The Real Costs Of Alternative Energy

Published in Investing on 6 January 2012

Are we getting our subsidy money's worth?

A version of this article originally appeared on our US site, Fool.com.

A clear-headed look at the true costs of energy is something many -- including our political leaders -- sorely need. Understanding our energy options, their present capabilities and their future potential is vital to help decide what deserves our support and what should be left in a heap of false hype. Subsidies are just one of the costs of supporting alternative energy, but are they worth it?

The subsidy myth

There are plenty of people on both sides of the renewable subsidy debate. Maybe the free market should determine the winners with no intervention. Maybe subsidies are essential to support the clean energy humanity needs to survive over the long term. Both sides have charts and statistics to damn the other side, but many cherry-pick data to make a compelling case that's slightly less than honest. With that in mind, I went to the source to find specific subsidy information for 2010:

Power sourceTotal US subsidy 
(millions)
Coal$1,358
Oil and gas$2,820
Nuclear$2,499
Biomass / biofuels$7,761
Geothermal$273
Hydro$216
Solar$1,134
Wind$4,986

Source: U.S. Energy Information Administration.

The problem with looking solely at subsidy numbers is that it easily ignores the many other stories our energy use can tell. The cost of America's energy addiction (in direct government subsidies) was scarcely half a percent of the total federal budget last year. Still, some forms of energy gave the economy a lot more bang for the buck, as the following chart shows:

Power source2010 US power consumption 
(million bbl. oil equivalent)
Subsidy cost per energy equivalent barrel of oil consumed
Coal3,439$0.39
Oil and gas10,012$0.28
Nuclear1,394$1.79
Biomass / biofuels381$20.37
Geothermal35$7.80
Hydro414$0.52
Solar18$63.00
Wind153$32.59

Source: U.S. Energy Information Administration.

The hydrocarbon giveaway

Oil companies hardly need the handouts. In Power Hungry, Robert Bryce reports that: "In the United States, there are about 5,000 independent oil and gas companies ... in 2007 alone, those companies spent $226 billion drilling and equipping some 54,300 wells." BP (NYSE: BP.US), despite the Gulf catastrophe, reported $10 billion in positive cash flow last year. Its liability losses are likely to stretch on for a long time; ExxonMobil (NYSE: XOM.US) managed to drag the Valdez litigation out for almost two decades, during which it suffered not a single remotely unprofitable year.

American coal-fired generation is on the decline, to the glee of environmentalists and many politicians, but remains quite profitable. Peabody Energy (NYSE: BTU.US), one of the country's largest coal miners, has a better profit margin than ExxonMobil, though with far lower revenues. Fellow Fool Aimee Duffy notes that American Electric Power will soon reduce its coal use by 17 million tons, but that's barely more than a tenth of Peabody's annual production from one rich Wyoming seam. Why offer any subsidy at all?

A renewable boondoggle?

On the other hand, renewable energy's costs to the government are in some cases so high, and the actual energy returns so low, that it hardly seems worth the investment. Solar's pitiful slice of American power use -- less than a single day's worth of oil consumption -- is underwritten by enough taxpayer money to simply buy most of the power outright and provide it to taxpayers for free.

Wind power, on top of its costly handout, requires another layer of expense: conventional power generation in a supporting role. Cambridge Energy Research Associates concluded that wind power "is more expensive than conventional power generation, in part because wind's intermittent production patterns need to be augmented with dispatchable generators to match power demand".

Wind and solar might currently be more costly to the consumer than hydrocarbon-sourced power, but their increasing competitiveness makes biofuels look like a wasteful boondoggle. The US Navy recently signed a fuel contract with Dynamic Fuels, a joint venture of Tyson and Syntroleum (NASDAQ: SYNM.US), which subcontracted a large amount of the production out to Solazyme (NASDAQ: SZYM.US).

The contract was worth $12 million for 450,000 gallons worth of biofuel. Basic maths tells you how lousy the Navy is at basic maths: every gallon will cost it $26.67, or $1,120 per barrel's worth. Even if costs are ever reduced to reasonable levels, which is doubtful, biofuel production demands vast swaths of arable land to produce any meaningful quantities.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

UrbanDreamer 06 Jan 2012 , 9:05am

I am not sure that it's possible to apply any information from this article to Europe or the UK.
It certainly would NOT work applied to Japan, which of course is short on resources like coal or oil.

Hannibalis 06 Jan 2012 , 6:28pm

The one thing we can take from this is that trying to spread the use of renewables is like pushing string. There is no way many of the technologies will be cost competitive with dirty old coal. And its not just the US and China. So what to do? Keep your head down and buy Shell or BP.
http://www.the-diy-income-investor.com/2011/09/are-you-investor-or-speculator.html

paintitblack 06 Jan 2012 , 6:56pm

What the article ignores is that fossil fuels and nuclear technologies, while renewables are developing. What are the total lifetime subsidies given to the mature technologies? Why do they still need subsidies?

Another point is that if the subsidies for renewables were for their construction, then of course you get meagre returns looking at the output in the year of subsidy because the cost will be amortised over their lifetime output. They may not even have been constructed in the year that the subsidy was given.

And what about the indirect subsidies given to coal and oil? The externalities such as pollution, environmental degradation and health consequences?

Even if costs are ever reduced to reasonable levels, which is doubtful, biofuel production demands vast swaths of arable land to produce any meaningful quantities. You're thinking of first generation bio fuels based general on food crops. Second generation bio fuels use agricultural waste, non food crops and food processing waste such as skins and pulp from juice extraction.

Wind power, on top of its costly handout, requires another layer of expense: conventional power generation in a supporting role. Cambridge Energy Research Associates concluded that wind power "is more expensive than conventional power generation, in part because wind's intermittent production patterns need to be augmented with dispatchable generators to match power demand". Well only if you've got a third world standard grid. In Europe we find that renewables don't disrupt our grids and they actually reduce electricity prices. As renewables go on line, they allow the most expensive plant to go off line. Generally this is the least efficient and most polluting conventional plant.

paintitblack 06 Jan 2012 , 7:00pm

Oops that should read: What the article ignores is that fossil fuels and nuclear are mature technologies , while renewables are developing.

UncleEbenezer 07 Jan 2012 , 6:47am

How about the real cost of fossil fuels? Those who account for them on the basis of immediate costs are cheerleading our generation's ultimate selfishness.

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