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The Real Costs of Alternative Energy

By Alex Planes
January 4, 2012

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:

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:

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 (NYSE: 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 (NYSE: 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 (NYSE: 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 (Nasdaq: SYNM ) , which subcontracted a large amount of the production out to Solazyme (Nasdaq: 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.