Analysis & Projections
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Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010
Release date: August 1, 2011
Executive Summary
Background
This report responds to a November 2010 request to the U.S. Energy Information Administration (EIA) from U.S. Representatives Roscoe G. Bartlett, Marsha Blackburn, and Jason Chaffetz 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 (Appendix A). As requested, this 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. These criteria do exclude some subsidies beneficial to energy sector activities (see “Not All Subsidies Impacting the Energy Sector Are Included in this Report”) and this should be kept in mind when comparing this report to other studies that may use narrower or more expansive inclusion criteria.
Energy subsidies and interventions discussed in this 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."1
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.”2 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.
With the exception of the federal electricity programs and loan guarantee programs, this report measures subsidies and support on the basis of the cost of the programs to the federal budget as provided in budget documents.3 This report measures support provided by federal electricity programs by comparing the actual cost of funds made available to these entities to the cost of funds that they might otherwise have incurred. Similarly, the value of the support provided by DOE's loan guarantee program is estimated by analyzing what the costs of financing eligible projects might be without the guarantees and the cost of the credit subsidy required for the guarantee. Uncertainties in the estimation of subsidy and support costs for federally-guaranteed loans, federal utilities, and participants in Rural Utilities Service loan programs are reflected by providing a range of subsidy estimates for selected programs in the body of the report. To facilitate exposition, the Executive Summary presents only midpoint value estimates for these programs.
Key findings
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, followed to a lesser degree by increases in electricity-related subsidies and subsidies for fuels used outside the electricity sector (Table ES1).
Table ES1. Value of energy subsidies by major use, FY 2007 and FY 2010 (million 2010 dollars) |
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|---|---|---|
| Subsidy and Support Category | FY 2007 | FY 2010 |
| Electricity-Related | 7,663 | 11,873 |
| Fuels and Technologies Used for Electricity Production | 6,582 | 10,902 |
| Transmission and Distribution | 1,081 | 971 |
| Fuels Used Outside the Electricity Sector | 6,246 | 10,448 |
| Conservation, End Use and LIHEAP | 3,987 | 14,838 |
| Conservation | 369 | 6,597 |
| End-Use | 1,342 | 3,241 |
| LIHEAP | 2,276 | 5,000 |
| Total | 17,895 | 37,160 |
Notes: Totals may not equal sum of components due to independent rounding. |
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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 (Table ES2) are temporary and the subsidies associated with them are scheduled to phase out over the next few years (see “Energy Provisions Included in Legislation Responding to the Recent Financial Crisis”). 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.
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 (Table ES2). 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 2010.5
Table ES2. Quantified energy-specific subsidies and support by type, FY 2010 and FY 2007 (million 2010 dollars) |
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|---|---|---|---|---|---|---|---|
| Beneficiary | Direct Expenditures | Tax Expenditures | Research & Development | DOE Loan Guarantee Program | Federal & RUS Electricity | Total | ARRA Related |
| 2010 | |||||||
| Coal | 42 | 561 | 663 | 0 | 91 | 1,358 | 97 |
| Refined coal | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
| Natural Gas and Petroleum Liquids | 4 | 2,690 | 70 | 0 | 56 | 2,820 | 0 |
| Nuclear | 0 | 908 | 1,169 | 265 | 157 | 2,499 | 147 |
| Renewables | 4,696 | 8,165 | 1,409 | 269 | 133 | 14,674 | 6,193 |
| Biomass | 57 | 523 | 537 | 0 | 0 | 1,117 | 10 |
| Geothermal | 160 | 1 | 100 | 12 | 0 | 273 | 228 |
| Hydro | 17 | 17 | 52 | 0 | 130 | 216 | 16 |
| Solar | 496 | 120 | 348 | 173 | 0 | 1,134 | 788 |
| Wind | 3,556 | 1,178 | 166 | 85 | 1 | 4,986 | 4,852 |
| Other | 95 | 0 | 205 | 0 | 1 | 302 | 130 |
| Biofuels | 314 | 6,330 | 0 | 0 | 0 | 6,644 | 169 |
| Electricity - Smart Grid and Transmission | 461 | 58 | 222 | 20 | 211 | 971 | 495 |
| Conservation | 3,387 | 3,206 | 0 | 4 | 0 | 6,597 | 6,305 |
| End-Use | 5,705 | 693 | 832 | 1,011 | 0 | 8,241 | 1,549 |
| LIHEAP | 5,000 | 0 | 0 | 0 | 0 | 5,000 | 0 |
| Other | 705 | 693 | 832 | 1,011 | 0 | 3,241 | 1,549 |
| Total | 14,295 | 16,284 | 4,365 | 1,570 | 648 | 37,160 | 14,786 |
| 2007 | |||||||
| Coal | 0 | 291 | 582 | NA | 70 | 943 | NA |
| Refined Coal | 0 | 3,038 | 0 | NA | 0 | 3,038 | NA |
| Natural Gas and Petroleum Liquids | 0 | 1,914 | 43 | NA | 53 | 2,010 | NA |
| Nuclear | 0 | 600 | 1,017 | NA | 96 | 1.714 | NA |
| Renewable | 110 | 4,130 | 717 | NA | 167 | 5,124 | NA |
| Biomass | 16 | 5 | 40 | NA | 0 | 61 | NA |
| Geothermal | 0 | 5 | 9 | NA | 0 | 14 | NA |
| Hydro | 0 | 6 | 0 | NA | 165 | 170 | NA |
| Solar | 0 | 8 | 171 | NA | 0 | 179 | NA |
| Wind | 0 | 418 | 58 | NA | 1 | 476 | NA |
| Other | 5 | 6 | 211 | NA | 1 | 224 | NA |
| Biofuels | 89 | 3,682 | 228 | NA | 0 | 3,999 | NA |
| Electricity (not fuel or technology specific) | 0 | 696 | 142 | NA | 243 | 1,081 | NA |
| Conservation | 369 | 0 | 0 | NA | 0 | 369 | NA |
| End-Use | 2,276 | 832 | 509 | NA | 0 | 3,618 | NA |
| LIHEAP | 2,276 | 0 | 0 | 0 | 0 | 2,276 | NA |
| Other | 0 | 832 | 509 | NA | 0 | 1,342 | NA |
| Total | 2,755 | 11,501 | 3,010 | NA | 629 | 17,895 | NA |
Total will not match Table 24 midpoint of “Estimated Interest Subsidy at Benchmark Interest Rate” because some data can not be allocated by fuel or activity. |
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The composition of subsidies to specific fuels and technologies in FY 2010 is significantly different than in FY 2007, reflecting the elimination of subsidies to refined coal and increases in subsidies to renewable energy due to a change in the incentive structure. The growth in subsidies for renewable fuels is primarily driven by the $4.2 billion in expenditures for grants under Section 1603 of ARRA, which went mainly to wind facilities, and by growth in federal support for biofuels. The ARRA grant program allowed investors in new qualifying facilities to choose an upfront grant in lieu of the longstanding 10-year production tax credit that was also available, but which became less attractive to developers as the market for financial instruments based on tax credit streams withered following the financial crisis. Though the two options have roughly similar value to investors and cost to the government over the life of the projects, the grant program front loads the government's support for covered projects in the year that the grant is awarded. If the wind and solar plants that took advantage of the grant program during the financial crisis had instead utilized the production tax credit program, the subsidy value reported in FY 2010 would have been much smaller, reflecting only the credit for up to one year of generation.6 Tax expenditures associated with ethanol tax credits also increased significantly between FY 2007 and FY 2010 with the growth in ethanol blending activity under the Renewable Fuel Standard.
The DOE loan program, designed to support nuclear power, energy efficiency and renewable energy projects, advanced fossil fuels, electric power transmission systems, advanced technology vehicles, and leading-edge biofuels, was only in its early stages in FY 2010. The midpoint estimate of the loan subsidies was $1.6 billion in 2010. As more projects are approved, the loan subsidies associated with this program are expected to rise over time.
The growth in energy-specific subsidies and support between FY 2007 and FY 2010 does not closely correspond to changes in energy consumption and production over the same time period. In fact, overall energy consumption actually fell from 101 quadrillion Btu to 98 quadrillion Btu between 2007 and 2010, reflecting economic conditions, while domestic energy production rose from 71 quadrillion Btu to 75 quadrillion Btu due to increasing domestic production of shale gas, crude oil, and renewable energy (Table ES3). While the overall amount of federal subsidies and support provided per unit of overall energy consumption or production has clearly grown, simply dividing the current value of subsidies by current consumption or production does not reflect either the long-run impact of imbedded subsidies and or the future impacts of current subsidies and support that may only be starting to impact energy markets. For example, increases in R&D expenditures are not reflected in the Nation's energy mix unless and until the research leads to successful innovations that penetrate the market, a process that can take many years.
Table ES3. Energy subsidies and support, selected indicators, 2007 and 2010 |
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|---|---|---|
| Item | 2007 | 2010 |
| Total Energy subsidies and Support (million 2010 dollars) | 17,895 | 37,160 |
| Energy Consumption (quadrillion Btu) | 101.4 | 98.0 |
| Energy Production (quadrillion Btu) | 71.4 | 75.0 |
| Notes: Totals may not equal sum of components due to independent rounding. The subsidy and support values provided in this table represent the average of the low and high values of more detailed estimates provided in the body of the report. The energy consumption and production values shown in this table represent 2007 and 2010 calendar year data rather than the fiscal year data reported for the estimated subsidies. Sources: U.S. Energy Information Administration, Monthly Energy Review May 2011, DOE/EIA-0035(2011/05) (Washington, DC, May, 2011), Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year s 2012 and 2009. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, JCS-3-10 (Washington, DC, December 2010), Table 1, and budget documents from the Departments of Energy, Agriculture, Transportation, Treasury, Health and Human Services, Housing and Urban Development, the Environmental Protection Agency and the General Services Administration. |
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Findings Regarding Electricity-Related Subsidies and Support
Electricity-related subsidies and support are estimated at $11.9 billion in FY 2010, up from $7.7 billion in FY 2007 (Table ES1). While fuel- and technology-related electricity subsidies grew 66 percent between FY 2007 and FY 2010, transmission and distribution system-related subsidies actually declined.
Direct expenditures accounted for 39 percent of total electricity-related subsidies in FY 2010 (Table ES4). These expenditures were mostly the result of the ARRA Section 1603 grant program, 84-percent of which went to wind generation. As noted, the relatively high value for this program stems from the fact that the grant program places all of the costs in the year that a project is initiated, while the existing production tax credit that the grant substituted for spread the costs of the tax credit over the first 10 years of a project's operation. If developers return to using the production tax credit in the future, the first-year costs for each project will be much lower.
Tax expenditures comprise over 28 percent of the total subsidies and support related to electricity production. Renewables accounted for 40 percent of all electricity-related tax expenditures in FY 2010, mostly due to the Sections 45 and 48 production and investment tax credits which predominantly went to wind facilities. A nuclear decommissioning—related tax credit accounted for $908 million in tax expenditures.
Research and development accounted for 22 percent of the total subsidies and support to the electric power sector. Nuclear accounted for the highest level of R&D expenditures at $1,169 million, followed by renewables at $632 million, and coal at $575 million.
Federal electricity support to federal utilities and participants in the Rural Utilities Service loan programs in the form of explicit and implicit loan guarantees are estimated at approximately $648 million in FY 2010. The level of this support is largely a function of the value of outstanding debt and prevailing interest rates.
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 (Tables ES4 and ES5). 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.
Table ES4. Fiscal year 2010 electricity production subsidies and support (million 2010 dollars) |
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|---|---|---|---|---|---|---|---|
| Direct Expenditures | Tax Expenditures | Research & Development | Federal Electricity Support | Loan Guarantee | Total | Share of Total Subsidies and Support | |
| Coal | 37 | 486 | 575 | 91 | 0 | 1,189 | 10.0% |
| Natural Gas and Petroleum Liquids | 1 | 583 | 15 | 56 | 0 | 654 | 5.5% |
| Nuclear | 0 | 908 | 1,169 | 157 | 265 | 2,499 | 21.0% |
| Renewables | 4,178 | 1,347 | 632 | 133 | 269 | 6,560 | 55.3% |
| Biomass | 6 | 54 | 55 | 0 | 0 | 114 | 1.0% |
| Geothermal | 115 | 1 | 72 | 0 | 12 | 200 | 1.7% |
| Hydropower | 17 | 17 | 51 | 130 | 0 | 215 | 1.8% |
| Solar | 409 | 99 | 287 | 0 | 173 | 968 | 8.2% |
| Wind | 3,556 | 1,178 | 166 | 1 | 85 | 4,986 | 42.0% |
| Unallocated Renewables | 75 | 0 | 0 | 0 | 0 | 75 | 0.6% |
| Transmission and Distribution | 461 | 58 | 222 | 211 | 20 | 971 | 8.2% |
| Total | 4,677 | 3,382 | 2,613 | 648 | 555 | 11,873 | 100% |
Notes: Estimates of federal electricity program support are based on the most recent audited annual reports for federally-owned utilities which conform to federal fiscal year convention. |
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Among the specific fuels and technologies, wind plants received the largest share of direct federal subsidies and support in FY 2010, accounting for 42 percent of total electricity-related subsidies. While the share of electricity-related subsidies and support received by wind and solar technologies is disproportionate to their generation share, their generation has increased dramatically in the last decade. Wind generation in 2010 is nearly 16 times the level achieved in 2000 (Table ES5). While natural gas-fired capacity additions have dominated for most of the last 15 years, wind generating capacity additions have also ramped up substantially in recent years (Figure ES1).
Table ES5. Measures of electricity production and production growth |
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|---|---|---|---|---|---|
| 2000 Net Generation (billion kilowatt-hours) | 2010 Net Generation (billion kilowattt-hours) | Share of 2000 Generation (percent) | Share of 2010 Generation (percent) | Annual Growth from 2000 to 2010 (percent) |
|
| Coal | 1,966 | 1,851 | 51.7% | 44.9% | -0.6% |
| Natural Gas and Petroleum Liquids | 726 | 1,030 | 19.1% | 25.0% | 3.6% |
| Nuclear | 754 | 807 | 19.8% | 19.6% | 0.7% |
| Renewables | 356 | 425 | 9.4% | 10.3% | 1.8% |
| Biomass Power | 61 | 57 | 1.6% | 1.4% | -0.7% |
| Geothermal | 14 | 16 | 0.4% | 0.4% | 1.3% |
| Hydroelectric | 276 | 257 | 7.3% | 6.2% | -0.7% |
| Solar | 0 | 1 | 0.0% | 0.0% | NA |
| Wind | 6 | 95 | 0.2% | 2.3% | 31.8% |
| Total | 3,802 | 4,120 | 100.0% | 100.0% | 0.8% |
Notes: Total net generation includes batteries, chemicals, hydrogen, pitch, purchased steam, sulfur, miscellaneous technologies not included in individual rows. |
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Findings Regarding Subsidies and Support For Fuels Used Outside of the Electricity Sector
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 (Table ES6). 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.9 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.
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.
Table ES6. Subsidies and support to fuels used outside of the electricity sector |
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|---|---|---|---|---|---|
| 2000 Fuel Production Excluding that used for Electricity Generation (quadrillion Btu) |
2010 Fuel Production Excluding that used for Electricity Generation (quadrillion Btu) |
FY 2010 Subsidy and Support (million 2010 dollars) |
Share of 2010 Non-Electricity-Related Fuel Production (percent) | Share of 2010 Fuel-Specific Non-Electricity-Related Subsidies (percent) | |
| Coal | 2.52 | 2.94 | 169 | 8.3% | 1.6% |
| Natural Gas Petroleum Liquids | 28.20 | 28.55 | 2,165 | 80.3% | 20.7% |
| Biofuels | 2.55 | 3.87 | 7,646 | 10.9% | 73.2% |
| Geothermal | 0.02 | 0.06 | 73 | 0.2% | 0.7% |
| Solar | 0.06 | 0.10 | 169 | 0.3% | 1.6% |
| Other Renewables | 0.04 | 0.02 | 226 | 0.0% | 2.2% |
| Total | 33.39 | 35.54 | 10,448 | 100.0% | 100.0% |
Notes: Totals may not equal sum of components due to independent rounding. | |||||
Footnotes
1 Section 1703 of Title XVII of the Energy Policy Act of 2005 authorizes the U.S. Department of Energy to support innovative clean energy technologies that are typically unable to obtain conventional private financing due to high technology risks. In addition, the technologies must avoid, reduce, or sequester air pollutants or anthropogenic emissions of greenhouse gases. See: United States Department of Energy, Loan Programs Office at https://lpo.energy.gov/?page_id=39.
2 Flood Control Act of 1944 (58 Stat. 890; 16 U.S.C. 825s).
3 Office of Management and Budget, Analytical Perspectives of the Budget of the United States, Editions 2009 and 2012. Data for 2007 appeared in Table 19-1; data for 2010-1016 appeared in Table 17-1. Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014, JCS-3-10, Table 1.
4 The Pew Charitable Trusts, Subsidy Scope, http://subsidyscope.org/tax_expenditures/db/group/31/?estimate=1&year=2001.
5 LIHEAP provides funds to states, the District of Columbia, U.S. territories and commonwealths, and Indian tribal organizations (collectively referred to as grantees) primarily to help low-income households pay home energy expenses.
6 The amount of the subsidy for the Production Tax Credit (PTC) reflects the dollar amount for production from all qualifying generators in that year. Qualifying generators receive the credit for 10 years from the initial in-service date. For 2010, the total dollar amount reflects the annual PTC for all qualifying generators and the grant amount for those new generators qualifying under the Section 1603 program under ARRA.
7 The $8.5 billion includes non-DOE-related energy expenditures.
8 These bonds are classified by the U.S. Treasury as tax expenditures although they are targeted at public power providers, which do not have any federal profit tax liabilities. They are, in some sense, the equivalent of the Production Tax Credit or Investment Tax Credit provided to investor-owned utilities. In essence, they amount to interest free loans, with the Treasury providing the interest payments rather than the public power provider.
9 The credits for mixtures other than ethanol are $0.60–per-gallon for alcohol fuel mixtures (other than ethanol), $0.50-per-gallon of biodiesel, and $1.00-per-gallon for agri-biodiesel.