US Energy Under Trump

• President-Elect Trump and his appointees plan a major policy and regulatory shift for energy, focusing more on economic benefits and less on environmental impacts.
• Obama-era regulations most at risk of roll-back are those justified mainly on climate concerns not shared by Mr. Trump and his team.
• Emissions are still likely to fall in the next four years as shale and renewable energy output grow. 

Next week's presidential inauguration will trigger the biggest policy and regulatory shift for the US energy industry in at least ten years. That's how long it has been since energy policy was set by a Republican president and Congress. Donald Trump is a different kind of Republican, though, and his goal does not seem to be a return to scarcity and high energy prices. What should we expect, instead?

To gauge how sharply the energy polices of the incoming Trump administration will diverge from those of the last eight years, we need to understand what motivates both leaders. The Obama administration's approach was driven by a deep, shared conviction that climate change is the most important challenge the US--and world--faces. The cost of energy and its impact on the economy became secondary concerns, subordinated by the belief that the added cost of climate policies would be offset in whole or part by the benefits of the green investment they unleashed--remember "green jobs"?

We saw this in President Obama's first year in office. Amid a deep recession he worked with Congress to attempt to limit greenhouse gas emissions by means of an economy-wide cap-and-trade system, on which he had campaigned. The House of Representatives passed the Waxman-Markey bill (HR.2454), a veritable dog's breakfast of economic distortions. Yet despite a filibuster-proof majority in the Senate in 2009, Waxman-Markey and every subsequent cap-and-trade bill died there.

That failure set in motion the agenda that the Obama administration has pursued ever since, to achieve via regulations the emissions reductions it could not deliver through comprehensive climate legislation. Last year's publication of the EPA's final Clean Power Plan was a key component of an effort that seems set to continue until just before Inauguration Day.

The transformation of energy regulations under President Obama was dramatic enough that a transition to any Republican administration would be a big change. The transition now in prospect will be even more jarring. Mr. Trump's rhetoric and his choices for key administration positions point to a concerted effort to unravel as many of the Obama-era regulations affecting energy as possible. That isn't just based on philosophical differences over regulation and markets. For President-Elect Trump the economy and jobs are paramount, so the Obama energy regulations must look like an unjustifiable threat to the fossil fuel supplies that still meet 81% of the nation's energy needs.

Despite that, it is unlikely the new administration will go out of its way to target renewable energy or the tax credits that have driven its growth to date. Renewables are becoming increasingly popular with conservatives. However, because Mr. Trump sees climate change as, at best, a secondary issue that may not be amenable to human intervention, his administration's won't put renewables on a pedestal as the Obama administration has done.

The biggest challenge for renewable energy may come from tax reform intended to make US companies and factories more competitive globally and shrink the incentive for them to relocate to lower-tax countries. This appears to be a high priority for the new White House and Congress, and one on which they broadly agree. If corporate tax rates drop, the value of the tax credits renewables enjoy is likely to fall, too, making wind, solar and other such projects less attractive and less competitive.

It remains to be seen how many of the Obama energy regulations can be rolled back. The most recent regulations might be averted through legislation like the Midnight Rules Relief Act, or the REINS Act, both of which would update the Congressional Review Act, a rarely used 1990s law intended to limit what presidents could impose by last-minute executive actions. Other regulations may eventually stand or fall as the courts rule. The stakes are high, particularly for regulations affecting the production of oil and gas from shale by means of hydraulic fracturing and horizontal drilling.

Energy independence was a touchstone of Mr. Trump's candidacy. Despite his campaign's focus on coal, it is fracking, as hydraulic fracturing is more commonly known, that holds the key to achieving that goal in the foreseeable future. It has been the main driver of the growth in US energy production since 2010.

The latest long-term forecast from the US Energy Information Administration (EIA) puts energy independence within reach--in the sense of the US becoming a net exporter of energy--by 2026 or sooner. However, the recent flurry of regulations affecting such things as drilling on federal land, and putting large portions of US waters off-limits for offshore drilling would not have been part of that projection. As EIA Administrator Adam Sieminski remarked at a briefing on the forecast, "If you had policy that changed relative to hydraulic fracturing, it would make a big, big difference to everything that's in here."

That's a key point, because most past notions of energy independence assumed that energy prices would have to be very high to promote lots of efficiency and conservation and stimulate large amounts of expensive new supply. The shale revolution changed that.

However, the global context is also changing. OPEC is attempting to reassert its control over the oil market, with help from non-OPEC countries like Russia. Two years of low oil prices shrank global oil and gas investment budgets by around a trillion dollars, and the International Energy Agency has warned of coming oil price spikes as a result. Forestalling tighter US regulations on fracking and offshore drilling increases the chances that US supplies could grow by enough to balance shortfalls elsewhere and avert much higher prices at the gas pump.

Energy infrastructure is likely to be another focus of the new administration, because the economic and competitive benefits of abundant energy will be diluted if, for example, Marcellus and Utica shale gas or Bakken and Permian Basin shale oil have to be exported because domestic customers don't have access to them.

That suggests an early effort to reverse decisions by the current administration to block the construction of various pipelines, starting with the Keystone XL pipeline and more recently the Dakota Access Pipeline. That will force new confrontations with activists and environmental organizations that have raised their game to a new level in the last eight years.

Such opposition would likely intensify if the new administration sought to withdraw the US from the Paris climate agreement, which recently went into effect, or submitted it for review by the US Senate as a treaty. But it's not clear that a big change in direction would require leaving Paris.

The US commitments at Paris, like those of the other signatories, were voluntary and non-binding. For that matter, recent shifts in US energy consumption and especially electricity generation have put the US in a good position to meet its initial Paris goals with little or no additional effort, as noted by outgoing Energy Secretary Moniz. The Paris Agreement will only become a major point of contention if President Trump chooses to make it one.

In his list of the top energy stories of 2016, fellow blogger Robert Rapier rated the election of Donald Trump ahead of the OPEC deal and many other important events of the year, based on its likely impact on "every segment of the US energy industry." In retrospect that was equally true of Barack Obama's election in 2008. The shift we are about to experience on energy will be that much sharper, because President Obama and President-Elect Trump both set out to make big changes to the status quo for energy, in opposite directions. We shouldn't miss one important difference, however.

The course that Barack Obama's administration followed on energy was largely predictable from the start, because it was based on openly and deeply held beliefs about energy and the environment. Donald Trump's well-known preference for deals over dogma sets up the prospect of some big surprises, in addition to what we can already anticipate.

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.

2014 in Review: Shale Energy's First Price Cycle

2014 was an extraordinary year in energy, vividly illustrating both sides of the Chinese proverb about interesting times. Oil market volatility was the big story for much of the year, with the dominance of geopolitical risks finally yielding to surging supplies. Of the two energy revolutions underway, shale wields the bigger stick for now, while the growth of renewables gathers momentum. All of this has implications for 2015 and beyond.

The US remained the epicenter of the shale revolution this year, with development elsewhere still subject to uncertainties about economic production potential, infrastructure, and the rules of the road. A comparison of oil-equivalent additions to US energy supplies from oil, gas and non-hydro renewables for the first nine months of the year highlights both the significance of shale and the differences in relative scale that impede a rapid shift to renewables.

US shale drilling added over a million barrels per day of "light tight oil" (LTO) production, compared to 2013, based on US Energy Information Administration data for the first nine months of the year. That brings cumulative gains since 2011 to nearly 3 million bbl/day. This hasn't just upended the global oil market; it has also revolutionized the way oil moves across North America. Over a million bbl/day now moves by rail, a figure recently projected to peak at 1.5 million by 2016. Nor is that entirely the result of delays to pipeline projects like Keystone XL. One proposed pipeline for Bakken LTO was reportedly canceled due to a lack of interest from shippers. Rail is expensive but provides producers and refiners with greater flexibility in both volume and destinations than fixed pipelines.

The collapse of oil prices has prompted many producers to reassess drilling plans, although it has been a boon for refiners and consumers.  Refining margins look relatively healthy, at least based on the proxy of "crack spreads", the difference between the wholesale prices of gasoline and diesel and the oil from which they are made. Some refiners also anticipate that low prices will spur demand growth, as described in a fascinating Wall St. Journal interview with Tom O'Malley, who has turned a succession of castoff refineries into profitable businesses. 

We may already be seeing the demand response to lower prices. November US volumes were at a 7-year high, according to API. This is unlikely to be replicated quickly elsewhere, however, for the same reasons that global oil demand was slow to moderate when prices rose over the last several years: In many countries the influence of oil prices on consumer behavior is overwhelmed by fuel taxes or subsidies. With prices now falling, some developing countries are capitalizing on the opportunity to unwind billions of dollars in consumption subsidies, offsetting market drops. That could have important implications for future oil demand and greenhouse gas emissions.

Meanwhile US consumers have watched retail gasoline prices fall by $1.39 per gallon since July and by over a dollar compared to a year ago. If sustained, the effective stimulus could exceed $100 billion annually, ignoring the effect of lower prices for jet fuel, diesel and other products. It's not surprising that half of respondents in last month's Wall St. Journal/NBC poll indicated this was important for their families.

While oil has been making headlines, shale gas without much fanfare added the equivalent of another half-million bbl/day to US production. That explains why despite enormous drawdowns of gas during last winter's "Polar Vortex", gas inventories began this winter much closer to normal levels than was widely expected in the  spring. Gas has lost a little ground in electricity generation to coal in the last two years, but few reading the EPA's proposed Clean Power Plan regulation would expect that trend to continue.

Shale gas remains controversial in some areas due to perceived environmental and community impacts. New York state is apparently making its temporary ban on hydraulic fracturing ("fracking") permanent, preferring to rely on shale gas supplies from neighboring Pennsylvania. Yet while shale drilling in North Dakota has led to an increase in gas flaring--burning off gas that can't economically reach a market--the latest findings from the University of Texas and Environmental Defense Fund measured methane leakage from gas wells at an average of 0.43%. That shrinks gas's emissions footprint and enhances its potential role in climate change mitigation.

Turning to renewables, wind energy now provides a little over 4% of US electricity. However, its growth has slowed due to uncertainty about continued federal subsidies. The wind production tax credit, or PTC, had previously been extended through 2013 in a way that allowed projects brought online later to benefit from the extension. It was just extended again through the end of 2014, along with a broad package of other expiring tax benefits. This late revival might be a gift to a few projects already under construction, but it seems unlikely to spur additional projects without further legislative action in the new Congress.

Solar power has also made great strides, with costs falling rapidly and US additions in 2014 expected to reach 6,500 MW, likely outpacing wind additions. This is happening despite the ongoing trade dispute between the US and China over imported solar modules. Utilities are already experiencing solar's impact on their traditional business model. Yet as important as wind and solar power are likely to be in the future energy mix, their impact in 2014, at least in the US, was still dwarfed by the growth of shale resources. Drilling is already slowing down, however, so renewables could take the lead in 2015 as shale is expected to post smaller gains.

Looking ahead, the global focus on greenhouse gas emissions will increase in the run-up to the Paris climate conference in December.  It remains to be seen whether enough progress was made in the recently completed talks in Lima, Peru, to resolve the significant remaining obstacles to a new global climate agreement. And while oil supply gains trumped geopolitics in 2014, a list of risk hot-spots from the Council on Foreign Relations includes several scenarios with major implications for oil and/or natural gas prices. Meanwhile we can expect the new Congress to take up Keystone XL, oil exports, EPA regulations, and other energy-related issues. I'd bet on another lively year.

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

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.

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.

The White House 2014 Budget Energy Proposals: Stuck in A Timewarp

• The President's budget proposal would increase taxes on energy in ways that would harm US competitiveness and consumers.
• Presenting the Energy Security Trust as a zero-sum game undermines its potential effectiveness and bi-partisan appeal.

After spending some time going through the White House's proposed budget for 2014-23, several conclusions were inescapable.  First, this administration still hasn't thought through the implications of the energy revolution that's currently unfolding in the US, as a result of the technology to develop our enormous shale oil and gas resources, which grew even larger this week. Not satisfied to see tax revenues and royalties from oil and gas expand as production grows, they miss no opportunity to seek to slice more from the current pie. This failure of imagination extends to the proposed Energy Security Trust Fund, which sounded intriguing when President Obama mentioned it in this year's State of the Union speech, but now appears to be mainly an accounting gimmick based on a zero-sum mentality.  Meanwhile, the budget's proposals for renewable energy and advanced technology vehicles seem largely divorced from our experience of the last several years.

Let's start with the tax changes and quickly dismiss them, because they're mostly a rehash of provisions in the administration's last four budgets and stand no better chance of Congressional approval this side of comprehensive tax reform.  Once again, we see proposals to eliminate about $4 B per year worth of tax treatment for the oil and gas industry, including provisions like the Section 199 deduction enjoyed by all US manufacturers.  Now add proposed changes in the treatment of foreign taxes, which would subject this highly international industry to double taxation on its activities outside the US, under the misappropriated label of "reform."  (True reform would move toward the territorial system used by most advanced economies.) Finally, the President's budget would eliminate both the widely used last-in, first-out (LIFO) and lower-of-cost-or-market (LCM) methods of cost accounting for inventories.  I don't know how much of the $87 B of higher revenue over ten years ascribed to that shift would come from the oil and gas industry, but it would certainly be in the billions, if this weren't all dead on arrival.

That brings me to the Energy Security Trust Fund, described in the State of the Union as a way to employ revenue from oil and gas development to fund R&D on reducing our dependence on oil.  That looked clever, if applied to incremental resource opportunities.  More production would fund more research, in an almost virtuous cycle.  Yet that's not how the idea would be implemented in this budget.  Instead of opening up new areas for drilling, and earmarking the royalties that would generate, the $2 B for the Trust would come mainly from diverting royalties from leases already in the budget, and from further "reform": higher royalties on US production and higher rentals and shorter lease terms to provide "incentives to diligently develop leases."  The latter echoes the "idle leases" canard we've heard since 2008, reflecting a continued misunderstanding of how the industry actually works, along with the real-world factors that often impede faster lease development, such as permitting delays and lawsuits.

So at least this part of the President's "all of the above" energy agenda is reduced to measures that, rather than "encouraging responsible domestic energy production", would make the US a much less attractive place to invest in developing oil and gas resources, and likely reverse our recent successes.  Yet if the new budget treats conventional energy as a slush fund to be raided, renewables and efficiency are treated to what would amount to a reprise of the 2009 stimulus.  I tallied $39.8 B through 2023 for programs such as alternative fuel vehicles, advanced technology vehicle manufacturing, advanced energy equipment manufacturing, bioenergy crop assistance, home energy efficiency retrofit credits, efficient buildings, and the Energy Security Trust Fund.  44% of the total would go to a single measure: making the production tax credit (PTC) for wind and other renewable energy permanent, instead of phasing it out, as even the American Wind Energy Association has suggested.  That's a bad idea for two reasons. 

First, it ignores a growing body of analysis pointing to the need for significant innovation in wind, solar and other renewable energy technologies, rather than continuing to pay project developers indefinitely to deploy the current technologies.  It also exposes a basic logical flaw in the argument for more subsidies: Renewables cannot simultaneously be approaching the point of becoming competitive with conventional energy, as they must if they are to capture significant shares of the energy market--wind accounted for 3.5% of US net electricity generation last year, and solar just 0.1%--while still needing permanent subsidies at rates orders of magnitude higher, on an energy-equivalent basis, than the tax breaks for oil & gas that the administration seeks to end.

After four years in office, it's reasonable to expect an administration to have learned what works and what doesn't. The President and his officials seldom miss an opportunity to brag about the enviable record of oil and gas production growth that has occurred since 2008, yet continue to propose and enact policies that, had they been in place in the previous decade--when the seeds of this growth were actually planted in an environment of rapidly rising energy prices--might well have nipped that growth in the bud. Nor do they seem to have learned much from the track record of business failures that has dogged their efforts in the renewable energy and advanced vehicles space--a record that extends well beyond the over-used example of Solyndra.  Taxing oil and gas much harder won't lead to more US production, nor will handing investors additional billions in taxpayer funds make renewables and electric vehicles competitive, without significant further improvements in the technologies.

Solyndra's Second Chapter

The details of the reorganization plan approved Monday by the judge hearing the Solyndra bankruptcy case reminded me of the admonition of one of my mentors always to beware of unintended consequences.  I'm sure the Department of Energy officials who recommended the federal loan guarantee for Solyndra in March of 2009 envisioned that the solar start-up would succeed.  As a worst-case outcome, they probably anticipated the loss of the entire $535 million direct federal loan ultimately provided by the Treasury. However, in a remarkable turn of events, the actual extent of the downside for taxpayers has now expanded to nearly $900 million, due to a quirk in the tax code and a subsequent DOE decision in 2011.

This odd sequence of events starts in early 2011 when two venture investors agreed to infuse another $75 million into the already failing Solyndra.  In order to facilitate this injection--presumably in hopes of protecting the government's substantial investment in the firm--the DOE agreed to allow the investors' loan to take precedence over the government's if Solyndra went bankrupt. Perhaps they thought that even in that case, they'd still recover most of the government's investment, because Solyndra had a sexy technology and a big new factory in Fremont, CA that could be sold to a competitor for close to full value.  They apparently didn't appreciate that Solyndra's high-cost technology had already been bypassed by falling polysilicon prices, and that the factory and its custom equipment wouldn't be of much interest to other solar producers, who were in the process of creating a huge global overhang of solar manufacturing capacity.  The Solyndra plant will now apparently be sold to a hard-drive maker for just $90 million.

In the meantime, Solyndra was piling up substantial losses running its plant and selling solar modules below cost, in order to compete with conventional solar panels that had become much cheaper. By the time Solyndra entered Chapter 11 bankruptcy, its cumulative losses apparently totaled $975 million.  To put that in perspective, the combined after tax profits of First Solar, the largest US solar producer, for the three years in which the DOE's loan to Solyndra was outstanding, were $1,265 million.

What makes Solyndra's losses relevant is that, contrary to intuition, they didn't disappear in bankruptcy.  Instead, via the investors' plan for emerging from bankruptcy, they became an asset.  And because the DOE ceded the first place in line to private investors, it is those investors who will control those "net operating losses" retained by Solyndra's reorganized parent company, 360 Degree Solar Holdings, Inc. That company apparently kept none of Solyndra's hardware, but when it acquires other companies--in any line of business--it will be able to offset future federal tax liabilities estimated by Bloomberg at $341 million.  Meanwhile, the federal government is likely to recover just 5 cents on the dollar on its "secured loan."  The Solyndra loan is a gift that keeps on giving. 

Hindsight is 20/20, but it seems pretty clear that the folks at DOE were outsmarted by private investors who had a much clearer picture of the stakes for which they were negotiating.  As we were reminded last week, Solyndra wasn't the only investment they made that went bad.  Let's hope that the others don't include similarly unpleasant surprises.  Meanwhile, I wish the IRS and Alameda County the best of luck in appealing the bankruptcy judge's ruling.

The Unlevel Playing Field for Energy

An editorial in last weekend's Wall St. Journal led me to a recent analysis by the US Energy Information Agency (EIA) summarizing the costs of the federal government's various "subsidies" for energy from different sources.  This is both useful and timely, since discussions of specific subsidies such as the expiring wind production tax credit inevitably lead to questions about how incentives for renewable energy compare to those for oil, gas, nuclear, and other more traditional sources.  As the Journal noted, the EIA stopped short of comparing these incentives on the basis of the relative productivity of different energy sources, but even without that it's still apparent that the category of new renewable electricity--excluding hydropower--received 21% of the federal energy benefits for 2010, while accounting for less than 3% of domestic energy production that year, when oil and gas, which provided 49% of US energy production, received less than 8% of these benefits.  Whether on an absolute or relative basis, renewables receive much more generous federal support than oil and gas.

Before digging further into the EIA's analysis, I should point out an important distinction between the federal expenses and incentives covered in the report and the externalities that are frequently conflated with them.  It is certainly true that many of these energy technologies involve significant impacts that aren't reflected in their market prices, and that the production and especially the consumption of fossil fuels create serious environmental and security externalities. However, to whatever extent federal subsidies address externalities they do so indirectly, at best, and in many cases inefficiently.  The focus of this posting, just like the EIA report's, is on the federal government's cash outlays and "tax expenditures"--deductions, credits, etc.--that have a direct bearing on the federal deficit and debt burden that are the subject of intense debate in this election cycle.

The tables in the report's executive summary reveal several key facts.  Between 2007 and 2010 federal energy subsidies in constant dollars more than doubled to $37.2 B, with most of the increase going to renewables and energy efficiency, except for a sizable bump in low-income energy assistance payments.   $14.8 B of the increase originated with the 2009 stimulus bill, none of which was directed at oil and gas, but which appropriated nearly $8 B to conservation and efficiency.  Overall, renewables received $14.7 B, split 55/45 between electricity and biofuels, while nuclear received $2.5 B and oil and gas $2.8 B.  The latter figure is lower than you'll see elsewhere, because among other incentives that the EIA chose to exclude from its analysis was the Section 199 deduction for manufacturers, which is budgeted at around $1 B/yr for oil and gas firms.  The logic behind that exclusion seems sound, because US manufacturers of biofuels, wind turbines, solar panels and other renewable energy equipment qualify for the same tax credit, and at a higher rate than oil companies.

I was also struck by the fact that oil and gas received just $70 million out of the more than $4 B spent on R&D. If there's one category in which federal expenditures on renewables should be expected to dwarf those for conventional energy, this is it, and they did so by a factor of more than 20 times.  (Coal R&D received more than $0.6 B, presumably for clean coal technologies.)

It's also the case that while the growth of renewable energy output from 2000-10 was dramatic, the relatively smaller net changes in oil and gas output in that period masked the substantial replacement of depleting resources that would have otherwise resulted in a large drop in output, especially for natural gas.  This is precisely the aspect of the mature oil and gas industry at which these federal incentives are aimed, to enable US projects to compete with the international opportunities to which many of these companies have access.

The authors of the report suggested caution in comparing the allocations of incentives to the energy produced by each technology, because some of these incentives were paid for projects still under construction and in some cases represented the front-loading of what would otherwise have been a 10-year stream of tax credits.  Fair enough.  Yet even with the conservative assumption that the entire $4.9 B of non-R&D subsidies for wind power in 2010 came in the form of cash grants in lieu of the 30% investment tax credit for new wind turbines that would produce for 20 years at a 30% capacity factor, that still equates to a subsidy of more than 16% of the average present wholesale value of all the electricity those turbines will produce, using prevailing industrial sector electricity prices as a proxy for wholesale prices.  By comparison, the $2.7 B of oil and gas tax incentives for 2010 represented just 1% of the wholesale value of US production of these fuels, before refining.

A serious debate about the appropriate level of US energy subsidies should begin with the facts, rather than with misperceptions. It should also focus first on the goals of such incentives, before jumping to the details of this tax credit vs. that one.  What do we want these measures to achieve?  If it's simply the promotion of energy production, then the current incentive system looks too heavily skewed in favor of renewables.  If it's jobs, then we should be realistic about how many can be added by such a capital-intensive sector.  If it's the promotion of both energy security and innovation, then at least parts of the current system look directionally right, though I'd argue that we'd benefit from spending more on renewable energy R&D and less on the deployment of mature-but-expensive technologies like wind.  However, if emissions and climate change are our primary concerns, then these incentives are not a terribly effective way to address them.  My own expectation is that regardless of whether the wind tax credit is extended for another year, most of the tax incentives that the EIA assessed here will eventually be swept away by tax reform focused on reducing corporate tax rates to improve US competitiveness, while eliminating loopholes to make the changes revenue-neutral.

The 2013 US Energy Agenda

It's tempting to focus mainly on the energy issues that have come up in the context of the presidential campaign, such as the Keystone XL pipeline, tax breaks for energy companies, and whether and how to regulate hydraulic fracturing, a.k.a "fracking".  Yet whoever is inaugurated next January, and however he resolves these issues, he will also face a much wider array of energy concerns, including some that are outgrowths of current policies or have emerged after a long gestation.  Though not intended as an exhaustive list, here are a few such issues that merit close attention from the next president's energy team.

They should begin by taking a fresh and objective look at the overall US energy posture and devising a clear and concise way to describe it to the public.  Big changes have taken place, with many of the issues that preoccupied us for the last decade or longer having become less relevant or out of date.  Topping that list is the sense of energy scarcity that has burdened us since the oil crises of the 1970s and early 1980s.  There's a realistic possibility that the combination of "tight oil" and the gas liquids production from shale gas could push domestic US petroleum/liquids production back above its early '70s peak of around 11 million barrels per day. At the same time, our net oil imports are declining, due in large part to the weak economy.  However, as the share of fuel efficient vehicles in our car fleet increases, it's reasonable to think that we've already seen the peak of US demand for petroleum fuels, even after the economy returns to healthy growth.  The net result might fall short of energy independence, but it will put us in a much better position than our largest economic rivals in terms of real energy security. 

Then there's shale gas.  Not only has it reversed a worrisome decline in US natural gas production that prompted numerous projects to import liquefied natural gas (LNG), but it has upended our assumptions about future prices and emissions in the electric power sector, while completing the divorce of oil and electricity that began in the 1980s.  Now we're talking seriously about exporting natural gas. When you combine all these changes with biofuels that are contributing roughly a million barrels per day to US supply (in volumetric, though not BTU-equivalent terms) the need to revisit some of our most basic assumptions about energy looks compelling. 

Energy scarcity isn't the only paradigm that needs to be rethought.  The current administration apparently took office with a view that was prevalent in the environmental community and among some in energy circles, that the solutions to climate change and energy security were effectively synonymous and synergistic.  That view predates the shale/tight oil revolution and was founded on the notion that renewable energy and efficiency were the only serious answers to both concerns.  That linkage was always oversimplified, because it ignored the trade-offs inherent in the shortcomings of every energy technology available.  And now, thanks to unexpected technological developments, we face an explicit choice between energy abundance based on hydrocarbons and a lower-emissions future based on renewables and electric vehicles that won't reach the required scale for decades, despite promising early signs. The transition from the former to the latter appears long and largely unpredictable, nor will it be cheap. 

The next administration also faces a set of practical issues, along with the big-picture reframing described above. Two of these issues involve urgent tasks.  The first is the growing need for a thorough evaluation of the recent and current approach to incentivizing renewable energy technologies and projects.  Since early 2009 we've spent tens of billions of dollars on a constellation of federal grants, tax credits, and loan guarantees to stimulate the growth of a domestic renewable and advanced energy industry and the deployment of its products. There's a lot of new hardware on the ground, but the sustainability of this industry looks uncertain. Although only a fraction of the companies that received federal support have failed, the tally has grown large enough--with the addition of Abound Solar last week--that it's no longer acceptable merely to shrug off these losses as par for the course.  We need some hard-nosed, detail-oriented outsiders to conduct a comprehensive post-expenditure review and extract the major lessons learned.  That should be an absolute prerequisite before anyone contemplates renewing or expanding any of these programs, including the Pentagon's $210 million "green fleet" program.

Another urgent clean-up task is the reform of the federal Renewable Fuel Standard (RFS).  This 2007 mandate was premised on the imminent arrival of cellulosic biofuel technologies that have turned out to be much harder than expected to transfer from demonstration to commercial scale.  That has resulted in drastic annual revisions to the cellulosic biofuel targets of the mandate, but even these lower targets have not been achieved.  Instead, the EPA imposes penalties on refiners and gasoline blenders for failing to blend non-existent volumes, with consumers ultimately absorbing the higher costs at the pump.  The attractive vision of abundant renewable fuels has thus turned into a bureaucratic game.  And while corn ethanol supplies 10% of gasoline and consumes nearly 40% of the US corn crop, it cannot more than double to meet the entire 36 billion gallon per year RFS target for 2022, nor should we wish it to.  Instead, the RFS must be updated to reflect reality, and the associated biofuel-credit trading system should be restructured to squeeze out the fraud that is infecting it, instead of leaving refiners and blenders--and again ultimately consumers--to pick up a tab estimated at $200 million. 

These items don't constitute an entire energy agenda by themselves, but together with a few higher-profile proposals from among those that both campaigns will announce and debate during the next four months, they could fill out a worthy first-hundred-days' energy plan for 2013.

Administration's Tax Proposals Would Hamper US Energy Output

The Obama administration is proposing significant changes in US corporate taxes, as reported in today's Wall St. Journal. If enacted, the corporate tax rate would fall from 35% of income to 28%, although the elimination of numerous tax incentives would subject many companies, including most in the energy sector, to higher taxes overall. On the surface, this looks like the kind of tax reform that has been long overdue; however, as always with such efforts, the details matter enormously. In this case, the details would create an even less-level playing field for US energy producers, while doubling down on the expensive tax benefits currently provided to favored sectors and technologies. It's ironic that this is being proposed just when rising gasoline prices have put the administration on the defensive concerning its energy policies. It will do the President little good to point to increasing US oil production--demonstrably the result of energy prices and policies in previous administrations--if he simultaneously jeopardizes that recovery in output by making it less attractive to produce oil and gas here.

The basic principle of cutting marginal corporate tax rates in exchange for the elimination of "tax expenditures", or loopholes, in common parlance, is consistent with the much broader tax reform proposed by the fiscal commission established by the White House in 2010, even if the administration has opted for the upper end of the range of tax rates suggested by Simpson-Bowles. In general, US oil and gas companies wouldn't be worse off for losing the various deductions and tax credits in the current tax code, if the marginal tax rate were reduced sufficiently and if the administration weren't proposing to raise royalty rates on US onshore production by 50% at the same time. However, the combination of the proposed changes, including subjecting part of their non-US income to US taxation, would not only make US oil and gas projects less attractive, relative to projects in other countries; they would also make it less attractive to be a US oil and gas company, instead of a non-US company that operates here. For an administration that is concerned about US competitiveness, this is perverse logic, indeed.

It doesn't take a crystal ball to predict that the combination of higher corporate taxes on energy companies, higher royalties, and the more complex permitting processes instituted by the administration even before the Deepwater Horizon accident will make it much harder to sustain the recent recovery in US oil output beyond the completion of projects that were initiated during the previous administration. New oil and gas production would probably still be profitable here after these changes, particularly if oil prices remain as high as they are now, but company portfolios would begin to shift back towards non-US projects that look more rewarding by comparison, and US companies would lose some of their edge to non-US competitors. None of that would be good for US energy consumers, considering that the oil and gas industry accounts for 62% of the energy we use, including 49% of all energy produced domestically.

Of course, the administration's tax proposals reach well beyond oil and gas. Among other things, they would extend the Production Tax Credit for wind energy by another year, through 2013, as well as extending for another year the Treasury renewable energy cash grants that expired at the end of last year. After 2012, the cash grants would be replaced by refundable tax credits, which essentially means you'd get a check from the IRS, rather than from the Treasury, if the credit were larger than the taxes your firm owes. The net effect of the latter would perpetuate a costly system of renewable energy subsidies that reward the deployment of renewable energy hardware, rather than the actual generation of renewable energy. (That distinction is important whenever the hardware is installed somewhere lacking in good wind, sun, or other renewable resources.)

Then there's the proposal to boost the electric vehicle tax credit to a maximum of $10,000 per car, and to shift the recipient from the purchaser to the seller. That circumvents the problem that under the current $7,500 credit you'd have to earn enough income to be paying at least that much in federal income taxes, in order to enjoy the full benefit of the credit. However, it also makes it much likelier that manufacturers and dealers would pocket a significant slice of the higher credit, instead of consumers. Since it was nearly impossible to justify the $7,500 per car credit on the basis of actual oil or emissions savings, the higher credit looks even less justifiable, other than as a means of raising the odds of achieving the President's arbitrary target of putting a million EVs on the road by 2015--another near impossibility. The pluses I see here include an automatic phaseout based on time, rather than sales volume, and a broadening of the credit to cover other efficient vehicle technologies such as natural gas, though it's not clear whether it would also cover advanced diesels. Still, if the President has his way, we'll be spending more than $10 billion to put vehicles on the road that will save less than 35,000 barrels per day of oil, or about 0.4% of our total gasoline consumption, along with greenhouse gas emissions worth less than $1 billion at market prices--even European market prices.

The proposals include other provisions that would affect the energy sector, including tax benefits for advanced energy manufacturing such as wind turbines, solar panels, advanced batteries, electric vehicles, and an array of other equipment. I'd be much happier with those incentives if they were provided as an alternative to origin-blind deployment incentives, instead of alongside them. And although oil and gas companies would lose the manufacturing tax deduction on their US production, it appears they might get to keep that deduction on US refining, which has been hurt by higher oil prices. That would be small consolation to independent refining companies that have been forced to close several large east coast refineries or that are barely breaking even.

If President Obama is serious about tax reform, the current proposals--flawed as they are--would have carried a lot more weight had they been introduced a year ago, in the immediate aftermath of the Simpson-Bowles report and various other tax reform suggestions, rather than in an election year. And if he is truly serious about the"all-out, all-of-the-above strategy" for energy that he referenced in this year's State of the Union address, the current proposals look like an extremely odd way to execute that, favoring as heavily as they do sources that account for less than 2% of US energy production, while penalizing those that contribute nearly half. The good news is that this is a meal that won't be eaten hot. For now, this package serves as another plank in the reelection campaign platform. Whether it will ultimately be implemented depends not just on who occupies the White House after January 20, 2013, but also on the composition of the next Congress since it has no chance of passage in the 112th.

Key Renewable Energy Subsidies About to Expire

The US renewable energy industry faces a greatly altered incentive environment next year, as eligibility for two of its largest current subsidies comes to an end at the close of 2011. The corn ethanol sector will likely see the complete withdrawal of the blenders' credit that has fueled its growth for more than 30 years, while new projects generating electricity from renewable energy sources must shortly attract investment without the Treasury grants that provided up-front cash in place of federal investment tax credits against taxable income--a commodity sometimes in even shorter supply among recipients than the energy they seek to generate. With these expirations taking place against the backdrop of a US presidential election campaign and record levels of deficit and federal debt, the prospects for another round of one-year subsidy extensions look slim. Yet renewable energy development in the US won't grind to a halt without them, because these two programs represent merely the most generous layer of the complex web supporting renewables.

Consider the venerable ethanol tax credit, which was made mostly redundant by the passage of the Energy Independence and Security Act of 2007, with its Renewable Fuels Standard mandating the use of increasing quantities of ethanol in gasoline. In fact, ethanol producers were never more than indirect beneficiaries of the $0.45 per gallon credit, which was paid to refiners and other gasoline blenders in order to help create a market for ethanol. Mission accomplished. Moreover, with US gasoline sales having stalled at a level that can barely absorb all the ethanol that existing US ethanol plants can produce, unless gasoline blends containing more than 10% ethanol become popular, there is simply no need for corn ethanol output to expand further. In fact, the market will be more than sufficiently challenged providing outlets for the limited quantities of cellulosic and other advanced ethanol likely to be produced in the next few years. As I've noted previously, forward-looking members of the industry are now seeking help in expanding the market for high-ethanol blends, rather than perpetuating an outdated support for existing sales.

The situation for renewable electricity sources like wind, solar and geothermal energy is more complicated. The expiring Treasury grants were introduced as part of the 2009 stimulus to stand in for the "tax equity swap" market, a category of financial transactions that froze up during the financial crisis. These swaps provided a private-sector cash-flow bridge between project expenditures and tax credits that only paid off after start-up as income was earned or energy produced. That was particularly helpful for smaller, less profitable developers, but it also provided an additional check on marginal projects. Even after credit markets eased, most developers understandably preferred the cash grants, which reduced their financing costs and avoided the fees that bankers charged on tax equity deals. However, that preference doesn't justify continuing the cash grant program--particularly for the large, profitable corporations that increasing dominate this space. The industry should focus more effort on fostering the revival of a liquid and competitive tax equity market and less on lobbying for an extension of a temporary stimulus measure.

Either way, the tax credits behind these grants and swaps won't last forever. Under current law, the principal federal tax credit for wind will be in place only through 2012, for biomass and geothermal through 2013, and for solar through 2016. Instead of a scenario of perpetual last-minute extensions such as we've seen in the past, the industry and its investors should be thinking about a scenario in which all these tax credits end, either as part of comprehensive tax reform that eliminates most such "tax expenditures"--including the ones for the oil and gas industry that have become so contentious in the last few years--or a transition to providing renewables with similar sorts of incentives as oil and gas, which essentially amount to forms of accelerated depreciation and modest tax breaks for manufacturing in the US, rather than in other countries.

It's also important to realize that even without these tax credits and in the absence of comprehensive federal energy legislation that looks unlikely any time soon, the industry would still retain numerous state-level benefits, starting with the renewable portfolio standards (RPS) for electricity currently in place in 29 states and the District of Columbia, a tally that encompasses most of the states with the best wind and solar resources. These RPS's are similar to the Renewable Fuel Standard for biofuels in requiring utilities to include increasing proportions of renewable energy in their supply portfolios, whether owned or purchased. Such standards, including California's aggressive RPS targeting 33% renewable electricity by 2020, stand outside the polarizing political debate over taxation and government expenditures. They function as an implicit tax on ratepayers, rather than taxpayers, because they show up within customers' utility bills rather than on their 1040 forms. That distinction could be particularly important if the congressional supercommittee fails to reach a consensus, and the default spending cuts built into the Budget Control Act that resolved this summer's debt ceiling crisis kick in.

So while it might appear that the US renewable energy industry is about it be cut loose from the key incentives that enabled it to grow to its present dimensions, it will continue to benefit from supports not enjoyed by other industrial sectors. Even when the current tax credits expire, renewables will have a mandated market providing a floor beneath them. Ethanol output won't revert to 2005 levels, nor will renewables vanish from the landscape, even if their growth slows a bit while the rest of the economy struggles to emerge from the aftermath of the Great Recession and financial crisis, and to avoid a double-dip. Meanwhile, global overcapacity in wind turbine and solar module manufacturing will keep their prices trending lower--and installations stronger--pending industry consolidations that will position both for healthier, more sustainable growth in the long run. All of this falls well short of the level of help for the industry that most renewable energy supporters would like to see, but it's far more than the level playing field (ignoring externalities) that would see cheap and abundant natural gas sweep away all competition for new power generation.