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Lame-duck bailouts for ethanol and wind?

Ethanol is the Frankenfuel of the energy business, a subsidy-devouring monster that cannot be killed, no matter how great the political opposition. Farm-state senators have apparently succeeded in adding an extension of the ethanol tax credit, which is scheduled to expire at the end of the year, to the tax bill now working its way through Congress.

While that news is disheartening enough, the wind-energy business – the electricity sector’s equivalent of the ethanol scam – may also be winning in its effort to garner more federal subsidies. It is pushing lame-duck legislators to extend a part of the stimulus package known as the Section 1603 tax credit, which gives cash directly to wind-project developers. But what the wind boosters really need to keep their struggling business afloat is a mandate requiring the production of renewable electricity – at least 15 percent by 2020. And some Democratic senators are pushing a bill that would do just that.

Any legislation that provides more subsidies for ethanol or wind energy in the final days of the 111th Congress will be a major loss for taxpayers, as billions of additional dollars will be lavished on sectors that cannot survive in the free market.

Both industries have a long history of subsidies. The ethanol sector began suckling at the public teat in 1978 and has never been weaned. Instead, the industry has convinced Congress to provide ever-increasing volumes of taxpayer cash on the promise that their corn-distilled elixir will drastically reduce America’s need for foreign oil.

That hasn’t happened, and it won’t. Nevertheless, in 2004, Congress enacted the 45 cent per gallon Volumetric Ethanol Excise Tax Credit, the subsidy to ethanol blenders it now seeks to extend. And in 2007, legislators decreed that U.S. motor-fuel retailers must be blending at least 15 billion gallons of ethanol per year into the nation’s gasoline supply by 2015.

The industry responded to the mandate by doubling its production capacity between 2007 and 2010. But it built too much capacity, too soon, which pushed a bushel of ethanol producers into bankruptcy. Their problem now, as one ethanol lobbyist put it, is that “we have lots of gallons of ethanol chasing too few gallons of gasoline.” In October, the EPA gave the industry a bailout of sorts, approving an increase in the amount of ethanol – a hydrophilic, corrosive, low-heat-content fuel – that can be blended into the U.S. gasoline supply from 10 percent to 15 percent.

But the ethanol producers, as usual, can’t get enough of your money, and they are working hard to assure that the fat subsidies (which now total about $7 billion per year) keep flowing. Last month, their main lobby groups – the Renewable Fuels Association, Growth Energy, and the American Coalition for Ethanol – sent a letter to congressional leaders telling them that ethanol has been “uniquely successful in reducing our dependence on foreign, imported oil.” They urged Congress to pass legislation extending the tax credit before the end of the year.

And they are likely to get that extension, despite the fact that on November 30, a bipartisan group of senators – nine Democrats and eight Republicans – declared their opposition to the continuation of the subsidies, saying they were “fiscally indefensible and environmentally unwise.” Those points are certainly true. But if you need another fact to shift your gasohol-induced anger into apoplexy, consider this: Ethanol has done nothing to cut oil imports. Between 1999 and 2009, U.S. ethanol production increased sevenfold, to more than 700,000 barrels per day. And yet, over that same time span, U.S. oil imports increased by more than 800,000 barrels per day.

While oil imports are increasing and the ethanol industry is producing too much ethanol, the wind-energy sector is being garroted by that dastardly opponent of renewable energy: competitive markets. In late October, the American Wind Energy Association announced that through the first three quarters, just 1,600 megawatts of new wind capacity was installed in the U.S., “down 72 percent versus 2009, and the lowest level since 2006.”

In a press release, the lobby group said the solution for its woes were – wait for it – more subsidies and mandates. The group’s CEO, Denise Bode, said that “the best way to galvanize the industry now will be continued tax credits and a federal benchmark of 15 percent renewables in the national electricity mix by 2020.” Bode continued, saying that those subsidies and a 15 percent renewable mandate “will send a clear signal to investors that the U.S. is open for business.”

But the market is saying that it doesn’t want the wind industry’s product. The reason: Even with the current subsidies for wind projects, natural-gas-fired generation remains a cheaper, more reliable option. That’s remarkable, given that the effective subsidy for wind-generated electricity, the $0.022 per kilowatt-hour production tax credit, amounts to $6.44 per million BTUs. By comparison, natural gas now sells on the spot market at Henry Hub, a major trading location, for less than $5 per million BTUs.

Two years ago, shortly after launching a multi-million-dollar media extravaganza aimed at promoting his “Pickens Plan,” Dallas-based billionaire T. Boone Pickens said that natural gas must cost at least $9 for wind energy to be competitive in the marketplace. (The Pickens Plan would involve subsidizing wind power and encouraging the use of natural gas – of which Pickens owns much – to fuel heavy trucks instead.) In March of this year, Pickens was still hawking wind energy, but he’d lowered his price threshold, declaring, “The place where it works best is with natural gas at $7.”

Perhaps, but Pickens and his subsidy-seeking pals have a big problem: Cheap natural gas may persist for years to come. Last month, the International Energy Agency’s chief economist, Fatih Birol, said that the world is oversupplied and he predicted that “the gas glut will be with us ten more years.” The abundance of natural gas, which is largely due to the gas industry’s newfound prowess at unlocking galaxies of methane from shale beds, has some wind-industry insiders predicting that new U.S. wind-generation installations will fall again, by as much as 50 percent, in 2011.

Unable to compete in the free market, the wind industry’s only near-term hope is an ethanol-style mandate. And if given that mandate, perpetual ethanol-style subsidies will surely ensue. Congress, please, just say no.

– Robert Bryce is a senior fellow at the Manhattan Institute. His latest book is Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future.

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