[Gary Hunt, President of Scalable Growth Strategy Advisors, posts on energy issues at his website, Zap! Crackle! Pop! Disruptive Technology, Global Competition and our Energy Future.]
The drama that raised the national debt ceiling without increasing taxes is sending warning shots across the bow for many industries. The message for energy subsidies, including the tax credits and treasury tax grants for wind and solar, as well as tax credits for oil and gas companies, could not be clearer. The gravy train is ending because the Government cannot afford it, and political realities won’t tolerate it much longer.
The debt deal did not cut renewable energy subsidies. But it set up a super committee of Congress that must produce $1.3 trillion in spending cuts by Thanksgiving. This sets up a ruthless competition between all the special interest causes that now get subsidies or tax supported benefits.
Mothers and grandmothers will be sacrificed by the lobbyists on K Street to keep their subsidies. But which ones might survive, and to what extent?
EIA Study of Energy Subsidies
In November 2010, several members of Congress asked U.S. Energy Information Service to update the study of direct Federal support and subsidies for energy done back in 2008. The request specified that the study include only energy-specific benefits with measurable budget impact.
That updated study found that direct Federal intervention and subsidies for energy have doubled from 2007 to 2010 from $17.9 billion to $37.2 billion.
But the political game played by that narrow definition was to exclude oil and gas tax benefits the President has sought unsuccessfully to cut in the debt deal. In May 2011, Congress rejected Democrat proposals to cut $21 billion in oil and gas industry subsidies. Crying foul, Friends of the Earth and other environmental groups filed a Freedom of Information Actrequest with EIA demanding an update of the subsidies for oil and natural gas that had been excluded from the updated 2010 report.
The result of this dueling studies dust-up is to make energy subsidies across the board much more visible, much more controversial and thus much more vulnerable in the next round of spending cuts.We can see the set-up taking place. If oil and gas subsidies are cut one side says, then renewable energy subsidies must also be cut. But this time, the reality is that both might have to be cut to get to the spending reduction target that avoids even more draconian triggering of across the board cuts that include defense and Medicare.
This pick-me-not-grandma choice is not the place energy subsidy advocates want to be.
The New Dynamic
Many sacred cows could be sacrifices at the altar of spending reduction, if not in the Thanksgiving round of spending cuts in 2011 then surely in the subsequent rounds needed to bring Federal spending back down to sustainable levels to enable economic growth. The reserve fund is exhausted. Surviving an early round of cuts will make each surviving subsidy more vulnerable in the next round.
At a time when every industry needs more certainty, the energy industry can expect more uncertainty and volatility. This will almost certainly quicken the consolidation process as weaker players and their investors decide not to tempt fate and sell out to bigger, stronger players with deeper pockets.
There is one certainty in all of this—the sacrifices will be enforced by the political realities that choices about cuts must be made many times before the 2012 elections. There is no escaping accountability for politicians—and voting present is not going to be acceptable to voters.
In the overall trillions at stake in the Federal budget deficitscheme of things the roughly $60 billion ($37.2 billion for renewables, ethanol, nuclear and other energy subsidies + $21 billion in oil and gas tax credits) is not a lot of money. But it makes for good political point scoring and headlines.
What Does This Mean?
Get Renewables to Grid Parity Fast. Sustainability is taking on an entirely new meaning in the energy industry that goes well beyond the political correctness that created it. Sustainability today means getting to grid parity for renewable energy or else get state regulators to raise utility rates.
States will declare RPS Victory rather than Raise Rates.Raising utility rates even more than they are going up now will be high risk so I predict state regulators will declare RPS victory at current levels and stop as business flees onerous regulatory environments taking jobs to more competitive markets. Loss of Federal subsidies for states will force all of them to get serious about enabling growth, competition between states for jobs and the loss of tax revenue from business flight.
From Ethanol back to Corn Flakes. It is tough to rationalize subsidies for corn-based ethanol even in good times and even tougher to imagine their survival in these bad times. If producers can make ethanol cost effectively from waste products without subsidies good luck to them, if not—toast.
Trade Subsidies for Pro-growth Domestic Energy Production Regulatory Streamlining. It means trading tax credits and subsidies for the oil and gas industry for less regulation and easier E&P development of unconventional resources to scale growth, create jobs and put revenues in the tax mans’ account. Arguing for regulatory certainty in exchange for tax subsidies is likely to be a very attractive alternative.
Unconventional Domestic Natural Gas is the Yellow Brick Road to Lower Emissions. Giving up subsidies to get more domestic energy production relief from regulation built into law is a deal worth doing for both the energy industry and politicians. EPA is killing growth with an endless stream of new regulations. But low cost natural gas produced domestically is an even more powerful and politically palatable way of making the transition away from coal while achieving 50% emissions reductions as a byproduct. What’s not to like about that? Environmental groups will want more renewable energy band they can achieve it with no subsidy grid parity competition between resources. This is the way out for politicians burned by picking winners and losers—and becoming losers themselves in the process of unsustainable subsidies.
Coal Exports grow as Natural Gas Takes Market Share Lead. It means a head to head competition between coal and gas for market share for power generation where coal not burned will be exported. Natural gas is the fuel of choice and will rapidly displace coal to help achieve emissions reductions.
Baby Nukes or Bye Bye Nukes. It means the looming risk of inflation driving up costs and uncertainties over nuclear safety after Fukashima puts nuclear energy back in its first generation “Groundhog Day” movie. The only escape is to abandon large nukes in favor of small, modular, safer designs while continuing to run the plants we have for as long as we can.
Gary Hunt has more than 30 years experience in the energy, software and information technology industries. His past positions have included VP-Global Analytics & Data at IHS/CERA; Division President, Ventyx/Global Energy Advisors (now an ABB Company); CEO, MMWEC, a New England-based wholesale power producer; and manager of Austin Energy and Austin Water as Assistant City Manager for Utilities & Finance for Austin, Texas.
Mr. Hunt can be reached at email@example.com.