Federal Electricity Subsidies

Electricity is vital to our daily lives, powering homes, businesses, and industries. Presently, electricity is generated largely by coal and other fossil fuels and nuclear power, with hydropower, and, to a lesser extent, renewable energy sources, such as wind. Because of electricity's importance to producers, consumers, and businesses, the federal government has undertaken a wide range of programs to develop the electricity sector, which includes fuel suppliers, electric utilities, and others in the electricity industry. These programs have sought to, among other things, develop the nation's electrical infrastructure, influence the types of fuels used to produce electricity, increase the use of renewable energy, and limit the harmful effects of electricity production. These programs are financed through federal subsidies, broadly defined as payments made or benefits provided by the federal government to encourage certain desired activities or behaviors. For example, the federal government has, for many years, funded research and development (R&D) on fossil fuels, nuclear energy, renewable energy, other energy technologies, and related efforts through the Department of Energy (DOE). In addition, the federal government has provided favorable tax treatment, such as tax credits to companies that make certain types of energy investments. These tax preferences--which are legally known as tax expenditures--result in forgone revenue for the federal government. The revenue losses can be viewed as spending channeled through the tax system. As requested, we are providing information on (1) federal funding DOE receives for electricity-related R&D, including funding by type of fuel; (2) tax expenditures the federal government provides to subsidize electricity production, including expenditures by type of fuel; and (3) other ways the federal government subsidizes electricity. As discussed with congressional offices, we examined federal electricity-related subsidies over a 6-year period, from fiscal year 2002 through fiscal year 2007.

We estimate that DOE's appropriations for electricity-related R&D, adjusted for inflation, totaled $11.5 billion from fiscal year 2002 through fiscal year 2007. These appropriations grew by 35 percent during the 6-year period we examined, increasing from $1.6 billion in fiscal year 2002 to $2.2 billion in fiscal year 2007. Nuclear programs received the largest share of electricity-related R&D funding, with appropriations totaling $6.2 billion from fiscal year 2002 through fiscal year 2007. Appropriations for nuclear programs grew by 59 percent, increasing from $775 million in fiscal year 2002 to $1.2 billion in fiscal year 2007. The greatest variation in funding within these programs occurred in the environmental cleanup program, which funds the cleanup of sites contaminated by nuclear research. Other nuclear energy programs include research on fusion energy and the Advanced Fuel Cycle Initiative, which seeks to reduce nuclear fuel waste requiring geologic disposal. programs. Fossil fuel programs were appropriated $3.1 billion in electricity-related R&D funding from fiscal year 2002 through fiscal year 2007. Appropriations for these programs were relatively constant during the 6-year period we examined. Most of the funding variation within these programs was due to the Clean Coal Power Initiative, which is aimed at accelerating the deployment of advanced technologies to reduce air emissions and other pollutants from coal-burning power plants. Other significant fossil fuel energy programs include the fuels and power systems program, which provides research funding aimed at reducing coal-burning power plant carbon emissions, and the FutureGen program, which focuses on the technical capability of coproducing electricity and hydrogen with near-zero emissions. Renewable programs were appropriated $1.4 billion in electricity-related R&D funding from fiscal year 2002 through fiscal year 2007. During this period, appropriations for these programs grew by 23 percent, increasing from $248 million in fiscal year 2002 to $305 million in fiscal year 2007. Variations in funding were primarily attributable to funding for the Solar program, which makes up the largest share of renewable program funding. Fossil fuels received the largest share of electricity-related tax expenditures. We estimate that tax expenditures to support electricity production from fossil fuels totaled $13.7 billion from fiscal year 2002 through fiscal year 2007. Revenue loss estimates associated with these tax expenditures grew by 43 percent during the 6-year period we reviewed, increasing from $1.9 billion in fiscal year 2002 to $2.7 billion in fiscal year 2007. These revenue loss estimates stemmed from 12 different tax expenditures. The largest tax expenditure supporting electricity production from fossil fuels was the alternative fuel production credit, which Treasury estimated at $2.1 billion for fiscal year 2007. We estimate that tax expenditures to support electricity production from renewable sources totaled $2.8 billion from fiscal year 2002 through fiscal year 2007. Revenue loss estimates associated with these tax expenditures grew by 232 percent during the 6-year period we reviewed, increasing from $238 million in fiscal year 2002 to $790 million in fiscal year 2007. These revenue loss estimates stemmed from three tax expenditures--Clean Renewable Energy Bond tax credits, exclusion of interest on energy facility bonds, and the new technology tax credit for renewable electricity production and renewable energy investment. We did not identify tax expenditures directed at nuclear power production during the 6-year period we examined. A key tax expenditure directed at nuclear power production, the advanced nuclear power facilities production tax credit, was enacted in the 2005 Energy Policy Act. However, this tax credit has not been used because no nuclear power plant has been built recently.