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Green Energy – Too Many Subsidies, Too Little Performance

By Marin Katusa, Chief Energy Investment Strategist, Casey Research

Any politician who talks of a green, utopian US – where wind and solar produce most of our energy, electric cars put power back into the grid, green fields of corn produce clean fuels, and millions of Americans work in green technology factories – is creating a fanciful vision so far detached from reality it should really be called a lie. Such tales are designed to encourage a public that is increasingly despondent about the future, but the policy moves that have been made in support of these fantasies have cost taxpayers tens of billions of dollars. Much of it is money that will not be repaid, because a whole whack of the companies and industries that accepted green grants, loan guarantees, and tax credits have turned out to be complete failures.

Two green subsidies expired with 2011, and not a moment too soon. In fact, we wish more of the US government’s initiatives to support green energy had ended with the stroke of midnight, because the green energy industry has become completely dependent on a steady stream of government money. Protected by this "green gold," green technologies from corn ethanol to solar power have not had to compete against other power sectors based on their merits. If they had, many would have already failed.

Let’s a take tour through some of the US’s green subsidies and examine just how they have tipped the scales in favor of technologies that generally don’t stand the test of economics, are often worse for the environment than conventional methods, and are costing taxpayers dearly.

There‘s nothing good about corn ethanol fuel

On New Year’s Eve the corn ethanol subsidy quietly expired, 30 years after it was implemented. In those three decades ethanol became the US’s top recipient of alternative-fuel funding, with corn ethanol in particular becoming the darling of the biofuels craze. As a darling should be, the industry was showered with money: Over the last 30 years the federal government has spent $45 billion supporting corn-ethanol producers. In 2011 alone the feds spent $6 billion on corn ethanol subsidies, equating to 45¢ for every gallon of ethanol. Even with that support, US corn ethanol was not able to compete with Brazilian ethanol, which is made from sugar cane. To rectify that, lawmakers instituted a 54¢-per-gallon tariff against the Brazilian product. Together, the 45¢ subsidy and the 54¢ tariff meant American-made corn ethanol was supported to the tune of almost $1 per gallon.

That would be great were ethanol a good way to reduce greenhouse gases, lower energy costs, or increase US energy independence. Unfortunately, it fails on all of those fronts. A growing left-right coalition has been speaking out against ethanol as a fuel for some time now; the latest voice to join the chorus is none other than the National Academy of Sciences. In October, NAS researchers concluded that grain ethanol "could not compete with fossil fuels in the U.S. marketplace without mandates, subsidies, tax exemptions, and tariffs… This lack of competitiveness raises questions about the use of government resources to support biofuels." The report went on to discuss how biofuels actually increase net carbon emissions: pumping energy-intensive row crops into gas tanks leads to land use changes that increase greenhouse gases.

Continuing down the list of ethanol-as-a-fuel failures, it turns out ethanol is very tough on vehicles – a bill to allow gasoline to contain 15% ethanol (compared to the max 10% now allowed) was shot down after every major automaker said that much ethanol would cause significant engine corrosion. Then there’s the fact that corn ethanol subsidies also generated a host of painful side effects. One is literally making us fatter: widespread use of high fructose corn syrup. Starting in the mid-1980s farmers realized that, even when sale prices for corn were low, the government’s largess meant it was still worthwhile to grow the stuff. More and more corn was grown, beyond what could be consumed by people or livestock or made into fuel. What were producers to do with the rest of it? Make high fructose corn syrup, a sweetener that is now in hundreds of thousands of products and that contributes thousands of empty calories to the average American diet every week.

So ethanol is uneconomic unless the government spends billions of taxpayer dollars supporting it, worse for the atmosphere than fossil fuels, and really hard on engines, while the support system to encourage corn-based ethanol production is contributing to the US obesity epidemic. Why, then, is ethanol even used in fuel? Because of all those government subsidies and mandates. After major lobbying efforts from the agricultural and biofuels industries, Congress mandated annual increases in use of renewable fuels, including ethanol, starting with 15 billion gallons in 2007 and growing to 36 billion gallons in 2022.

So fuel makers have to include ethanol in their mixtures. Too bad that rule did not also expire.

Electric vehicles: expensive toys that basically burn coal instead of oil

Another lesser-known tax break also expired with 2011: the credit that gave electric car owners up to $1,000 to defray the cost of installing a 220-volt charging device in their homes, or up to $30,000 to install one in a commercial location. A related subsidy that did not end still gives $7,500 in tax credits to purchasers of electric vehicles. For a variety of reasons, like the ethanol subsidy none of these incentives should have existed in the first place.

Electric vehicles have failed on one front after another. To start, they are inordinately expensive – the much-lauded Chevy Volt costs $40,000, while the Karma from Fisker costs a whopping $100,000. This means electric vehicles are only affordable for the wealthy; it’s pretty hard to understand why American taxpayers should subsidize cars for the wealthiest members of society. The subsidies go beyond direct tax credits and rebates – government loans and grants in support of the Volt alone total $3 billion, which means each car produced to date has been subsidized to the tune of $250,000. (Volt supporters contest this number, saying subsidies only total $30,000 per vehicle… still not an insignificant amount.)

Then, for all that money, you still can only drive short distances. The Volt’s official range is 30 miles, but reports show it can actually travel only 25 miles before needing to either recharge or switch to gasoline. There’s also the issue that electric vehicles still need power, and the electricity that charges their batteries comes primarily from the US power grid, to which the largest contributor is coal-fired power plants. As such, a Volt essentially burns coal instead of gasoline, at least for the 25 miles it can drive before switching to gas.

At least coal is a domestic resource, compared to gasoline derived from imported crude oil, right? Well, let’s see just how much electric vehicles will reduce US oil consumption. Assuming there are 6 million of them on American roads in ten years, out of 300 million passenger vehicles, and assuming that passenger vehicles continue to account for 40 to 45% of total US oil consumption, in ten years these tens of billions of dollars spent to support electric vehicles will have reduced US oil consumption by less than 1%. When you add in the fact that lithium-ion batteries are pretty toxic items, and that coal- or natural-gas-derived electricity demands will go up with each electric vehicle, the case for electric vehicles becomes pretty darn weak.

Solar and wind power: a financial sinkhole

Electric vehicles and corn ethanol fuel are not the only green industries that have been producing pitiful returns on government investment: Solar and wind power are just as guilty of eating up huge subsidies and still failing to break even economically.

Let’s start with an example – one that was highlighted in a recent New York Times article. NRG Energy is building a 250-MW solar project in San Luis Obispo Country (northwest of Los Angeles), known as California Valley Solar Ranch. The ranch’s one million solar panels will provide enough energy for 100,000 homes, but it will cost $1.6 billion to build. Most of those dollars are coming from government subsidies or low-interest loans.

All told, NGR and its partners secured $5.2 billion in federal loan guarantees plus hundreds of millions in other subsidies for four large solar projects. The crazy thing is, the government is giving out these grants and loans despite information from its own researchers that solar power is uneconomic now and will remain so in the future. The US Energy Information Administration predicts that by 2016 the total cost of solar photovoltaic energy will be about $211 per megawatt-hour, compared to $63 for an advanced natural-gas combined-cycle power plant.

Just as with corn ethanol, it’s the taxpayer who bears the brunt of this obsession with expensive solar power. The main federal subsidy currently covers 30% of the cost of a residential solar system. When other subsidies are added in, as much as 75% of the cost can be covered. Obama’s administration has spent $9.6 billion on solar and wind power through the Section 1603 Treasury grant program over the last few years.

With that kind of support, it’s no wonder America is in love with solar power. In 2011, solar installations skyrocketed, with 1,700 MW installed during the year, an 89% increase over 2010. Still, all of the panels now installed across the nation produce only about as much electricity as a single coal-fired plant. And even with demand growing rapidly, the industry is awash in debt and bankruptcy.

US solar manufacturers are being pushed out of the market by low-cost Chinese manufacturers, which get even more support from their government than Obama gives to American producers. In California, for example, Chinese producers held 29% of the market at the beginning of 2011; by the end of the third quarter they had grown their market share to 40%, while US manufacturers saw their share fall from 37% to 29%. And with the Chinese flooding the market with cheap solar panels, prices for solar panels fell by 40% in 2011.

Falling prices for solar panels and dwindling market shares forced three US solar companies into bankruptcy in 2011 and recently necessitated staff cutbacks at another two companies. This is all happening despite billions in loan guarantees to these companies. First Solar, for example, took $3 billion in loan guarantees from the federal government to develop three solar farms in Arizona and California. Now the company is cutting half of its staff, including 60 jobs in California where it received $3 million in state sales tax credits.

Of course, the most notable solar bankruptcy of 2011 was Solyndra, the California-based company that went bankrupt months after receiving a loan guarantee of $535 million from the US government and despite increased demand for solar panels in the country following implementation of state mandates for solar energy.

And things are about to get a lot tougher for struggling solar panel producers in the US, because the 1603 program expired on January 1. When you add up grants, subsidies, loans, and tax credits that have been helping the solar and wind industries along, then add in mandates that require utilities to buy renewable power at set prices from the alternative energy producers for decades, you are left with an industry that is wholly dependent on taxpayers, not on its own technology’s capabilities. Forced to go it alone in the power industry, solar and wind producers are not going to survive.

Leveling the playing field

In chasing the green power dream, the US is not alone. In fact, it trails several European countries in the effort. Germany and Denmark have the largest installed bases of alternative energy in Europe and are often held aloft as examples of how to encourage wind and solar power. Proponents usually stay mum on the fact that retail customers in Germany and Denmark pay the highest electricity rates in the European Union.

It is true that progress is never easy and is often expensive. From that pulpit, advocates argue that continued investment in green technologies will drive prices down in the long run. However, this reasoning ignores the other side of the problem: solar and wind can never produce baseload energy. The average wind plant in the United States runs at about one-third of its rated capacity, while solar plants runs at about 25% of their nameplate capacity. Since there is no way to store large amounts of electricity, the variable outputs from solar and wind facilities will only ever be able to replace a modest amount of conventional baseload power.

When you look at green subsidies on an energy production basis, the disparity becomes pretty stunning. Wind’s 5.6 cents per kilowatt hour is more than 85 times that of oil and gas. Solar power costs 13 times more than wind, making solar more than a thousand times more expensive than conventional fuels.

Wind and solar power, corn ethanol, and electric vehicles are not infant industries in need of support. They are perennially inferior industries that only still exist in their current forms because of a constant stream of "green gold." That stream is slowly drying up, thankfully. The only way to achieve the very admirable goal of transforming society into an energy-efficient space is to eliminate all of the subsidies that are currently directed at green energy and clean technology while increasing taxes on the things we are trying to minimize, such as gasoline consumption and plastic bags. That would force everyone to innovate, compete, and win or lose according to merit.

[With green energy unable to fulfill its promise as a viable alternative to conventional fuels, crude oil prices are poised to skyrocket. That will be bad news at the pump, but good news for investors who get in on a little-known "energy dividend."]

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For over a quarter of a century, legendary investor and best-selling author Doug Casey and his team at Casey Research have been helping self-directed investors to earn superior returns through innovative investment research designed to take advantage of market dislocations.

8 Comments

  1. Dan Meeuwsen says:

    I think you need to get your fact a little closer to reality on the corn based Ethanol versus Fossil fuels along with competing with Brazilian Sugar based Ethanol.  The Ethanol industry does not recieve the subsidy but the oil companies actually get it.  Yes the same oil companies that have recieved billions of dollars in subsidies and breaks for the last 100 years.  If you add up all of the big oil breaks along with what they have made on Ethanol it is a very large number.  By the way still smaller than a war in the middle east…..  Corn Ethanol has moved very fast in the last 10 years to become very efficient and competitive with fossil fuels.  Also how would you like the price of gas if we took 10% of the supply away from it which is what Ethanol is, the price would be right around $5 per gallon. 

  2. Tonywesterberg says:

    “……it should really be called a lie..”  now there is some all to infrequent straight talk.

    The ideas that the discussion about alternative energy is in some way driven by a problem of pervasive public depression about the future is……..stupid.  “Such tales are designed to encourage a public that is increasingly despondent about the future,…………”

    The cheerleading is political and financial.  People gain office and raise money, generate fees etc., on the back of the hype.  Once again…..”power and money”.    

    Our sustainable energy future is and always has hinged on how we use energy.  Energy effeciency is the way forward.  The opportunities are plentiful and the cost is nil. 

    • Anonymous says:

      Energy efficiency is not a zero cost option, but it is an option with exceptionally high rates of return. For that reason alone it should be pushed heavily. 

      I do agree about too many subsidies and the distorting affect. Personally I would like to see an end to all petroleum subsidises. Then a carbon tax that is for funding energy efficiency programs, but set at a level that puts renewable energy at a very slight cost advantage. That will help encourage renewable energy production. If this carbon tax were extended to gasoline with the revenue to be given to each state for road repair, public transport and rail expansion, it could improve roads and clear them as well. 

      I would also end the ethanol subsidy as it is of questionable benefit. Higher gasoline prices will drive alternatives without the need for subsidy. 

  3. Oldrich says:

    Well, first a general point about the oil-business. It is as pure as the Virgin Mary. If there ever there was a business which was not associated with political influence, corruption, shady deals, wars, interventions I am sure that this the one business which is  devoid of these sins…
    I do not think the argument about the supposed lack of performance is a valid one. Historically the same arguments were used against the steam locomotive in the first half of the 19th century, then at the end of the 19th century combustion-engine powered cars. In the 90ies I was reading articles in the mainstream papers ridiculing mobile phone or the Internet. 
    I find the argument about the irreplaceability of certain resources utterly false. For instance throughout the 18th, 19th century a whale oil was a vitally important strategic resource. I remembering reading the book from the famous 19th century French author Jules Verne “Mysterious island” about a group of Americans stranded on a deserted island. In one of their discussion a guy who was an engineer mentions that the mankind is in for quite a serious predicaments in the decades to come as the reserves of coal will be exhausted. And obviously no modern society can function properly without this vital resource….
    And finally, it has been proven time and again that when a development of technology is given a top priority – its development can be accelerated tremendously almost “miraculously”. The Manhattan project when the nuclear technology was developed within a couple of years. Germans in a couple years developed aircraft propelled by jet engine as well the rocket technology. And how about the Apollo project ? As president Kennedy put it in his famous speech – technologies used had to developed as they were non-existent at the time of the start of the project.

    • Anonymous says:

      The oil industry is probably the biggest lobbyist outside of banks. They have a multitude of tax breaks, and still lobby for more. To say that they are as pure as the Virgin Mary is like saying that they are faultless. That said the oil industry will shrink over the coming decades as oil simply runs out. It will still be around for more than a century but it will become much more expensive to obtain. Saudi oil can be brought to the surface for a few dollars. North Sea oil costs upwards of $50 a barrel to extract now. Oil will be available but at ever higher costs. 

      We probably have four or five hundred years of coal available, more if we are more efficient with its use. The only problem is the carbon dioxide that burning it emits. Without sequestration you can kiss good bye to much of Florida, as it submerges below rising sea levels. 

      Ultimately as green energy alternatives become ever cheaper especially in comparison to rising fossil fuel prices. Also the mention of the Manhattan Project, German jet technology and the Apollo Program, all had substantial government money backing them. So while it is technically possible that the solutions could be found in a few years, you fail to mention the political problem. Big Oil will lobby against such programs and push for more drill, drill, drill. Then add the Republicans who have boxed themselves into corner by denouncing any government action. 

      • Oldrich says:

        Well, I tend to be an optimist in these matters (which I admit might be a foolish attitude-:)). I believe that even the Republicans have the sense of survival, self-preservation…. I do not know but I do hope…         I know that nowadays there is this prevalent, pervasive sort of religious believe in the laissez-faire “free market solves it all” ideology which I find silly, intellectually dishonest, self-delusional, self-serving, totally unsupported by the factual and empirical evidence and ultimately suicidal and self-destructive. 
        I am not against capitalism. Paraphrasing Churchill I consider it to be “the worst system except all the others”.  I am in favor of a “social capitalism” – being a pragmatist for practical purposes I do not care whether it comes in the orange (Social-democratic form), green, Christian-democratic or under another name which it must take in some states for political purposes.
        I agree that the political influence, big-business lobbying is a tremendous barrier to progress. 
        These are the sort politicians I do admire.

        http://www.youtube.com/watch?v=KCOd-qWZB_ghttp://www.youtube.com/watch?v=ouRbkBAOGEw
        Those who have the vision and  the ability to see further than the tip of their nose and these are the people who ultimately change the world for the better and bring about the progress. Particularly Jimmy Carter with his I.Q. 176 was in my opinion cruelly misunderstood, laughed at and ridiculed as a kind of wimpy foolish weakling wearing his head in the clouds…. In fact he is one of my heroes. If after his speech in the midst of the oil crisis had been given the same priority to the development of alternative energies as to the Apollo program or the Manhattan project I am firmly convinced that the world we live in today would be radically different.

  4. Kiwi says:

    For clarity, my comments relate to renewable energy and not to ethanol from corn.

    Lots of issues pointed out with an emerging technology, yet no positive solutions? Is it for the US to stay wedded to oil and coal as sole energy sources? I would seriously suggest you read the latest IEA World Energy Outlook. Unless you can break you romance with oil to move yourselves around, as India and China outstrip your oil consumption the price of oil will rise dramatically and you’re going to find yourselves in a very interesting situation. So electric vehicles and renewable energy actually go together (you’re right, lets not replace oil with coal).

    And perhaps to give your article balance you could take us back to when oil was first discovered as a fuel and the size of the subsidies the US Government (amongst others) placed on this ‘new’ technology (and still do). I smell bias. And a total disregard for climate change science (which is one of the drivers for all of this new technology – an understanding that fossil fuels are finite, and that humans are changing our environment).

    I’d like to see a piece of research showing how America would look today if all subsidies were wiped. Lets call it a level playing field. Of course that is political naivety.