By John Kemp
LONDON Jan 9 The Obama administration has
presided over a record increase in federal spending on
programmes designed to boost energy supply and reduce
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
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
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.
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
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
(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.
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.