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EIA: Federal Subsidies Do Little to Raise U.S. Energy Output

Despite a doubling of federal energy-related subsidies and other financial support between 1999 and 2007 and a significant increase in most energy prices over that period, the level of domestic energy production has remained virtually unchanged during the eight years, the Energy Information Administration (EIA) said in a new report issued last Wednesday.

"Basic economic principles suggest that higher real energy prices together with the significant incentives provided to various production segments of the energy sector would tend to raise domestic energy production. [However] a variety of factors unrelated to prices or subsidy programs, such as state and federal statutory limitations imposed on onshore and offshore oil and natural gas exploration in environmentally sensitive areas, uncertainty regarding future environmental policies possibly restricting future emissions of greenhouse gases and declines in future production from previously developed domestic oil and natural gas resources, may have impeded growth in energy production despite modest growth in consumption," the EIA said in its report, which was requested by Sen. Lamar Alexander (R-TN).

Total federal energy-specific subsidies and support to all forms of energy were estimated at $16.6 billion in fiscal year (FY) 2007, more than double the $8.2 billion that was paid out in FY 1999, the agency noted. The subsidies included direct expenditures, tax breaks, research and development (R&D) spending and support for federal electricity programs.

Renewable fuels received the most subsidies ($4.9 billion) in FY 2007, and was followed by refined coal ($2.4 billion) and natural gas and petroleum liquids with $2.15 billion. Renewables share of federal subsidies increased almost four-fold from FY 1999 to FY 2007, while natural gas and petroleum liquids' share fell to about one-eighth of the total $16.6 billion in subsidies in 2007 from about one-fourth of total subsidies in FY 1999, the EIA said. The drop for natural gas and petroleum liquids was primarily due to the expiration of the alternative fuels production tax credit for the production of unconventional natural gas in 1999.

Subsidies and support for electricity production were estimated at $6.7 billion. "A significant portion of electricity subsidies and support ($1.2 billion, or 18% of total electricity subsidies and support) is directed to electric plant or infrastructure, such as transmission. Another $407 million consists of capital cost support associated with electric generation assets of federal utilities and [the Department of Agriculture's Rural Utilities Service] loans," the EIA noted.

"The remaining $5.1 billion of electricity subsidies are either directed at specific types of electricity production, based on fuel type or investment, or expenses associated with upstream production and transportation of fuels used in electricity production."

Refined coal (synfuels) received the highest level of electricity production subsidies and support ($2.2 billion) in FY 2007, while nuclear and renewables received between $1 billion and $1.3 billion in subsidies to generate electricity. Natural gas and petroleum liquids received the lowest level of support ($227 million).

"Coal-based synfuels (refined coal) that are eligible for the alternative fuels tax credit, solar power and wind power receive, by far, the highest subsidies per unit of generation, ranging from more than $23 to nearly $30/MWh of generation," the EIA said. "Subsidies and support for these generation sources are substantial in relationship to the price or cost of electricity at the wholesale or end-user level. The average U.S. electricity price was about $53/MWh at the wholesale level in 2006 and about $92/MWh to end-users in all sectors in FY 2007."

Excluding municipal solid waster, natural gas and petroleum liquids received the lowest subsidies per unit of generation in FY 2007 -- 25 cents/MWh.

An estimated 59% of energy-related subsidies are associated with end-use applications or with fuel consumed outside the electric power sector, according to the EIA. These subsidies totaled $9.8 billion in FY 2007. About one-third of these subsidies are used to promote alternative fuels, particularly ethanol and biodiesel, both of which are eligible to receive a blender's credit under the Volumetric Ethanol Excise Tax Credit. It estimated that ethanol/biofuels received a subsidy of $5.72 MMBtu in 2007.

And approximately $3.6 billion was spent by the federal government on energy efficiency, conservation and energy-related financial assistance to residential, commercial and industrial users.

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