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| Fig. 1: Renewable Electric and Biofuel Total US Federal Expenditures, FY 2016-22. [3] (Courtesy of the EIA) |
As electricity demand in the US grows driven largely by electrification, including the shift to electric vehicles, heating and cooling systems, and household appliances, conventional fossil fuel-based generation technologies are expected to be replaced by renewables. This transition is supported by strong federal and state subsidies, and driven by the low cost of renewables like wind and solar. [1] US Federal energy subsidies that support conventional generation technologies have declined immensely, falling from over 65% of total energy incentives from 1950-2016 to under 14% from 2016-2022. [2,3] Levelized Cost of Energy analyses, which compare the cost-competitiveness of various generation technologies, often exclude federal subsidies for conventional power systems, likely due to the decreasing scale of subsidies for these established systems. [4] Further, vast monetary support for fossil fuels, and in turn conventional power systems, comes from global private investment and financing, including the worlds 60 largest banks who financed $5.5 trillion from 2016-2022. [5] In general, private support for conventional energy systems surpasses renewable energy subsidies, which continues to sustain fossil fuel reliance and exacerbate climate change.
Conventional generation technologies have received $666 billion (2015 dollars) (approximately $822.3 billion in 2022 dollars) in federal US energy incentives from 1950-2016, representing over 65% of total US energy incentives during this time period. [2] In stark contrast, from 2016-2022, only $24.5 billion (2022 dollars) supported conventional power systems via federal US energy-specific subsidies, represents just under 14% of the total during this time span. [3] Renewables on the other hand received $83.8 billion (2022 dollars) or 46% of total subsidies from 2016-2022. Of this renewable federal investment, an average of almost 68% supported renewable electric power systems like wind, water, and solar, with over 32% supporting biofuels (shown in Fig. 1). This means that the renewable power systems which the public most commonly associates with "renewable energy" received just over double (2.3x) the subsidies of fossil fuel-based systems.
The federal energy subsidies detailed above do not account for the undercharged costs of externalities, such as environmental damage and public health impacts, which are implicit subsidies inherent to fossil fuel-based energy generation. [6] State energy incentives also play a significant role in the US energy domain, yet are not included in the above values given they differ substantially between states. With the limitations of this high-level view and the complexity of US fossil fuel funding in mind, federal energy subsidies are generally shifting away from supporting mature and profitable fossil fuel industries and toward cost-competitive renewable generation technologies that support achieving global warming reduction targets. However, the total amount of aid allotted to fossil fuel industries from the US government is in no way negligible. [7]
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| Fig. 2: Levelized Cost of Energy Comparison - Sensitivity to U.S. Federal Tax Subsidies. [4] The Investment Tax Credit ("ITC"), Production Tax Credit ("PTC") and domestic content adder, among other provisions in the IRA, are important components of the levelized cost of renewable energy generation technologies. (Courtesy of Lazard) |
The Levelized Cost of Energy (LCOE) represents the total cost of activities associated with the building and lifetime operation of an energy generation system per the electricity it generates. LCOE thus quantifies how expensive (in dollars) each unit of electricity (usually in MWh) is for a given generation technology. More specifically, LCOE represents the average revenue per unit of electricity generated that would be required to recover the costs of building and operating a generation plant during an assumed cost recovery period. [8] LCOE is calculated by dividing the total annualized costs of a system, including those related to upfront capital (siting, licensing, and construction), operation, maintenance, and fuel (if applicable), by the annualized electricity it produces. LCOE does not include costs related to externalities like air pollution and environmental degradation, and is a metric used to compare cost-competitiveness between energy generation technologies.
Federal tax subsidies are often presented in LCOE figures for contemporary energy technologies only (shown in Fig. 2). The omission of subsidies for longstanding energy systems, most of which are conventional and thus fossil fuel-based, is likely due to the relatively small scale and number of subsidies they now receive, as discussed in the previous section. Limited subsidies are provided to these mature systems given they are already well-established, highly profitable, and thus no longer reliant on substantial governmental support to operate. In contrast, modern energy technologies, which most often do not rely on fossil fuels, frequently receive subsidies to support their development and reduce costs, making them far more dependent on federal incentives which are thus prominently highlighted in LCOE figures. Ambitious carbon reduction goals in response to the climate crisis are also key drivers behind renewable energy subsidies surpassing those for conventional energy. Lastly, the financial mechanisms supporting established fossil fuel technologies are highly complex, transcending subsidies, and are heavily influenced by private investment and financing.
Private entities play a critical role in supporting conventional generation systems via fossil fuel funding. For instance, from 2016-2022 the worlds 60 largest banks provided $5.5 trillion (2022 dollars) in global financing, growing to $6.8 trillion (2023 dollars) (approximately $6.5 trillion in 2022 dollars) if you include 2023. [5,9] Further, the worlds 21 largest private equity firms had 67% of their energy portfolios in fossil fuels as of July 2024, and are responsible for at least a combined 1.17 Gigatons of annual emissions. [10] Funding overlap between major banks and private equity firms is highly possible given their frequent collaboration on financing fossil fuel projects through debt and equity markets, shared investments, and institutional relationships. Although this report focuses within the US, global funding figures provide the most relevant perspective for understanding private sector investment given its vast international reach, and the overall lack of country-specific data that is available.
Renewable energy generation systems are rising to the unprecedented climate occasion, supported by robust federal and state incentives which further facilitate unmatched cost-competitiveness. Subsidies for conventional generation technologies, that have historically dominated federal energy support, have drastically declined, being replaced by renewable energy allocations aimed at scaling technologies and achieving climate goals. LCOE analyses are vital for comparing energy systems and often contain federal subsidies for renewable energy systems. However, LCOE figures regularly overlook explicit and implicit subsidies allotted to conventional power systems and fail to consider the monetary implications of immense private financial backing for fossil fuels. Private financing and investment, including hundreds of billions of dollars annually from global banks and private equity firms, continues to uphold fossil fuel and conventional energy industries. Ultimately, while renewable energy subsidies have surged over the past two decades, the share allocated to electric power systems is overshadowed by the combination of private financing, intricate investment mechanisms, and government subsidies that continue to sustain fossil fuel dependency, hindering a just energy transition and further exacerbating the climate crisis.
© Bryan A. Kendall. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.
[1] "Annual Energy Outlook 2023," U.S. Energy Information Administration, March 2023.
[2] "Two Thirds of a Century and $1 Trillion + U.S. Energy Incentives: Analysis of Federal Expenditures for Energy Development, 1950-2016," Management Information Services, May 2017.
[3] "Federal Financial Interventions and Subsidies in Energy in Fiscal Years 2016-2022," U.S. Energy Information Administration, August 2023.
[4] "Levelized Cost of Energy," Lazard, April 2023. [Courtesy of Lazard.]
[5] "Fossil Fuel Finance Report 2023," Banking Climate Chaos, 2023.
[6] M. J. Kotchen, "The Producer Benefits of Implicit Fossil Fuel Subsidies in the United States," Proc. Natl. Acad. Sci. (USA) 118, e2011969118, 2021.
[7] "Fossil Fuel Subsidies: A Closer Look at Tax Breaks and Societal Costs," Environmental and Energy Study Institute, July 2019.
[8] "Levelized Costs of New Generation Resources in the Annual Energy Outlook," U.S. Energy Information Administration, April 2023.
[9] "Fossil Fuel Finance Report 2024," Banking on Climate Chaos, 2024.
[10] "Scorecard 2024," Private Equity Climate Risks, 2024.