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The Tradition of Subsidies in US Energy Development and Infrastructure

Posted 14 March 2013 5:06 PM by Ken Zweibel

There is substantial historical precedent, even historical momentum, for subsidizing solar energy deployment. Not a single form of electricity generation – be it coal, oil, hydro, natural gas, or nuclear – failed to receive significant government support, especially during early deployment. These have taken the form of:

  • Subsidies for development of the initial technology
  • Subsidies for manufacturing or extraction support to reach first-time production
  • Subsidies or loans to achieve economies of scale, or in the case of nuclear and hydro, to pay for facilities that must be built on a large scale
  • Tax relief to bring down the cost of commercial generation and encourage a domestic industry

Why does the government invest in such subsidization? Because it develops or accelerates new electricity options, which improve the electricity sector. This improvement can be in the form of lower cost options, but it can also be for cleaner generation (substitutes for coal or nuclear), or for domestic jobs and domestic fuels (e.g., substitutes that allowed the elimination of oil as a fuel for electricity). These are societal needs, not directly met by competition in the marketplace. Government has its own priorities, and government has traditionally acted to have those priorities fulfilled.

Solar and wind subsidies are just the latest version of this tradition of meeting societal priorities. The societal reasons solar and wind attract support are well known – elimination of pollutants during generation, especially carbon dioxide; and fuel-free, domestic generation.

Energy Incentives: The Power behind the PowerThe GW Solar Institute has published a report, “Energy Incentives: The Power behind the Power,” drafted for us by Bryan Crabb, now executive director of the California Solar Energy Industries Association (CALSEIA). The report details the tradition of support by the federal government for development of domestic electricity – both the infrastructure of the grid and the generation technologies that power it.

The Tennessee Valley Authority Act (1933) expanded the tradition of federal subsidies to construct hydroelectric, coal, and eventually nuclear power to serve less affluent regions of the country. The infrastructure of the grid was spread to rural areas by subsidies as part of the Rural Electrification Act (REA) of 1936. This made subsidies and loan guarantees available for utilities to extend the grid to the least populous American regions. The Flood Control Act of 1944 established the Southwestern Power Administration (SPA) which expanded the government’s reach throughout the west and south, and began selling government-subsidized hydroelectric power to rural utilities in Missouri, Arkansas, Kansas, Louisiana, and Texas. By the 1950s, this resulted in near-total electrification across the country.

Individual power sources also received support.

  • Large-scale hydroelectric power was jump-started 110 years ago by the Reclamation Act of 1902, then further expanded, and institutionalized through the Federal Water Power Act and the New Deal projects of the 1930s and 1940s—such as major dams in the west.
  • Domestic coal and oil extraction was specifically promoted through the Revenue Acts of 1916 and 1918. These laws introduced “discovery value” into the tax code, along with favorable expense treatment for drilling costs. These incentives, which continue today, totaled some $172 billion from 1950 –2006.
  • The Mineral Leasing Act of 1920 eased regulatory hurdles for coal, oil, and gas extraction on federal lands, opening up vast tracts to supply power plants with critical fuel sources.
  • The Department of Defense invested millions of dollars per year in the development of jet engine turbines from the mid-1970s to the mid-1980s, and then handed the commercialized technology over to the independent power sector, which began using “aero-derivative” turbines in natural gas power production in the 1990s.
  • Natural gas became further commercialized through the Public Utility Regulatory Policy Act (PURPA), which required utilities to procure gas, and through governmental technology investments and the Federal Energy Regulatory Commission’s Order 888, which opened up the transmission grid to independent power producers.
  • Starting in the late 19th century, the federal government supported railway construction and river dredging to allow coal from the East to be transported across the country, driving down prices and making coal a viable option for power generation in the West. More than 10 federal coal subsidy programs continue today.
  • The nuclear power industry grew out of the development of nuclear weapons and has been highly subsidized since inception, despite original claims of being “too cheap to meter.” Congress also passed the Price Anderson Act to reduce the risk of nuclear plant investment by capping liability for private nuclear facilities (without which they could not be built) and established a subsidy program that by now has invested more than $66 billion in additional support. From 1943-1999, the nuclear power industry received over $145 billion from the federal government.

Government investments are summarized in Figure 1, which shows the historical average annual subsidies of oil and gas, nuclear, biofuels, and solar and wind (labeled “renewables” in the figure). Some might argue that solar and wind power generation are receiving larger subsidies per kWh of production. However, this is a narrow way of looking at subsidies: all forms of energy start with low levels of production, which is when they are in the most need of support. Thus this ratio is likely to be high during the developmental stage and then fall as deployment increases.

Subsidies Chart

Figure 1. Average annual US federal subsidies for different sources of energy. Renewables are almost exclusively solar and wind, as biofuels are reported separately.

Ken Zweibel is the director of the GW Solar Institute and former head of the National Renewable Energy Laboratory's Thin Film PV Partnership Program. Zweibel has almost 30 years of experience in solar photovoltaics and was a co-founder PrimeStar Solar. He has written two books on PV and co-authored a Scientific American article (January 2008) on solar energy as a solution to climate change and energy problems.