The Oil Drum | US Energy Tax: How Level Is the Playing Field?

81 comments on US Energy Tax: How Level Is the Playing Field?

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Target0 on January 16, 2009 - 12:34pm

The concept of adjusting the income tax code to guide energy investments is flawed. As you point out the companies actually investing in new projects often have very little income at least at the beginning when investments are made. A feed in tariff for renewables such as wind and solar as in Europe would be far more direct and effective.

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Gail the Actuary on January 16, 2009 - 12:41pm

Does the government provide the money to fund the feed in tariff, or does the electric utility?

If it is the government (which it seems like it should), I suspect that is the problem with enacting it here.

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Niobium41 on January 16, 2009 - 2:48pm

There is essentially NO government monies needed for Feed-In Laws. That is one of the beauties of these. The other is that the electric tariffs are customized for each renewable energy technology, as well as their location sometimes (different PV rates for deserts and temperate climate areas based on average insolation of regions). Furthermore, rates are essentially locked in for 20 years (constant or slightly declining), so future electricity prices are predictable.

Feed-In Laws are very well designed for capital intensive investments, where the cost of energy production has minimal or no fuel inputs, little maintenance costs and huge loan repayment/interest on loans/return on equity requirements. The predictable price lowers but does not eliminate the financial risk, which lowers the interest rate on loans/debts and capital return (unless the owners are really greedy). This lowers the cost of production.

In general, the Feed-In tariffs on competitive technologies (wind, run-of-river, tidal, geothermal) are still higher than for electricity made at today's natural gas, coal and fully depreciated nuke plants (especially since there are essentially zip for CO2 or rad-waste pollution costs, or proliferation of nuke "firecracker" costs). When gas prices were $10 to $15/MBtu, Ngas derived electricity was more expensive than wind. And who thinks that Ngas will stay at $6/MBtu for that long, let alone 20 years. What would normally happen is that, without a steady and rapid buildup of renewables, we will depend on Ngas and coal, until those prices spike, again and again. The high prices will cause recessions and depressions, ad infinitum, until the Ngas is gone. When Ngas prices are high, renewable investments will increase, followed by the hangover of low Ngas/electricity prices in the following recession, when the after-effects of demand destruction work on the demand for Ngas. And also the supply of Ngas...as the low prices cause supply destruction. Repeat cycle, and rinse.....

Perhaps a nuke fails or is sabotaged, or perhaps the Greenland ice-sheets break up a bit earlier than expected, and coastal towns like NYC and Miami and Houston strt turning into fish farms. The consequences of reliance on depleting and moderately polluting Ngas, depleting and highly polluting coal, on nukes....those get accentuated when no renewables are allowed in the picture.

Renewables are significantly encouraged with Feed-In Laws. So is conservation. Feed-In Laws also minimize the casino like gambling on future electricity prices, as they put on ceiling on electricity prices. Why pay 20 or 30 c/kw-hr for expensive Ngas based electricity when Ngas is pricey, when wind is available at 10 c/kw-hr...? Feed-In Laws do not result in the cheapest possible electricity when fossil fuel prices are cheap, but so what - electricity prices will be reasonable with wind. If electricity prices are based on unrestricted use of Wyoming coal at $15/ton...how is that going to provide any motivation for energy efficiency?

In other words, customers pay known prices that are predictable for a generation. These allow massive deployment of renewables, especially in countries with significant renewab;le resources, such as the U.S. and Canada. Just think what would happen if the Feed-In Laws in Germany (which, in general, has pretty crappy wind, especially crappy solar, and modest biomass resources) were available in the U.S? What energy crisis? What massive unemployment problem...? would be the result. After all, we have several times the wind capacity versus our current electricity demand. And the wind derived electricity capacity of this country and of Canada is more a function of what the allowable price for that electricity is than anything else. Close to zip at 3 c/kw-hr, several times the current 450 GW at 10 c/kw-hr. Places like the southwest could start getting populated with solar thermal generation systems. And the tidal potential of San Francisco Bay, Puget Sound and especially the Bay of Fundy could finally get tapped with "underwater turbines" without having to "compete" with fully depreciated fossil fuel plants that pay squat for the ability of using our atmosphere as a collective CO2 garbage dump.

Besides, Feed-In Laws have a proven track record of providing more renewables at lower cost and at gretaer installation rates than subsidies and quotas and other ways of "bribing really rich people" into investing in renewable energy, and a better world. That way, they get a chance to pretty much own most of this important future technology, even if the installation rate is painfully slow compared to what is required.

For more info, try here:
http://www.wind-energie.de/en/news/article/amendment-of-the-renewable-en...

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Consumer on January 16, 2009 - 3:22pm

Thanks. That does seem a much more efficient system. Does a feed-in tariff address the transmission issues? What about time-of-use?

I really hope that NioBium41 is Steven Chu's username.

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Niobium41 on January 16, 2009 - 5:59pm

Consumer,

No such luck, just another unemployed and over-educated engineer. Still available for hire by Dr. Chu, in case the U.S. DOE wants a renewable energy system with some cojones. I'm no fan of wimped out when it comes to renewable development.

As to transmission issues, we really don't have to worry given the 1.5% wind penetration of the US grid - that is a concern, in general, once you get above 20%. Denmark and parts of Northern Germany range between 25% to 100% (depends on how windy it is).

Access to the grid is much easier administratively with a Feed-In Law - renewable generation gets preference. And connecting more grids together makes for a more robust arrangement, where wind tends towards baseline power production - lack of wind in one spot gets made up for by a lot of wind somewhere else.

As higher levels of grid penetration occur, more use of HVDC, and pumped hydro systems will be needed. More jobs, more infrastructure, more economic development. And costs gets paid by all customers of the grid(s).

Nb41

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RBM on January 16, 2009 - 8:02pm

I recognize that link ...

OK, this post you used the abbreviated handle I was trying to trace:

http://www.strandedwind.org/node/4119

Nice to see you 8D

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Cyril R. on January 17, 2009 - 8:48am

Production based subsidies (PTC in the US, FIT in Europe) are very effective, there's no doubt about it. Still, I also support mandatory renewable energy targets per state or region, since that will supply an additional incentive for co-operating and investing in transmission (especially for regions with lower renewable resources, since importing renewable electricity will be economically optimal, promoting increased grid interconnections with other areas).

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Gail the Actuary on January 16, 2009 - 3:32pm

It seems to me that one of the obstacles to feed in tariffs in the US is probably concern that the grid cannot really accommodate very much in the way of renewables. Our interconnection between locations is pretty poor, and strained already, particularly in the Northeast and California. A major upgrade would have a lot of other impacts as well (make it easier to ship cheap electricity generated from coal in Wyoming elsewhere, for example). A major upgrade would be very difficult, because we have a huge number of players, and assigning costs and benefits is problematic. This analysis is looking at the tax issues with respect to encouraging grid upgrades, but there are a lot of other issues as well.

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thomas deplume on January 16, 2009 - 6:00pm

Does Germany have provisions for assisting low income households with the higher rates that would inevitably come from a Feed-in Tariff? With the very cold weather we have had in Iowa recently has led to greater use of electric heaters to supplement our propane use.

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Cyril R. on January 17, 2009 - 8:53am

As I mentioned elsewhere, the mandatory renewable energy targets that are being devised/implemented in many US states will provide a decent incentive for more interconnected transmission grids, with the lower renewable resource states having to import renewable electricity from other states. Because the tax credits will pay for renewables in higher resource areas (in particular wind right now) this extra instrument will typically not incur much extra costs.

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enemy of state on January 16, 2009 - 8:28pm

That is one of the beauties of these. The other is that the electric tariffs are customized for each renewable energy technology, as well as their location sometimes (different PV rates for deserts and temperate climate areas based on average insolation of regions).

Depending on how it is implemented there could be some adverse effects. Assuming transmission capacity is sufficient and PV supply capability fixed, we would want PV to be installed only in the highest insolation sites. Giving a greater incentive for someone in a cloudy location decreases the net power produced. Of course if the objective is to incubate a nascent industry which is expected to grow exponentially, then supporting the fastest possible growth rate for that industry should take precedence.

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Cyril R. on January 17, 2009 - 12:01pm

That's why per kWh electric feed in rate for PV systems should be as equal between areas as possible. And also as equal as possible between different system sizes; the benefits of scale vs distributed should be decided by the market, not distorted by large feed in tariff differences (my biggest issue with most feed in tariff structures today).

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Engineer-Poet on January 17, 2009 - 12:24pm

Perhaps a nuke fails or is sabotaged

Nukes (plural) are redundant. Further, they are far easier to defend and less vulnerable to sabotage than thousand-mile transmission lines. The US's worst commercial nuclear accident had little negative effect on either the grid or public health, and improvements since then make it very unlikely to be repeated [1].

The consequences of reliance on depleting and moderately polluting Ngas, depleting and highly polluting coal, on nukes....

You put non-GHG-emitting nuclear with coal and gas, instead of with non-GHG-emitting (maybe, depending on the specifics) renewables?

You have a mental blind spot, sir.

[1] Projections indicate that public health was probably harmed quite a bit by the coal-fired power used to replace the output of TMI Unit 2.

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Dryki on January 16, 2009 - 11:51pm

The concept of adjusting the income tax code to guide energy investments is flawed.

Manhattan Institute. Yup. The basic premise is that a) taxes are always too much, b) private is better than public, and c) growth is good.

But skip the first question - are we too big or too small right now? Scale. I'd argue that our scale is too big and there is no justification for incentivizing a *bigger* grid.

"This hasn't worked for us. This hasn't worked for the planet. It's time to go on to the next age."

Fudging this stuff through tax code is nothing but subsidy. Better to pay up front, to pay it forward, to own it. Munis and local energy co-ops. At least in US, all of this is going to run head on into Commerce Clause, WTO and GATTS. Get used to it.

cfm in Gray, ME

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