Blog >
Rethinking Renewable Subsidies

Blog

Rethinking Renewable Subsidies

edward-d-kee-mckinsey-alum-washington-dc

Edward Kee shares a post on rethinking renewable energy subsidies and how these impact other energy industries.

Government energy subsidies are standing in the way of a clean US electricity system — and US nuclear.

Nuclear power in the United States is struggling, with well-maintained plants closing early and few new projects in the works.  At the heart of these struggles lies a failed gamble: regulators and policy makers bet that market forces in de-regulated electricity markets would lead to the electricity sector that best served the needs of society.

Sadly, deregulated electricity markets have fallen well short of this target.  When markets fail, economic theory recommends prudent regulation. Instead, we have US energy subsidy policy, a poor replacement.

The Logic of Energy Subsidies

Energy subsidies are intended to steer markets away from a course considered bad for society. During the early years of a technology’s commercialization, subsidies are often used to increase investment and development, as well as to protect nascent industries from competition. Starting in the Carter administration with the creation of the Department of Energy, support for alternative fuel, and later renewable energy, often had this second goal in mind. Any technology that could diminish US reliance on imported oil had value, over and above its costs to consumers. It was in the best interests of the US to support these industries and help them develop.[1]

Proponents of renewable subsidies often present a cut-and-dried case of resolving market failure: Renewables provide clean energy, but the extra benefit that renewables provide (very low greenhouse gas emissions) is never incorporated into the market price of electricity, making renewable projects less profitable than they should be.

US federal and state governments step in, providing investment tax credits, production tax credits, feed-in tariffs, renewable portfolio standards, and other subsidies to address this market failure.  Such subsidies to renewable energy projects drive investment in these projects; indeed, renewable energy has seen significant growth over the period of subsidization, with increasingly competitive renewable generation costs compared to conventional energy sources.  Renewable energy subsidies seem to have delivered.

Key points include:

  • Hindering the proper target of reducing emissions

  • Distorting market outcomes

  • Phasing out subsidies

Read the full article, Time to Rethink Renewable Subsidies, on Nuclear-Economics.com.