It’s time to cut subsidies, cut rates, and reduce emissions
$20 billion (at least) and 2,610 subsidies
Americans want cleaner air, a better future for our children, and lower bills, for everyone.
In America, 38 states use rate regulation at the state level; whereby state public utility commissions evaluate utility costs and operations and set rates that provide for safe, adequate, and reliable power – at affordable rates.
In the other states, organized markets provide the economic signals to incent efficient investments to provide reliable power at affordable rates.
It is essential to understand that the rates are paid to investor-owned utilities include federal taxes.
In 2015, U.S. electric utilities paid $12 billion in federal taxes – all of the money was collected from customers when they paid their electric bills.
Meanwhile, in Washington, D.C. the government hands out over $20 billion a year in subsidies to companies in the electric industry. The U.S. Department of Energy spends $2 billion a year simply administering those programs.
There is a better way.
Instead of imposing federal taxes on the revenues earned by zero emissions energy sources (like nuclear, wind, and solar); and then doling out $20 billion in subsidies to incent those very sources of power – we should just stop taxing them.
Cutting the taxes on zero emissions energy sources would cut electric bills across America – even the municipal and Cooperative electric companies would be able to buy zero emissions power at cheaper rates (because the seller wouldn’t have to factor taxes into the price.)
But that’s only the beginning of what Zero Regrets means for America.
Utilities and their state regulators would have to re-evaluate their long-run pricing models to account for the fact that zero emissions sources wouldn’t pay taxes that need to be included in customer rates.
That means that solar, wind, nuclear, hydropower, and geothermal sources would have a competitive advantage in the market place. And utilities would be much more inclined to increase their investment in those sources because it provides power without having to have customers pay the federal taxes on the revenues.
Under a 35% corporate income tax, rates have to be grossed up nearly 54% to generate enough money to pay the taxes.
Because of the “tax gross-up factor” electric rates increase 54% to pay for a 35% federal tax rate.
Eliminating the tax rate on zero emissions energy sources (nuclear, wind, solar, hydropower, and geothermal) would save American households billions of dollars a year.
Current Problems with Today’s Approach
In our efforts to incent wind and solar power, America has provided those developers with “production tax credits” that provide the owners with tax benefits regardless of whether the power was needed.
Under the Wind Production Tax Credit, wind power receives a $22 a megawatt-hour tax credit. Every megawatt they produce generates that tax credit.
Regrettably, that has created “negative pricing” situations in many states (New York, Illinois, and New Jersey in particular).
Because nuclear plants can’t “ramp up and ramp down”, meaning they can’t change the amount of power they produce, in periods of low electric demand, wind providers can keep selling power and making money even if the market price for that power is $1 a megawatt-hour.
This has led to the closures of many American nuclear power plants.
Nuclear: America’s Largest Source of Zero Emissions Energy
Nuclear power provides America with over 60% of its zero emissions electricity. When a nuclear power plant closes, it’s replaced with a natural gas-fired power plant.
While natural gas is more than twice as clean as coal, it still emits around 800 pounds of pollution for every megawatt-hour it produces.
Nuclear plants have zero emissions for every megawatt-hour they produce. If we care about controlling pollution and reducing emissions, we have to protect America’s nuclear power fleet.
ConservAmerica supports wind energy. And we worry that the scheduled expiration of the wind production tax credit will stall wind’s remarkable growth. It is America’s fastest-growing source of zero emissions power.
Under Zero Regrets, wind power will continue to have significant tax advantages – but they won’t be arbitrarily based on output that doesn’t factor in the market’s needs.
Instead, wind developers will not pay taxes on the power they sell into the market. That makes wind power more affordable – without distorting the market.
America has seen a surge in rooftop solar installations – far exceeding every independent estimate:
Solar’s uptake rate has been great news for solar installers and their employees; now employing over 260 thousand Americans (surpassing the number of jobs at coal, oil and natural gas-fired power plants, combined).[i]
Unfortunately, 95% of solar installations have gone on the rooftops of the wealthiest 60% of Americans.[ii]
That is made more troubling when one recalls what was earlier explained in this paper – Americans provide $20 billion a year to support energy, with solar receiving nearly 350 times more in subsides per unit of electric production than fossil fuels.[iii]
ConservAmerica believes that what is needed is a move away from production incentives to a level playing field on all forms of zero emissions energy, including solar.
Additionally, we have urged states to adopt programs that allow regulated utilities to put rooftop solar onto the homes of low-income customers (who cannot afford it, and who often lack the credit score required for a solar “lease”).
Additionally, utilities should be encouraged and incented to emplace community and utility-scale solar. One of the premier energy consulting firms in America concluded that the costs of 300 megawatts of utility-scale solar are one-half the costs of an equivalent amount of rooftop solar.[iv]
zero regrets energy policy
|A Level Playing Field Incenting Zero Emissions Clean Energy Sources|
Under ConservAmerica’s Zero Regrets Energy Policy, every megawatt-hour of electricity generated by a zero emissions source would have its revenues non-taxed.
This would cut rates by billions of dollars a year – saving all utilities and their customers significant money.
In exchange for this status, the $20 billion in direct federal subsidies could be mostly eliminated (we do favor continued support for next-generation research and development).
The reduction in direct federal subsidies would also all the Department of Energy to save on the $2 billion a year they spend just to administer the subsidies.
Expanding the Concept
ConservAmerica is also looking closely at the potential to achieve even greater emissions reductions by providing incentives to the owners of coal and natural gas-fired power plants.
In both the 1969 and 1984 federal Tax Acts, accelerated depreciation was granted to selected emissions control technology investments.
We believe that treatment should be replicated in 2018 – by providing accelerated depreciation to owners of higher-emissions plants, the U.S. could incent those utilities to invest in next-generation emissions control technologies.
America has about 334 coal-fired power plants in operation; ten years ago there were 200 more, but they have shuttered.
Some argue for closing all American coal-fired plants – but ConservAmerica believes that would be a disastrously bad mistake for the world.
There are over 6,711 operating coal plants in the world.[v]
If America closed all its coal plants it wouldn’t move the needle on global emissions (though it would certainly have major local impacts on particulates, arsenic, and mercury emissions to name but a few).
However, America is also the world’s most powerful innovator.
If we want to reduce global emissions from coal, we need to incent research and development into coal-fired power plants and their emissions – which won’t happen without coal-fired power plants.
In fact, there is an ongoing competition called the Carbon XPrize which has $20 million in prize money for the innovators who can prove an ability convert CO2 from power plants into valuable products in an economic way.[vi]
By providing accelerated depreciation a’la the 1969 and 1984 Tax Acts, we can incent and further efforts like the Carbon XPrize – and increase the amount of investment in technologies that are “already on the shelf” and ready to be emplaced on existing plants.
Hydraulic fracturing (“fracking”) has led to a massive increase in American natural gas production and proven reserves.
It has stabilized and reduced the price of natural gas – so much so that it has been a key driver of the closure of America’s oldest and least-efficient coal-fired power plants.
While natural gas-fired electricity is much cleaner than coal; it still emits about 850 pounds of pollution per megawatt-hour.
ConservAmerica supports accelerated depreciation for selected emissions technologies.
Hydropower is the largest source of U.S. renewable energy, providing 44% of all U.S. renewable energy.[vii]
75% of American hydropower is owned by governments and Cooperatives (non-taxed entities) the remaining 25% is owned by taxed entities.
Eliminating taxes on hydropower would fuel the expansion of a great technology “small hydro”. These are small water-driven turbines that can be placed in rivers, canals, and downstream from dams to generate electricity at staggeringly low variable costs.
The U.S. Department of Energy calls geothermal power a “vital, clean energy resource [that] supplies renewable power around the clock and emits little or no greenhouse gases – all while requiring a small environmental footprint to develop.
Yet geothermal receives 9.9% of what solar receives; and produces two-thirds the power of solar.[viii]
Zero Regrets will spur geothermal investment in the U.S.
In 2015, investor-owned electric utilities earned $352 billion in revenue. After operating expenses of $281 billion, they had $71 billion in operating income. After interest expenses, asset write-downs and other expenses; they had $47 billion in net income before taxes – a 13.3% marginal profit.[ix]
In 2016, investor-owned electric utilities earned $351 billion in revenue. After operating expenses of $278 billion, they had $73 billion in operating income. After interest expenses, asset write-downs and other expenses; they had $37 billion in net income before taxes – a 10.5% marginal profit.[x]
In 2016, the U.S got 34.9% of its electric power from zero-emissions sources of power (nuclear, wind, hydro, solar, geothermal by order of production).
If we simply look at top-line data; in 2016 investor-owned electric utilities had $37 billion in taxable income, and 34.9% of its power came from zero-emissions sources. As a quick “back of the envelope” calculation, $12.9 billion in income would have been tax-exempted under Zero Regrets ($37 billion X 34.9%). At a 35% federal corporate income tax rate, the tax exemption would have been $4.51 billion).
[ii] “Bridging The Solar Income Gap”, GW Solar Institute, January 2015
[iii] Herald-Whig newspaper, Quincy Illinois, “U.S. government subsidies are swelling growth of solar sector”, June 12, 2017
[iv] “Comparative Generation Costs of Utility Scale and Residential-Scale PV in Xcel Energy Colorado’s Servie Area”, July 2015, Tsuchida, et.al.
[vii] “Electric Markets and Reliability” U.S. Department of Energy, August 2017