COLUMN-Government cash will transform US energy sector: Kemp

Wed Jan 9, 2013 2:01pm GMT

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By John Kemp

LONDON Jan 9 (Reuters) - The Obama administration has presided over a record increase in federal spending on programmes designed to boost energy supply and reduce consumption.

Net outlays linked to energy supply programmes peaked at almost $13 billion in fiscal 2012. In addition, the federal government spent a record $9.4 billion on conservation measures last year.

As Energy Secretary Steven Chu prepares to step down, it is worth asking what impact this extra spending will have on the American energy system.

Whether all the money has been well-spent remains controversial. Critics point to the administration's support for now-bankrupt Solyndra to say at least some of it has been wasted on pet projects that will not benefit taxpayers.

But there can be no doubt that more than $20 billion per year buys a lot of research and innovation.

In the same way flush corporate cashflows have triggered a boom in oil exploration and production activity that has transformed the outlook for oil markets, the U.S. Department of Energy's spending spree will transform America's energy system in the decades ahead.

FOUNTAIN OF CASH

Charts 1-4 show budget authority (what the government was authorised to spend by law) and net outlays (actual spending) on energy supply and energy conservation according to records published by the powerful White House Office of Management and Budget (OMB).

Chartbook:

Figures have not been adjusted for inflation, so they should not be used for long-term comparisons. It is almost impossible to work out the real value of spending on energy programmes over long periods because inflation in the energy sector is very different from the overall change in consumer prices. In real terms, the federal government spent much more on energy supply programmes in the late 1970s and early 1980s following the oil supply disruptions in the Middle East.

But the time series do reveal short-term changes in spending patterns, particularly the surge in expenditure under Obama. Total spending by the U.S. Department of Energy has risen from 0.7 percent of total outlays in fiscal 2008 (the last full year of the Bush administration) to 1.0 percent in fiscal 2012.

Even that understates the extent of the increase. Managing the national nuclear weapons stockpile accounts for around half of the Department's total spending and has been broadly flat. If activities related to the stockpile are excluded, spending by the rest of the Department has risen much faster than government spending as a whole.

ENERGY-PRICE PANIC

The reasons for the spending surge are complicated:

(1) Spending is clearly linked to oil and energy prices more generally (such as electricity and gas). It shows marked cyclicality.

Concerns about supply security and the economic impact of high oil prices triggered a significant increase in spending during the Ford and Carter administrations following the oil shocks (1973-74, 1979-80), and again under the Obama administration following spikes in oil (2008), gas (2003, 2005, 2008) and electricity (2000, 2008) prices.

(2) Democratic administrations favour more spending on supply and conservation than Republican ones, consistent with their preference for higher spending and more government intervention generally.

(3) The Obama administration has supported ambitious attempts to transform the energy system to boost the share of renewables, raise vehicle efficiency and cut carbon emissions.

(4) Shovel-ready energy projects, as well as basic research, have been major recipients of funding under the American Recovery and Reinvestment Act (2009) and other stimulus programmes as the administration tries to twin its interest in transforming electricity supply and motor vehicles with job creation and supporting private sector investment.

The bottom line is that rising oil, gas and power prices push energy concerns up the political agenda and the federal government tends to respond by increasing expenditure, especially if it is headed by a Democratic president who believes the government has a significant role to play alongside the private sector.

TRANSFORMATION?

The crucial question is how much transformation will all this spending buy?

Opinions tend to be polarised on ideological lines. Free-market conservatives assume all government spending is wasteful bureaucracy. Pro-government progressives over-estimate the government's capacity to bring about lasting change. The reality is usually somewhere between.

Some spending is likely to be highly effective; other programmes will fail. The federal government is like a portfolio investor: some projects in its portfolio will achieve big returns while others will have to be written off.

Jaded cynics will dismiss all this spending as too little to make a difference. But past experience suggests support through tax breaks, subsidies or mandates has often had a big impact on the energy sector.

Government spending has often catalysed much bigger investments by private companies.

Production tax credits for wind and solar, the ethanol blending mandate, fuel economy standards and support for early-stage research into hydraulic fracturing are all examples where government interventions have had an enormous impact on the U.S. energy supply. There are numerous other examples across both the clean energy and fossil fuels sectors.

Big rises in energy prices and the associated increase in spending have accelerated the pace of innovation both within the private sector and via government-supported initiatives. The consequences have lasted long after the price spike itself has finished. The repeated energy crises of the 1970s and early 1980s, for example, produced a long-lasting reduction in oil consumption compared with the previous trend.

It is very likely that the surge in federal spending on energy programmes over the last four years will result in similar lasting changes. Even if some initiatives prove costly failures, others have the potential to make significant changes in oil and gas production, electricity generation and transmission, as well as the energy efficiency of vehicles, buildings and manufacturing processes.

Under the Obama administration, the Department of Energy has poured funding into a bewildering array of projects, ranging from carbon capture utilisation and storage (CCUS), power plant scrubbers and more efficient boilers for coal-fired power stations to the installation of millions of smart meters, the rollout of synchrophasors, upgrades to the transmission system, and thousands of megawatts of extra wind and solar capacity, as well as the speculative funding provided by the Advanced Research Projects Agency (ARPA-E).

The most pressing question is whether it can be sustained. Deficit-reduction efforts are likely to cut the funding available for energy-related projects in the years ahead. The Obama administration's own projections show spending on both energy supply and conservation activities falling by 80 percent between 2012 and 2017.

Even so, the high level of spending over the last four years is set to leave a lasting mark on the U.S. system for the remainder of the decade and beyond.

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