Wednesday, August 03, 2011

EIA Reports On Energy Financial Interventions & Subsidies

Aug 1: The U.S. Energy Information Administration (EIA) has released a report entitled, Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010. The report responds to a November 2010 request to EIA from U.S. Representatives Roscoe Bartlett (R-MD), Marsha Blackburn (R-TN), and Jason Chaffetz (R-UT) for an update to a 2008 report prepared by EIA that provided a snapshot of direct Federal financial interventions and subsidies in energy markets in fiscal year (FY) 2007, focusing on subsidies to electricity production. As requested, the report updates the previous report using FY 2010 data and is limited to subsidies that are provided by the Federal government, provide a financial benefit with an identifiable Federal budget impact, and are specifically targeted at energy markets. Subsidies to Federal electric utilities, in the way of financial support, are also included, as requested. The criteria do exclude some subsidies beneficial to energy sector activities which EIA details in a separate summary. EIA notes that this fact should be kept in mind when comparing the report to other studies that may use narrower or more expansive inclusion criteria.

    Energy subsidies and interventions discussed in the report are divided into five separate program categories:

  • Direct Expenditures to Producers or Consumers. These are federal programs that involve direct cash outlays which provide a financial benefit to producers or consumers of energy.
  • Tax Expenditures. These are provisions in the federal tax code that reduce the tax liability of firms or individuals who take specified actions that affect energy production, consumption, or conservation.
  • Research and Development (R&D). These are federal expenditures aimed at a variety of goals, such as increasing U.S. energy supplies or improving the efficiency of various energy consumption, production, transformation, and end-use technologies. R&D expenditures generally do not directly affect current energy consumption, production, and prices, but, if successful, they could affect future consumption, production, and prices.
  • Loans and Loan Guarantees. These involve federal financial support for certain energy technologies. The U.S. Department of Energy (DOE) is authorized to provide financial support for "innovative clean energy technologies that are typically unable to obtain conventional private financing due to their 'high technology risks.' In addition, eligible technologies must avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases."
  • Electricity programs serving targeted categories of electricity consumers in several geographic regions of the country. Through the Tennessee Valley Authority (TVA) and the Power Marketing Administrations (PMAs), which include the Bonneville Power Administration (BPA) and three smaller PMAs, the federal government brings to market large amounts of electricity, stipulating that "preference in the sale of such power and energy shall be given to public bodies and cooperatives." The federal government also indirectly supports portions of the electricity industry through loans and loan guarantees made by the U.S. Department of Agriculture's Rural Utilities Service (RUS) at interest rates generally below those available to investor-owned utilities.
    According to the report, the value of direct federal financial interventions and subsidies in energy markets doubled between 2007 and 2010, growing from $17.9 billion to $37.2 billion. In broad categories, the largest increase was for conservation and end-use subsidies (approx. $4 billion to $15 billion), followed to a lesser degree by increases in electricity-related subsidies and subsidies for fuels used outside the electricity sector (approx. $6.2 billion to $10.5 billion). Electricity-Related increased from  $7.7 billion to $11.9 billion.
    The report indicates that a key factor in the increased support for conservation programs, end-use technologies and renewables was the passage of several pieces of legislation responding to the recent financial crisis and subsequent economic downturn, particularly the American Recovery and Reinvestment Act of 2009 (ARRA) and the Energy Improvement and Extension Act (EIEA). Some of the ARRA-related programs that account for a large portion of the growth in subsidies and support between FY 2007 and FY 2010 are temporary and the subsidies associated with them are scheduled to phase out over the next few years. Other recent legislation impacting energy subsidies included the Food, Conservation, and Energy Act of 2008, which provided significant new subsidies to biofuels (primarily ethanol and biodiesel) producers, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended the sunset dates for several tax expenditure programs, as well as the grant program for qualifying renewables.

    The report indicates that conservation and end-use subsidies experienced rapid growth in both absolute and percentage terms, more than tripling in real terms between FY 2007 and FY 2010. The increase in subsidies and support was led by growth in direct expenditures and tax expenditures. The home energy efficiency improvement tax expenditure accounts for most of the increase in conservation-related subsidies between FY 2007 and FY 2010. Conservation subsidies were almost equally divided between direct expenditures and tax expenditures, with estimated tax credits for energy efficiency improvements to existing homes totaling $3.2 billion. These tax credits funded investments in energy-efficient windows, furnaces, boilers, boiler fans, and building envelope components. End-use subsidies, nearly all of which were provided through direct expenditures of appropriated funds, were boosted by a doubling of expenditures in the Low Income Home Energy Assistance Program (LIHEAP) spending between FY 2007 and FY 2010.

    The report indicates that relative to their share of total electricity generation, renewables received a large share of direct federal subsidies and support in FY 2010. For example, renewable fuels accounted for 10.3 percent of total generation, while they received 55.3 percent of federal subsidies and support. However, caution should be used when making such calculations because many factors can drive the results. For example, many of the programs that showed the largest increases in subsidies between FY 2007 and FY 2010 are supporting facilities that are still under construction, including energy equipment manufacturing facilities that may not affect energy consumption or production for several years. Furthermore, the ARRA 1603 grant program, that allows investors to choose an upfront grant instead of a 10-year production tax credit, tended to lead to much higher overall electricity subsidy estimates for renewables in FY 2010 than would have occurred had they continued to rely on the existing production tax credit program, which does not front-load subsidy costs. Focusing on a single year's data also does not capture the imbedded effects of subsidies that may have occurred over many years across all energy fuels and technologies.

    Additionally, the report indicates that biofuels receive most of the subsidies and support for fuels used outside the electricity sector. Based on the subsidy categories used in this report, subsidies and support for fuels used outside the electricity sector, at $10.4 billion, accounted for 28 percent of total energy subsidies. In this category, biomass and biofuels received the largest subsidy in FY 2010, at $7.6 billion. Under the Volumetric Ethanol Excise Tax Credit (VEETC), blenders receive a $0.45-per gallon credit for each gallon of ethanol that is blended with gasoline for use as a motor fuel. Internal Revenue Service regulations require that blenders apply for VEETC refunds to offset gasoline excise tax payments, but they may submit a claim for payment or take a credit against other taxes if their VEETC credits exceed their gasoline excise tax liability. Based on its implementation rules, the Treasury reports VEETC as a $5.7-billion reduction in excise tax revenues for FY 2010. For purposes of this report, VEETC is classified as tax expenditure.

    Finally the report notes, natural gas and petroleum liquids also received significant subsidies and support for fuels used outside the electricity sector. They accounted for 20.7 percent of the fuel specific subsidies and support and, together with biofuels, accounted for nearly 94 percent of the subsidies and support going to fuels not supporting electricity production.

    Access the complete 105-page report (click here). Access an Executive Summary and Tables with links to footnotes (click here). [#Energy/Subsidies]