A clear-headed look at the true costs of energy is something many -- including our political leaders -- sorely need. Understanding our energy options, their present capabilities, and their future potential, is vital to help decide what deserves our support and what should be left in a heap of false hype. Subsidies are just one of the costs of supporting alternative energy, but are they worth it?

The subsidy myth
There are plenty of people on both sides of the renewable subsidy debate. Maybe the free market should determine the winners with no intervention from Uncle Sam. Maybe subsidies are essential to support the clean energy humanity needs to survive over the long term. Both sides have charts and statistics to damn the other side, but many cherry-pick data to make a compelling case that's slightly less than honest. With that in mind, I went to the source to find specific subsidy info for 2010:

Power Source

Total U.S. Subsidy 
(millions)

Coal $1,358
Oil and gas $2,820
Nuclear $2,499
Biomass / biofuels $7,761
Geothermal $273
Hydro $216
Solar $1,134
Wind $4,986

Source: U.S. Energy Information Administration.

The problem with looking solely at subsidy numbers is that it easily ignores the many other stories our energy use can tell. The cost of our energy addiction (in direct government subsidies) was scarcely half a percent of the total federal budget last year. Still, some forms of energy gave the economy a lot more bang for the buck, as the following chart shows:

Power Source

2010 U.S. Power Consumption 
(million bbl. oil equivalent)

Subsidy Cost per Energy Equivalent Barrel of Oil Consumed

Coal 3,439 $0.39
Oil and gas 10,012 $0.28
Nuclear 1,394 $1.79
Biomass / biofuels 381 $20.37
Geothermal 35 $7.80
Hydro 414 $0.52
Solar 18 $63.00
Wind 153 $32.59

Source: U.S. Energy Information Administration.

The hydrocarbon giveaway
Oil companies hardly need the handouts. In Power Hungry, Robert Bryce reports that "In the United States, there are about 5,000 independent oil and gas companies. ... in 2007 alone, those companies spent $226 billion drilling and equipping some 54,300 wells." BP (NYS: BP) , despite the Gulf catastrophe, reported $10 billion in positive cash flow last year. Its liability losses are likely to stretch on for a long time; ExxonMobil (NYS: XOM) managed to drag the Valdez litigation out for almost two decades, during which it suffered not a single remotely unprofitable year.

American coal-fired generation is on the decline, to the glee of environmentalists and many politicians, but remains quite profitable. Peabody Energy (NYS: BTU) , one of the country's largest coal miners, has a better profit margin than ExxonMobil, though with far lower revenues. Fool Aimee Duffy notes that American Electric Power will soon reduce its coal use by 17 million tons, but that's barely more than a tenth of Peabody's annual production from one rich Wyoming seam. Why offer any subsidy at all?

A renewable boondoggle?
On the other hand, renewable energy's costs to the government are in some cases so high, and the actual energy returns so low, that it hardly seems worth the investment. Solar's pitiful slice of American power use -- less than a single day's worth of oil consumption -- is underwritten by enough taxpayer money to simply buy most of the power outright and provide it to taxpayers for free.

Wind power, on top of its costly handout, requires another layer of expense: conventional power generation in a supporting role. Cambridge Energy Research Associates concluded that wind power "is more expensive than conventional power generation, in part because wind's intermittent production patterns need to be augmented with dispatchable generators to match power demand."

Wind and solar might currently be more costly to the consumer than hydrocarbon-sourced power, but their increasing competitiveness makes biofuels look like a wasteful boondoggle. You might remember that the Navy recently signed a fuel contract with Dynamic Fuels, a joint venture of Tyson and Syntroleum (NAS: SYNM) , which subcontracted a large amount of the production out to Solazyme (NAS: SZYM) .

The contract was worth $12 million for 450,000 gallons worth of biofuel. Basic math tells you how lousy the Navy is at basic math: Every gallon will cost it $26.67, or $1,120 per barrel's worth. Even if costs are ever reduced to reasonable levels, which is doubtful, biofuel production demands vast swaths of arable land to produce any meaningful quantities.

The best option for now
Wind and solar power have their drawbacks, but continue to make notable improvements year after year. However, neither option can yet provide the clean, constant, and convenient power the world demands. Natural gas offers the best opportunity for the near term. It's plentiful, well-developed, and efficient, and will take on greater importance as dirtier hydrocarbons lose market share. The Motley Fool's found one exciting opportunity to play the natural gas boom, with a small company turning our oil-guzzling vehicle fleet into clean-burning nat gas machines. Find out more and claim your copy of this free report while it's still available.

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Introduction to ETFs

The basics of Exchange Traded Funds and why ETFs are hot.

View Course »

Introduction to Value Investing

Are you the next Warren Buffett?

View Course »

Add a Comment

*0 / 3000 Character Maximum

2 Comments

Filter by:
Aaron

Sweet. All we have to do is take the subsidy away from the already profitibable and established hydrocarbon sector and give it to the alternative energy sector. And then make the hydrocarbon sector pay up for the externality costs. Between the two, we can cover the expense of giving a boost to alternative energy. Or, we could continue to fight alternative energy on idealogical grounds and lose out to Europe and China.

January 06 2012 at 6:17 PM Report abuse rate up rate down Reply
Tony

Actually, Solazyme does not require, "vast swaths of arable land to produce any meaningful quantities". In Fact, Solazyme's algai-derived fuel is grown in the dark by using waste biomass which is readily availble and not taking away from food sources.

January 04 2012 at 8:25 PM Report abuse rate up rate down Reply