EME 444
Global Energy Enterprise

Incentives

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Both wind and solar require substantial initial capital outlay relative to the long run operating cost. These systems have no fuel costs. Once built, the operating costs are generally low. Solar photovoltaics (PV, aka solar panels), in particular, have a low operating cost. In addition to components having long rated lives (solar panels are usually warrantied for at least 25 years), there are no moving parts (except in cases where mechanical trackers are used). Under normal conditions, wind turbines will last at least 25 - 30 years, though they require more maintenance than solar PV.

States and countries have implemented a variety of policies meant to incentivize or encourage private investment in clean, renewable energies. The most common of these policies are tax credits, grants/rebates, and performance-based incentives (PBI), including feed-in tariffs (FIT) and renewable portfolio standards (RPS).

A tax credit is just that, a credit. When an individual or business investor earns a tax credit it means that the amount of the credit will be subtracted from a future tax bill. For example, in the United States, we have a Federal Residential Renewable Energy Tax Credit  which provides a tax credit covering 30% of the cost of an installation. If you put a photovoltaic system in your yard at a cost of $30,000, you earn a $9,000 tax credit. The government doesn’t mail you a check for this amount. It means you get to deduct that amount from your next tax payment. To realize this money, you will need to have paid at least $9,000 in taxes, but excess credits can "generally" be carried over to future tax years. Note that even if you were owed a refund, this tax credit can be used to increase your refund, as long as you paid at least $9,000 in federal income tax throughout the year.

A rebate means that a government agency or other group (sometimes utility companies) will refund some of the investment. Pennsylvania used to provide a solar rebate program that provided rebates to investors based on the power rating of the system, $1.75/Watt, for example. The rebate was a check mailed directly to the investor (or their designate). Many states still have such programs such this solar PV rebate program in Oregon (description from DSIRE of course!). Different states often have different program specifics. See DSIRE for more examples of programs.

Performance-based incentives (PBIs), also known as production incentives, provide cash payments based on the actual output of the system. For wind and solar electric, this is the number of kilowatt-hours (kWh) generated.

The case study for this course illustrates in detail how a renewable portfolio standard (RPS) policy works. To summarize, an RPS requires utilities to use renewable energy or renewable energy credits (RECs) to account for a certain percentage of their retail electricity sales. A REC is earned by a qualified grid-tied facility for every 1,000 kWh (i.e., 1 MWh) of electricity that is generated using a renewable energy resource. The RECs are then bought and sold through an auction where the market determines the price. The settlement price varies depending on REC supply and demand at any point in time, though special auctions and incentives are sometimes used.

Another type of production-based incentive, a feed-in-tariff (FIT) pays grid-tied renewable energy generators a specified price for the electricity they generate and guarantees them this price for a specified amount of time. This type of policy is widely used in Europe, most notably in Germany, but less so in the USA. This may be changing.

Balance Please

Renewables are not the only energy source receiving government subsidies to keep costs down and encourage consumption. The International Energy Agency (IEA) provides this global assessment in 2014:

"Achieving universal access to modern energy remains imperative; fossil-fuel subsidies continue to distort energy markets. In 2011, nearly 1.3 billion people worldwide lacked access to electricity and more than 2.6 billion relied on the traditional use of biomass for cooking. Over 95% were located in Asia and sub-Saharan Africa. The global cost of fossil-fuel subsidies expanded to $544 billion in 2012 despite efforts at reform. Financial support to renewable sources of energy totaled $101 billion."

International Energy Agency, World Energy Outlook 2013 Fact Sheet.

The IEA keeps track of energy subsidies each year. In their 2016 World Energy Outlook (released in November of 2016), they reported that:

"The value of global fossil-fuel consumption subsidies in 2015 is estimated at $325 billion, much lower than the estimate for 2014, which was close to $500 billion... The decrease in the value largely reflects lower international energy prices of subsidized fuels since mid-2014, as the gap between international benchmark and end-user prices is closed by decreased international prices of energy, but it also incorporates the impact of pricing reform. Of the total, oil subsidies accounted for 44% of the total ($145 billion, covering an estimated 11% of global oil consumption), followed by electricity subsidies estimated at just over $100 billion (covering 17% of global electricity use). Natural gas subsidies were also significant, amounting to nearly $80 billion (affecting the price paid for 25% of gas consumption). Coal subsides are relatively small, at $1 billion in 2015"

International Energy Agency, World Energy Outlook 2016, p. 99.

The IEA goes on to address market distortion and their projection of the continued need for subsidies. (The New Policies Scenario is the IEA's baseline scenario, and assumes that countries will comply with policy commitments and plans. There is also a description of other IEA scenarios)

"In the case of subsidies to renewables (examined in detail in Chapter 11), these continue to be necessary to incentivize investment in renewables over fossil-fuel alternatives, for as long as markets fail to reflect the environmental and health costs associated with the emissions of CO2 and other pollutants. But as technology costs come down and electricity and CO2 prices increase in several markets, more and more new renewable energy projects become economically competitive without any state support: in India, solar PV is competitive without subsidies well before 2030; for the world as a whole, most new renewables-based generation in 2040 does not require subsidies. The value of the subsidies paid to all forms of renewable energy peaks at $240 billion in 2030 in the New Policies Scenario and then falls back to $200 billion by 2040, remaining well below the today’s value for fossil-fuel consumption subsidies. The subsidy per unit of renewables-based electricity generation falls dramatically: subsidies to renewable-based generation rise by some 30% over the period to 2040, yet the electricity generated by non-hydro renewables increases by a factor of five over the same period."

International Energy Agency, World Energy Outlook 2016, p. 100.

It is difficult to put an objective number on the amount and distribution of energy subsidies in the United States, due to the complexity of the inner workings of our tax code. As one Forbes article put it, "Just how taxpayer money gets doled out is mired in so much intricacy that is difficult to follow." (And that's from Forbes, "among the most trusted resources for the world's business and investment leaders!")

One can easily find news from credible sources saying that both in the United States and globally, fossil-fuels are subsidized more than renewables, and vice versa, depending on how you scope which subsidies and tax breaks to include and how you measure the amount (total $ or total $/BTU produced, for example). Regardless of the relative subsidy, a strong case can be made for reducing fossil-fuel subsidies, especially with regards to climate change. For example, in 2015, a coalition of eight governments  (Costa Rica, Denmark, Ethiopia, Finland, New Zealand, Norway, Sweden, and Switzerland) calling themselves the Friends of Fossil Fuel Subsidy Reform submitted a communique "encouraging governments to prioritize the reform of fossil fuel subsidies," mostly in an effort to influence the recent Paris Climate Talks.