China

I'll say right up front that I am not an unbiased observer of this particular effort by OECD to tabulate support measures to fossil fuels.  I've collaborated with Ron Steenblik, one of the project supervisors, for decades at this point; and with project manager Jehan Sauvage since his early days of deciding to enter the bizzarre-but-fascinating world of energy subsidies.  I also contributed directly to the 2013 version of the Inventory. (Access the report and associated data via this link).

Since I started working on subsidy issues more than 25 years ago, a key goal was always to take this whole area of perniciously invisible support -- distortions that were surreptitiously undermining our economies and our environment -- and to force it into the fore where it would become an unavoidable part of policy discussions and make the subsidies much harder to defend.  I clearly think what OECD is doing here is very important.

But it is because of this long involvement that I can see the many ways in which the current work moves the ball on subsidy transparency and reform. Here are some of them:

• Capturing the policy-level details for more supports; filling in pieces missing from price gap.  Measuring the gap between market prices and domestic prices for fossil fuels (the "price gap" approach used in subsidy estimates by IEA and the World Bank) is by no means easy, and in many countries is still the only way to assess government support.  But the metric does not capture everything.  Further, the reform of subsidies is, at its root, a political rather than an economic battle.  The politics lie not with national aggregate figures but with individual tax rules and grant programs.  It is these policy details that set the fault lines that drive or block reform.  Although tracking these supports is time consuming and often quite challenging, if you want to see the points of distortion, prioritize the worst ones, and have a focal point around which others can organize politically for reform, you need the line-item detail. 
• Expanding the countries evaluated beyond the OECD member states.  The challenges OECD faced in getting the first fossil fuel subsidy inventory off the ground were very big.  I am gratified to see this newest update cement the OECD data collection effort as an important and integral part of the move towards transparency in fossil fuel subsidy reporting around the world.  Of particular note is that this edition expanded beyond OECD member countries, with the important addtion of Brazil, Russia, India, and China. 
• Inclusion of both national and sub-national supports.  It is increasingly recognized that the market distortions and environmental damage from particular fossil fuel activities may not be visible by looking at any particular support in isolation.  Rather, the combination of support policies flowing to a single economic actor or activity (often referred to as "subsidy stacking") needs to be evaluated as a group.  In addition to a growing range of supports captured, the OECD Inventory continues to be one of the few resources to include state and provincial subsidies rather than just national policies.   
• Free access to detailed subsidy data, under the oversight of OECD.Stat.  The 2015 Inventory brings with it a big expansion in data access.  The information is now housed at the OECD Statistics group, and will benefit from their strong reputation and ability to manage the information over time.  The data sets include granular policy-level estimates, and OECD's decision to make the information available at no charge on the internet will greatly leverage the ability of other researchers to build on OECD's work. 
• Build-out of time series.  Each iteration of the Inventory brings in additional years of coverage, providing a much clearer picture of policy change over time.  Rather than publish just the most recent data, OECD is presenting the full historical time series.  

Two years from now, in 2017, the next update will arrive.  As with the 2015 Inventory, my hope is that the next one will also include a number of important innovations.  The area I would particularly like to see is an expansion of the types of support systematically reviewed and captured.  Right now, the Inventory primarily captures tax expenditures and direct government support.  For the next update, my hope is that government subsidies via credit markets, indemnification, and preferential market rules (e.g., dispatch order that puts coal plants first) would also be captured; and that the coverage of all policy types at the sub-national level continues to expand.

In one of their recent blog posts, the Nuclear Information Resource Service (NIRS) called attention to the apparently amazing efficiency of Chinese new build nuclear reactors.  Two new units are being built at a stated cost of roughly $2.5 billion each, significantly less expensive than what it would cost for similar projects in other countries (access the NIRS posting here).  Plant Vogtle in the US State of Georgia, for example, will cost well more than $8 billion for each of two planned new reactors.  Olkiluoto-3 in Finland is now estimated to cost nearly $12 billion (8.5 billion euros).

The Western and Chinese cost figures are literally worlds apart.  Yet the core question with most heavy industry in China is what drives this difference.  What proportion of the cost differential is due to real competitive advantages, and what proportion is the result of simple, old fashioned industrial subsdization policies?

The US nuclear industry likes to point to Asian costs as the "real" economics of nuclear builds.  They frequently blame nuclear opponents for their economic troubles, arguing that irrational opposition drives up costs by elevating safety standards and plant delays unnecessarily.  If only they could just get on with their work, the argument goes, new reactors would be very inexpensive even in the United States.

Such arguments are actually unhelpful, even to the industry itself.  They deflect attention from real structural problems in the way they operate and manage risk, and the sooner they fix those problems, the sooner they have a chance of a competitive market offering without the coddling hand of government. 

The reality is that nuclear has a number of characteristics that make it difficult to build cheaply, regardless of where the plants are built.  The facilities are capital intensive and complex, a combination that often triggers significant construction delays and overruns well beyond the nuclear sector.  Think of big tunnel, highway, and building projects. Financing costs are high not only because the project is big, but also because investors worry a great deal about overruns, and therefore require more compensation for risk.  Interest compounds mightily because large investments take years to begin producing revenues even in the best of times.  This makes the levelized costs of power sensitive to financing costs and delays, as interest on a large investment base continues to compound during delays.   It also means that taxpayers and investors alike are right to favor smaller, quicker-to-build sources of energy or energy efficiency to very large nuclear plants.

Subsidies in the west: cheap money, shifting risks to ratepayers and taxpayers

In Western countries, the industry has focused on trying to get subsidized debt, both through using tax-exempt bonds and through government guarantees on borrowing.  The government loan guarantees subsidize nuclear projects in two ways:  by allowing higher risk projects to borrow at a lower interest rate (the "risk-free" Treasury rate rather than a rate reflective of the project itself); and by enabling them to use much more debt (which is less expensive than equity) than would be possible in a market transaction.  Purchase guarantees have also been popular in the UK.

The states currently developing new reactors have also employed favorable Construction Work in Progess surcharges that "avoid" interest charges altogether by forcing ratepayers to fund the interest costs upfront.  This works, at least for the utilities.  They even get to keep the money if the plant is never completed.  It's not such a great deal for ratepayers though, as can be seen in a $1.5 billion bill faced by customers in the cancellation of Duke Power's planned Levy reactors in Florida.

Chinese approach:  direct government ownership, very little transparency

Tapping into cheap sources of capital and CWIP has been effective in the US projects that continue to move forward.  But nuclear projects do still face market risk and scrutiny from bond underwriters.  Government subsidy programs are at least moderately visible, and subject to public challenge.  These factors help explain why the vast majority of US nuclear projects announced 7-10 years ago have been cancelled. 

In China, the state is directly involved with key parts of the supply chain and the scale of their interventions is murky at best.  While the World Nuclear Association is often a mere cheerleading squad for the expansion of nuclear power, they do have a good summary of the structure of the Chinese industry.  Many, many of the entities have substantial government involvement, sometimes with ownership shares by both national and provincial interests.  It is likely that somewhere in China, somebody knows how much money has been fronted by the government to each part of their nuclear infrastructure.  One should not expect that analysis ever to see the light of day, however.

Suffice it to say that if the Chinese government views nuclear power as a strategic industry (as it does), the costs they report on any part of the nuclear market need to be taken with a grain of salt.  How much capital is the government putting into not only the reactor projects directly, but into key components in the nuclear fuel chain and related infrastructure?  Are those funds entirely free or at terms more favorable than would be offered in an arms-length transaction?  When there are plant delays or changes in market conditions affecting the value of future power sales, are plant returns and costs adjusted appropriately, or are these costs merely socialized? 

Costs are kept low through other subsidy mechanisms as well:  state funded R&D; less expensive labor, part of which is likely due to fewer options for workers to unionize or organize; and woefully inadequate requirements for accident liability (roughly $45 million --see page 809) -- the losses from Fukushima are $500 billion and counting.  Additional support likely comes through how Chinese nuclear waste is managed and government involvement with uranium mining and enrichment.  Whether Chinese nuclear is really less expensive than reactors in the West, or simply more heavily subsidized, remains an open question.

This challenge is not unique to nuclear investment:  it is very difficult to get data on how China subsidizes any of its energy industries.  This was a clear conclusion of our review of data sources on Chinese fossil fuel subsidies a few years ago.  The trade cases on solar probably identify many of the instruments the government is also using in the nuclear sector to subsidize its investments, though doing a detailed exposition to the nuclear sector would be a fair bit of work.  One interesting aspect that I'd expect to emerge from such a comparison is that the same exact subsidy instrument would turn out to be more valuable to nuclear new build than when it is applied to renewable energy.  This is because the market risks of nuclear are higher (so the difference between subsidized and market interest rates would be bigger on a nuclear project) and the scale of construction is larger as well (so any subsidy will apply to a larger base of money, and often remain in place over a longer period of time).

Giving up on "zombie" solar manufacturing plants in China might not be the best solution in terms of dealing with climate change and energy poverty.  A Bloomberg review of overcapacity in the Chinese solar sector (Feifei Shen, "Chinese Zombies Emerging After Years of Solar Subsidies") contained some fairly staggering numbers.  Foremost was that if the existing solar plants in China operated at full capacity, they would produce 49 gigawatts of panels per year.  In contrast, and according to data assembled by the World Nuclear Association, new nuclear power grid connections over the past fifteen years was only 42 gigawatts. 

Okay, okay:  don't start sending the protest e-mails just yet.  The two capacity figures are not totally comparable.  Nuclear is dispatchable, and has a capacity factor of around 85-90% depending on its location (and once the plant finally comes online, which is often years later than planned).  Solar is intermittent and its capacity factor, according to the US Energy Information Administration, is a much lower 25%. 

But even if we adjust the installation numbers by capacity factors, Chinese PV production capacity in terms of expected associated power generation remains an impressive 12.3 GW per year, about equal to nuclear capacity grid additions (at a 90% capacity factor) worldwide since 2007 (see table to the right). 

Uses of Zombies

Bloomberg focuses mostly on the overly-generous credit subsidies and other support extended by the Chinese government to overbuild this solar capacity; and how much of it is likely to be shuttered.  But China subsidizes all forms of energy (see Earth Track's review of data on Chinese subsidies to fossil fuels prepared for the Global Subsidies Initiative, for example). 

Further, zombie assets periodically exist in many sectors of the economy when capital expansion overshoots:  chemicals, real estate, primary metals and paper to name a few.  When the zombies arise, there are some common patterns that often accompany them:  returns to investors drop sharply for awhile, and past investments into capital may never (or not for many years) be recovered as prices across the industry fall to variable costs.  But despite the pain, more often than not the excess built capacity eventually wiggles its way into supply chains.

Trying to keep Chinese PV production operating over the long-term could well be a good thing -- though a reduction in the number of firms to have fewer producers each controlling larger production capacity is probably inevitable.  Specifically, elevated installations of PV capacity can help address some fairly intractable global problems.  Reducing greenhouse gas emissions in the face of a surge in fracking and a (politically- rather than economically-based) race to drill the Arctic is one important issue, particularly given that there is no indication governments will price fossil fuel externalities into energy markets any time soon.  Pricing in carbon, for example, would give a boost to the economics of all low- and no-carbon energy resources.

Improving access to high quality power for the world's poor is another.  In its 2012 World Energy Outlook[fn]Page 535.[/fn], the International Energy Agency estimated that 1.3 billion people worldwide had no access to electricity, of whom 85% were located in rural areas.  Rural locations generally have much higher costs of power transmission and distribution per kWh delivered.  This makes grid extensions expensive on a per-customer served basis, though makes off-grid renewables such as PV more attractive.  In addition, IEA's data indicated that the group without access to electricity includes two-thirds or more of the population in developing Africa.

The positive news?  China is Africa's largest trading partner.  And Africa has very favorable conditions for PV power generation (see graphic below from this report):

Modifying "roads for resources" 

For the past decade or more, China has been among the largest investors in Africa, building vast swathes of infrastructure.  Chinese firms have also been a major buyer of Africa's metals, minerals, and fuels, part of a trade strategy to secure access to a huge domestic demand for raw materials.  In our data review of fossil fuel subsidies in China three years ago, it was clear that foreign aid and infrastructure projects were linked to access to foreign oil, though figuring out the financial flows was not possible. 

A simple tweak of China's roads for resources strategy could shift at least a chunk of the focus on big infrastructure deals to trading PV installations for raw materials instead.  These installations could go to populations most in need of access to safer, cleaner energy sources.  Further, the shift might help address some of the pushback that Chinese oil companies are now facing from multiple African nations on the terms of their oil deals and whether or not the trade provides sufficient benefits to the local population. There may be domestic jobs benefits as well.  A shift from roads to PV export and installation would be expected to create more jobs right in China, rather than having to export road crews abroad. 

Power intermittency less of a problem where current power systems unreliable or non-existent

Although solar power is intermittent, its value in less-developed countries remains strong.  First, it can be operated independently of state-owned power suppliers -- often a plus in countries where governance may not work very well, utilities are unresponsive to consumer needs, and grid networks aren't well maintained.  Second, it can provide power in remote locations where there is no grid connection at all, or only a connection of poor quality.  Third, even among wealthier customers unreliable power supplies have triggered widespread use of loud and heavily polluting diesel generators.  Where those locations are remote, the delivered price of fuel can be high.  Broader deployment of PV into these regions allows the demand on the generators to drop, reducing both pollution and fuel costs.  While generators may still be required for times when the PV generation is insufficient (e.g., nighttime), a reduction in the hours per day on which fossil generators were needed would still be beneficial.

Last April when dried distillers grains DDGs started showing up in far flung markets, the industry touted it as an example of their global competitiveness.  I was thinking subsidy arbitrage was more likely.  Seems like the subsidies are closer to the truth.  Philip Brasher summarizes the pending trade case launched by China for dumping DDGs.  He notes that the case is likely retaliation for a case the US launched against China for subsidies to renewable energy industries such as wind and solar.  It is likely that both the US and Chinese cases have merit, and that the existing subsidies do, indeed, result in substantial distortions in trade patterns.  It is also likely that politics, rather than economics, is more likely to drive their resolution.

Spineless subsidies part 1:  Ethanol

Ethanol blenders credit moves forward towards extension at current rates in the Senate.  Even more ludicrous since even without the excise tax credit subsidy we are still forced to buy the stuff at above market prices under the federal Renewable Fuel Standard.

Chuck Grassley makes a good point when he argues that you can't treat ethanol and oil subsidies differently:

The fact is, it's intellectually inconsistent to say that increasing taxes on ethanol is justified, but it’s irresponsible to do so on oil and gas production.

Grassley, a strong supporter of everything corn, uses this logic as a justification for keeping all subsidies.  Of course, the logic is even stronger in the other direction:  get rid of all of the subsidies -- to oil and gas as well as to ethanol.  Large fiscal and environmental benefits.  Such broad-based reform is difficult, to be sure.  But there have been successes.  New Zealand, for example, got rid of a wide swath of sectoral subsidies. 

Domestic producers will see little change in their subsidy capture once the Renewable Fuel Standard mandate premiums rise to offset the decline in excise tax credit subsidies.  Thus, Grassley's arguments about domestic energy security seem a bit hollow.  What then?  Perhaps it is the fact that without VEETC, producers can't export taxpayer subsidized ethanol to other countries.  Robert Rapier did a nice write-up of this issue on his R Squared blog.

Spineless subsidies part 2:  Nukes

In the House, legislation kicking in another $7 billion in loan guarantees for new nuclear reactors has passed.  It's another "opportunity" for taxpayers to participate in building what industry regularly claims to be a low-cost energy resource over the long-term.. Seems like the massive bailouts of the last two years have made people forget that a $7 billion investment into a private firm is hardly the norm throughout the history of the United States.

Think the money is safe?  I don't.  In other nuclear industry news:

• The Oyster Creek Plant in NJ will close early rather than properly manage its water use (virtually every one of the billions of gallons of water used per day at reactors across the country is free).  
• The EIA's capital cost estimates for new nuclear plants are up 37% since last year -- despite a recession that has dampened construction costs generally and reduced pressure on the nuclear power supply chain.
• Westinghouse has provided its Chinese partners with key technical documents on its designs.  They, and all of the other vendors competing for market share in the heavily state-subsidized Chinese nuclear power sector, fully expect their IP to be appropriated and applied by domestic Chinese competitors in short-order.
• Key nuclear plant owner Exelon acknowledges natural gas will be their first choice to fill new generation needs (page 1) and that not much new generation is needed right now anyway (page 2).  And, despite ignoring many of the embedded subsidies to the nuclear fuel cycle, Exelon's new ghg abatement curve is still placing new build nuclear well behind many other options (page 6).

Subsidy measurement is a pre-requisite to any effective program of subsidy reform, whether through the WTO, the G20, or domestic policy initiatives.  Too often, policy makers take accurate and comprehensive subsidy measurement as a given.  It isn't.  In fact, making subsidies difficult to measure can be part of a political strategy to slow or block reform.  It is no accident that subsidy mechanisms able to transfer value without easily-tracked government cash flows are popular -- purchase mandates, tax breaks and loan guarantees are examples. 

In light of the growing recognition that fossil fuel subsidy reform needs to occur in tandem with efforts to constrain carbon through taxes or caps, and that information on producer subsidies is often lacking, Earth Track teamed up with the Global Subsidies Initiative in Geneva to evaluate the availability of subsidy data in four case study countries. The FiFo Institute of Public Economics at the University of Cologne, and two independent energy researchers also supported the effort.

While we did identify a number of fossil fuel subsidies, the focus of this research was on data availability, examinining how information varied across subsidy types and countries.  The result of this effort, Mapping the Characteristics of Producer Subsidies: A review of pilot country studies has just been released.   The report provides an overview of data availability for each country, along with a more detailed subsidy data review in template form that includes url links to source materials.

Case studies of subsidy data availability were done for China, Germany, Indonesia, and the United States.  The countries were chosen to model data availability under a variety of conditions:  energy market importance, type of governance, and levels of transparency.  The project team hopes that others will replicate this work in a broader array of countries, and that the data review can be used to produce a detailed analysis of fossil fuels within the case study countries in the near future.

Among the key findings:

• Standardized review highlights data gaps, ensures systematic assessment of policies.  Many prior energy policy reviews have focused on the information that is most available within each country.  While intuitive, this approach may miss some of the most important subsidy policies, often less visible and that may never have been quantified.  To overcome this limitation, it is critical to use a standardized template of subsidy mechanisms, and for researchers to systematically assess each type of policy.  In addition to ensuring no types of subsidies are skipped, the template clearly highlights data gaps.  Some training of researchers so they become comfortable with less familiar transfer mechanisms will be needed. 
• Evaluation team requires mix of skills.  Accessing data proved to be quite difficult in countries with limited transparency.  The research requires a mixture of expertise to carry out successfully.  First, policy-type expertise is needed in order to evaluate complex subsidy mechanisms across countries.  Second, strong local knowledge of language, cultural operating norms, and governance structure is needed within each country in order to effectively navigate domestic data sources and bureaucracies. 
• General transparency aligns with accessibility of subsidy data.  Countries with a variety of mechanisms supporting data disclosure (e.g., private capital markets; audited financial statements even for public institutions; mandatory reporting and publication of detailed budgets, tax expenditures and credit subsidies; and public liability and rights to litigate) had better information in each category of subsidy than those countries without a culture of transparency.  The deficit can be partly addressed in less transparent countries by using more researchers with larger budgets.  Fully addressing the gaps, however, may not occur until the country itself views subsidy transparency as benefitting its own broader interests rather than harming them.  Building this case will be important, and will likely encompass fiscal, trade, environmental, and competiveness elements.
• Complex subsidy mechanisms had relatively worse data in all case study countries.  Though more transparent countries generally had more comprehensive and accessible subsidy data than less transparent countries in all categories, the relative quality of data within countries showed similar patterns.  For example, data on tax expenditures, credit subsidies, purchase mandates, and subsidies through government-owned enterprises were of relatively worse quality than direct expenditures in all countries evaluated.
• Sub-national subsidy data lacking in most cases.  Subsidy policies at the sub-national level (state/province, country, municipality) were poorly characterized and quantified in nearly all cases.
• Producer subsidies are significant even in developing world.  Conventional wisdom notes that the developing world primaily subsidizes fossil fuel consumers while the developed world primarily subsidizes producers.  Our case studies indicate that producer subsidies are also pervasive in the developing world.