Subsidies Aren’t the Real Problem for Alternative Energy
by David Fessler, Investment U Senior Analyst
Tuesday, January 03, 2011: Issue #1678
No doubt you’ve seen plenty on the news the last few months about a certain solar panel maker, Solyndra.
The California-based company received a $528-million federal loan, with White House support, only to declare bankruptcy in September.
Beacon Power, which built flywheel energy storage devices, declared bankruptcy in late October, but not before drawing down the majority of its $43-million federal loan guarantee.
Should those companies have received the funding?
That’s a matter for Congressional committees to determine. But one thing is clear to me – the government shouldn’t be in the business of trying to pick winners. It will more often than not get it wrong – and taxpayers will turn out to be the losers.
And yet, here’s a news flash for you: No new energy source has ever been developed in the United States without government subsidies.
That’s right: The government has subsidized all energy sources that ultimately became viable. That includes oil drilling, which still receives a type of federal subsidy, in the form of the percentage depletion allowance, first put into place as part of the Revenue Act of 1913.
I’ve been perusing a 2008 report from the EIA, which lists the subsidy levels for all the different types of energy.
As a group, renewables (such as solar and wind) get the lion’s share of incentives and tax breaks ($4.8 billion). Refined coal (a treatment process that reduces carbon emissions in low-grade coal) receives about $2.3 billion. After that comes natural gas ($2.1 billion), nuclear power ($1.2 billion) and coal ($932 million).
But let’s look at federal support in a different way.
How many “subsidy dollars” does it take to produce one megawatt-hour (MWh) of electricity for each of those forms of energy?
Again, we turn back to the EIA data:
Refined coal: $29.81/MWh
Solar: $24.34/MWh
Wind: $23.37/MWh
Nuclear: $1.59/MWh
Coal: $0.44/MWh
Natural gas: $0.25/MWh
Go back and look at that last entry… natural gas. At $0.25 per MWh, it clearly gives the federal government its biggest subsidy “bang for its buck.”
It’s All About “Scale”
In the words of the famous American venture capitalist Vinod Khosla, “If it doesn’t scale, it doesn’t matter. Most of what we talk about today – hybrid, biodiesel, ethanol, solar photovoltaic, geothermal – I believe are irrelevant to the scale of the problem.”
Khosla’s hit the nail on the head. Natural gas scales. With the advent of new fracking technologies, it’s plentiful and cheap to pull out of the ground. That’s right now – not some time in the future.
And once a well is tapped, it continues to produce. There are no interruptions from sunless or windless days. No years of delay and public anxiety that come with building and maintaining a nuclear power plant. No additional and costly steps, like refined coal, where it has to be dug out of the ground and processed further (which uses yet more energy) before being sent on to market.
Alternative Energy’s Biggest Problem
Don’t get me wrong. When it comes to alternative energy, wind and solar in particular, the technologies are certainly viable.
As the industries scale to greater manufacturing volumes, cost comes out of the process.
Ultimately, I believe both will be successful without subsidies, but that day is three to five years away at best.
And even as they succeed in driving down manufacturing costs, alternative energy still won’t be able to produce electricity as cheaply as natural gas. At least not for a very long time.
Right now, we have more natural gas in this country than we’ve ever had. The cost of natural gas hasn’t budged in a year, and it’s not going to increase any time soon.
Storage levels are even higher than they were last year, and that was a record.
The bottom line is this: If it weren’t for the 36 states with Renewable Energy Portfolio Standards (RPS) that mandate utilities use renewable energy sources, solar and wind would still be science projects.
The Federal government, from the President on down, talk about getting us off foreign oil…
The reality is, they’re doing very little to foster the development of industries that’ll profitably achieve that goal. Instead, they’re trying to pick winners. Mr. Market will determine who the winners ultimately are. He always does.
Right now the winner is natural gas.
“The Tipping Point” For Natural Gas
And one of the biggest winners in that space is going to be Westport Innovations (Nasdaq: WPRT).
Westport is an “alternative energy” leader in its own right – it makes and sells vehicle engines and fuel-delivery systems that use natural gas for fuel.
Westport’s CEO said in early November that he sees 2011 as a “tipping point for the use of natural gas as a transportation fuel.”
And it looks like the company is seeing a corresponding leap in sales. Westport saw its revenue jump 80 percent in its most recent quarter, compared to year ago levels. And the company raised its forecast as well, expecting total revenue of $240 to $250 million this year.
Westport’s already linked some big marketing and supply ventures with the likes of Shell (the largest global LNG supplier) and General Motors, as well as three of the four largest makers of heavy-duty tractor-trailer engines.
The company now sells natural gas power systems for Ford F-250 and F-350 pickup trucks, as well.
So if you want to invest in the alternative energy “pioneers” (you know the kind… the ones with the stock market arrows in their backs), then gamble in the wind and solar sector…
Or buy a company like Westport that already has technology and timing on its side. And no government loan guarantees, either.
Good Investing,
David Fessler
Any investment contains risk. Please see our disclaimer.
7 Responses to “Subsidies Aren’t the Real Problem for Alternative Energy”
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David Fessler is the energy and infrastructure expert for Investment U.
Teh obvious aside we will still need petroleum products, green technology depends on plastics, carbon fiber, polypropylene, and then we need fertilizers which take and use a by product called sulpher which also goes into other manufacturing process’s,. Your bar-B-Que needs propane as does much of the heating of homes in certain parts of the country. Paints, cleaning solvents, glues, and then packaging etc. Safe to say your article lightly touches the surfaces and future aircraft, cars, trucks, trains may run on NG but they will be built in part with Oil byproducts.
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David you for got to mention how destructive fossil fuels are to our Country and the more than 100 billion dollars a year hidden cost to the consumer.
Right now we have the US Navy in harms way ready to give their lives in the Persian Gulf so we can have cheap oil and or gasoline.
How many more wars are we going to have over cheap oil? Last time I checked the Iraq war cost the US over 700 billion. How many hybrid cars could we have put on the road for this amount of money and how many US citizens could we have employed for this same dollar amount?
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Balanced and forthright.Natural gas, together with N.G.L.’s can reform the energy equation for the U.S.A. to decrease dependency on Middle East,
reduce transportation costs, increase employment prospects and provide a Chemical base for new manufacturing operations,replace heating oil with a more efficient product and a more efficient delivery method in urban areas.
There are downside costs to coal, nuclear,and oilwhich are not dealt with in your fine article
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Dave,
I enjoyed your analysis on a MWh basis. I agree that renewables perform poorly on that basis and suggest that other costs need to be included in addition to the EIA data. The picture is worse for renewable and the cost of electricity in the US because solar and wind are intermittent as you point out. To address this weakness state and federal policy makers and regulators requiring electric utilities to spend money on energy storage (such as Beacon) and smart grid to enable integrating the intermittent nature of solar and wind. The electric grid infrastructure is being made more complex and more costly to allow solar and wind. So, the real cost per MWh of solar and wind is much worse.
Don
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Great article. Is the $.25 for natural gas a direct cash subsidy? The depletion allowance is not a direct cash subsidy. If there is no production there is no depletion allowance. Depletion allowance is comparable to the depreciation allowance on machinery & equipment. Drilling expense comes out of capital, is not entirely expensed in the first year so the depletion allowance provides for the discovery of new reserves for replacement of depleted resevoirs.
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Do you have any information regarding Sauer Wind Energy (SENY) – Good or Bad or Future or ???
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OK, but when does natural gas run out? Have you figured in the cost of that little incidental of getting rid of hydrofracking waste? Pollution of rivers? Help!
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