealistic expectations, inadequately ambitious forecasting, or some combination of the two.

A couple of other points from the State of the Union are worth noting. The President called for Congress to "Pass clean energy tax credits," presumably a reference to the Production Tax Credit (PTC) for wind and other renewables that expires at the end of this year. Yet he didn't devote a word to whether the PTC should be restructured and gradually phased out in light of the steadily narrowing competitive gap between renewable and conventional power, let alone the kind of major tax reform he alluded to later in the speech. Mr. Obama also called for a Clean Energy Standard in lieu of a comprehensive climate bill. This is small beer when most of the states with attractive renewable energy resources already have fairly aggressive state-level Renewable Portfolio Standards. Meanwhile, the development of 3 million homes' worth of clean energy sources on public lands that he is directing his administration to allow equates to less than 1% of US electricity demand--helpful, though hardly transformational.

With little likelihood of a divided Congress enacting much that is new on energy this year, the President's remarks last night are mainly interesting for what they suggest about the energy platform on which he will run for reelection this fall. In terms of clean energy, that seems to mean more of the same from 2008 and the last three years, but with much less emphasis on climate change than we heard in his last campaign. The new element is his pivot to embrace rising oil production and the possibilities created by shale gas, even as he cautiously distances himself from the technologies (hydraulic fracturing and horizontal drilling) that make these two trends possible. Although this might appeal to independent voters, it's also vulnerable to deflation by fact-checking and stands in tension with his rejection--for now--of the Keystone XL pipeline. And if tensions in the Persian Gulf or some other oil hot spot were to increase, so would the scrutiny applied to the administration's energy policies. I'll take a much closer look at those policies when the campaign heats up.