Natural Gas Industry Cozies Up to Washington

Investor dollars, not government subsidies, should guide the energy industry.

Public outrage at cronyism and corporate welfare is growing—and that’s all to the good. But don’t expect well-connected special interests and politicians to go gentle into that good night. Especially if they think the darkness can be dispelled via energy subsidies that are supposed to lead to green jobs, lower gas prices, and energy independence.

The latest energy boondoggle on the table involves the natural gas industry and is called the New Alternative Transportation to Give Americans Solutions Act (NATGAS Act). The bill would provide subsidies for the manufacture and purchase of cars that run on natural gas, the conversion of commercial trucks from diesel to natural gas, the creation of natural-gas filling stations, and tax preferences to favor the use of natural gas over other energy sources. All told, NATGAS could end up costing taxpayers somewhere from $3.8 billion annually (according to the Joint Committee on Taxation) to as much as $14 billion a year by other estimates.

Like many bad ideas, it has bipartisan support, with politicians such as Tom Cole, Charlie Rangel, Ron Paul, and Harry Reid all pushing for its passage. The bill has stalled in Congress, coming up nine votes short of the filibuster-proof 60 votes in the Senate. But with nearly 180 co-sponsors in the House, it’s likely to be reintroduced after the election. Having big players in the natural gas industry such as T. Boone Pickens and Chesapeake Energy pushing the bill will only make its resurrection all but certain.

The rationale behind NATGAS is familiar. Backers say that they’ve got a whiz-bang technology whose benefits are guaranteed. The only problem, they say, is that transition costs to the new and better technology are really high. In this case, investors are reluctant to spend the billions of dollars in capital expenditures necessary to earn natural gas the much larger share of the transportation market it supposedly deserves. Such a view is as self-serving as it is ahistorical. The automobile itself provides a counter-example. The shift from horse-powered vehicles to gasoline ones came about without tax subsidies for filling stations. And in fact, some companies are already converting trucks, cars, and buses to run on natural gas without the NATGAS Act’s large subsidies. Honda, the only company that sells factory-ready natural-gas-powered cars in the country, is offering buyers $3,000 of free fuel as an incentive.

Natural gas does in fact provide a proven, less-polluting alternative to conventional fuels for cars and trucks. But the reluctance of investors to pour the $130 billion to $210 billion that may be needed over the next 20 years to build for the natural gas infrastructure alone stems from precisely the sort of market forces that government should respect. Natural gas prices are well below historic levels while oil prices are well above historic levels. There’s no guarantee that these prices will stay at those mismatched levels over the life of the capital expenditure needed to ramp up the market for natural-gas vehicles.

If the recent string of government-subsidized energy failures such as Solyndra teaches any lesson, it’s that government should be extremely slow to overrule investors’ reluctance to wager their own money. Just as it does with more chic “green energies,” the acknowledged need for subsidies shows that natural gas technology is not ready for prime time. Tilting the scales in its favor will introduce even more economic inefficiency into the market while putting taxpayers on the hook for yet another “sure thing” that will help America move forward into a future of cleaner and greener energy.

As it stands, natural gas companies are already set to benefit from regulations that hamstring competing energy sources. After granting itself the authority to regulate greenhouse gases, the EPA proposed a series of regulations apparently aimed toward eventually requiring every coal plant in America to either close shop or convert to natural gas. As one EPA administrator recently admitted, “gas plants are the performance standard, which means if you want to build a coal plant, you got a big problem.” The cost of retro-fitting existing plants to meet numerous EPA requirements—including mandated installation of selective catalytic reduction for nitrogen oxides, scrubbers for sulfur dioxide, and electrostatic filters for fine particulate matter—is big enough that the smart choice will be to retire plants sooner than would otherwise be the case. Brattle Group energy analysts estimate that approximately 20 percent of existing coal capacity will be retired rather than face the alternative of installing these and other EPA-mandated retrofits.

One EPA rule already has some coal-fired generating capacities off-line: the Utility MACT. That rule, which was finalized in December of last year, places limits on the emissions generated by coal fired electric generating units starting in 2016. However, the impact of the rule is already being felt today as plants are proactively going off-line. The EPA estimated that the rule would cost $10.9 billion in the year 2015, $10.1 billion in 2020, and $10 billion in 2030. However, according to the National Economic Research Associates annualized compliance costs could be as high as $17.8 billion.

It is important to understand that the issue here isn’t that coal-fired plants may eventually have to be closed to convert to natural gas. Rather, it’s that the natural gas industry will benefit from these rules, which have been pushed before it’s fully clear that the energy sector is ready for the change. It’s possible that a Romney win might see some of these rules rolled back, but a flurry of midnight regulations from the outgoing administration could also cause more havoc than they are able to solve.

These new EPA rules didn’t just materialize out of thin air and their origins show how special interests are always working to rig outcomes in the name of an ever-changing public interest. The rules were spurred by lawsuits from the Sierra Club's “Beyond Coal” campaign a few years ago. The Sierra Club received $25 million from Chesapeake Energy CEO Aubrey McClendon between 2007 and 2010. Chesapeake Energy is the second-largest natural gas company in the United States and stands to gain considerably from any legislative or regulatory restrictions on coal. It's unlikely that McClendon, who has also been embroiled in a corporate governance scandal, would otherwise be interested in the work of the Sierra Club, which has already zeroed in on natural gas as its next target. Fracking, after all, which promises an abundant supply of natural gas for the foreseeable future, has gone from being the darling of the environmental movement to one of its betes noire.

Rather than pushing new legislation like the New Alternative Transportation to Give Americans Solutions Act—which would simply introduce new and fickle incentives—policy makers should actually level the playing field in energy. Both Barack Obama and Mitt Romney—and Democrats and Republicans more generally—say they believe in an “all of the above” energy policy. That is, they think that all forms of energy production and innovation should be encouraged. But the best way to find the fuels of the future is to use markets—and investor dollars—to lead the way.

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  • tagtann||

    Never really thought about it like that man!
    www.anon-you.tk

  • ||

    oh anonbot, you were so close to full sentience and the joys that brings here at HyR- puns, personal abuse, and wincing at Welch's jumpers - and then you retreated into stock phrases. Colour me disappointed

  • Caleb Turberville||

    Anon-bot is just your typical partisan hack.

  • DJF||

    “””in the work of the Sierra Club, which has already zeroed in on natural gas as its next target.”””

    The Gas Industry needs to pay off oops I mean donate to the Sierra Club. David Gelbaum gave the Sierra Club a hundred million dollars and got them to stop any talk about limiting immigration. I am sure with the right donations going to the right hands the Sierra Club will come around.

  • Pound. Head. On. Desk.||

    Voter turnout this morning is v e r y heavy in my district (VA). I was at the polls 20 minutes before they opened and just got home.

  • ||

    are you close to DC or do you live in some more normal part of the state? Just wondered if it was bureaucrats, political junkies, or normal people

  • Whiterun Guard||

    Probably just normal people. But they have to vote at five or six different polling stations, so they have to start early...

  • Christina||

    I live in Loudoun County, Virginia, which is the richest/most parasitic county in the country (my household income is below the median for the county, and we clear over $100K) For us, normal = bureaucrats and political junkies.

    By the way, a LoCo libertarian I know had a picture of his homemade front yard signs published in the print edition of the NYT. In my very large planned community in Ashburn I have seen ONE Obama sign, compared to Romney signs on every block. I think Loudoun will go for Romney.

  • Pound. Head. On. Desk.||

    are you close to DC or do you live in some more normal part of the state?

    Central VA. Far from DC.

  • Palin's Buttplug||

    That is not good for Macaca Man.

  • sloopyinca||

    What if he lives in Bedford County? A high turnout there would bode quite well for Allen, you stupid bastard.

  • Whiterun Guard||

    Oh come on, you know if The People™ were allowed to have their say, instead of being held back by the Rethuglicans, that Glorious Leader and all of his disciples would win every election by about 98% to 2%.

  • Pound. Head. On. Desk.||

    That is not good for Macaca Man.

    Heh. My district is very Republican. I was surprised to be in line with a couple Democrats today. Of course, nobody had a clue who Gary Johnson is.

  • Christina||

    Voting before work always means a long wait. I vote after work and the lines are much shorter.

  • sloopyinca||

    I try to head in during the workday when the lines are shortest. Either way, I immediately take a shower as soon as I'm done to get the stank off of me.

  • Rich||

    get the stank off of me.

    I know a guy who always loads up on beer and hard-boiled eggs so he can fart during the entire process.

  • ||

    If you are posting on H&R, we all know That Guy.

    (knowing look).

  • Rich||

    I dare say there are *several* members of the commentariat with such finesse.

  • Pound. Head. On. Desk.||

    I see no need to stink the process up any more than it already is.

  • Fist of Etiquette||

    How can we talk about natural gas of all things on the day of the most important election of our lifetime?

    As natural gas shows its abundance and its relatively clean energy offerings, the alternative fuel industry is going to go after it hard. It's an unacceptable rival. Natural gas is going to have to cozy up to Washington not for subsidies but to keep regulators at bay. Coal and oil first, then natural gas.

  • Whiterun Guard||

    Pfft. Natural gas? That is no competition for alternative fuels.

    I mean our gas supply would only last three or four hundred years. It's clearly not sustainable.

  • Pound. Head. On. Desk.||

    Pfft. Natural gas? That is no competition for alternative fuels.
    I mean our gas supply would only last three or four hundred years. It's clearly not sustainable.

    400 years ago John Rolfe was just trying the first tobacco crop in Virginia. 300 years ago the first practical steam engine was invented by Thomas Newcomen.

    Of course I write this and then realize you're speaking tongue in cheek.

  • Whiterun Guard||

    So no one is going to say it?

    Fine, I sure wouldn't mind cozying up to Veronique de Rugy...

  • Drake||

    Doesn't Honda already sell natural gas powered cars without a subsidy?

  • sloopyinca||

    Hell yeah, they do.

    I've got a customer in LA that has converted the overwhelming majority of their fleet to CNG. They currently pay the equivalent of $.45/gal for their fuel. The only issue they have is fill times and the cost of setting up their station. Because CNG tends to be transported at a low pressure, their fill times are quite long. Their trucks are on the road an average of 10 hours per day and it takes them as long to refill the tanks. As far as set-up costs, they invested around $300k to get their station built, not including compliance costs. Once done, they recouped their initial investment in the project after about 26 months (based on mileage driven and the cost difference in fuel types). And they took no subsidy money to complete it because they did not want to see a CA auditor any more frequently than they had to for tax purposes.

    They also have a deal with their employees: if anyone who has worked there for 5 years or more wants, they will pay the difference for them buying a CNG vehicle and will let them fill up for free at their facility.

  • Whiterun Guard||

    Terrible business decisions. They could have gotten the whole setup for free from good old Uncle Sugar, and then just paid off the auditor every few months for a hell of a lot less than the startup costs.

    And even if they didn't feel like paying him off, the worst that'd happen is they'd have to shut down their 'free' CNG station.

  • GW||

    $.45/gallon is WAY subsidized for the price of CNG. Hell, the road taxes are almost that much. Most people will pay 2x-3x that price, which is still a hell of a deal.

  • GW||

    Honda does sell a CNG Civic, but it's dedicated, so they don't sell many. Most conversions leave the existing gasoline fuel system intact, and they can run on either fuel. So if you can't fill with CNG, you can run on gasoline.

    With the CNG Civic, it holds 8 gallons of CNG, and the tank takes up most of the trunk. Not an ideal solution, and the sales figures demonstrate that.

  • Lyle||

    Hmmm... they ain't stupid.

  • Ptah-Hotep||

    Like many bad ideas, it has bipartisan support, with politicians such as Tom Cole, Charlie Rangel, Ron Paul, and Harry Reid all pushing for its passage.

    I wonder why?

  • crazyfingers||

    Does the bill actually provide "subsidies" or just tax breaks? I can see Paul supporting the latter, with the idea that some tax cuts for someone are better than none for anyone.

  • Ptah-Hotep||

    The bill would provide subsidies for the manufacture and purchase of cars that run on natural gas, the conversion of commercial trucks from diesel to natural gas, the creation of natural-gas filling stations, and tax preferences to favor the use of natural gas over other energy sources. All told, NATGAS could end up costing taxpayers somewhere from $3.8 billion annually (according to the Joint Committee on Taxation) to as much as $14 billion a year by other estimates.

    Looks like straight up subsidies. I wonder if there are manufacturers in his district?

  • crazyfingers||

    I did read that but I'm still not convinced the author isn't using "subsidies" and "tax cuts" interchangeably, especially if Paul's on board with it.

    The language about it "costing taxpayers" probably operates under the assumption that the government is owed a certain percentage of a company's revenue and getting any less than that is a "cost" to taxpayers, as opposed to making direct payments out of the treasury (actual subsidies).

  • GW||

    I think it's a tax credit similar to the one for electric vehicles.

    This is actually not a bad deal, but it's still an example of excessive government.

    It costs about $10k to convert a vehicle to CNG. Of that, about $3k is wrapped up in EPA emissions certification of the conversion kit. I'd gladly not support NATGAS in exchange for telling the EPA to piss off regarding emissions certification.

  • Ted S.||

    The latest energy boondoggle on the table involves the natural gas industry and is called the New Alternative Transportation to Give Americans Solutions Act (NATGAS Act).

    I'd vote against legislation that has an acronym name on sheer principle.

    That, and the [insert name of photogenic victim here]'s Laws.

  • Ron Wagner||

    Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, vans, buses, locomotives, aircraft, ships, tractors, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our blood and money. It lowers CO2 emissions. Over 2,400 natural gas story links on my blog. An annotated bibliography of live links, updated daily. The big picture of natural gas.
    Ron Wagner

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    Apart from these two points with a fox's body made her ignore me. And not to be seen at these two points, but also with all standards of foxtail pointed ears or something correspond. People will be able to http://www.cheapfootballcleatsmall.com/ differentiate a glance anyway, this is a fox.

  • Ron Wagner||

    CNG is about one sixth to one eighth the price of gasoline or diesel, yet the leadership to promote this cleaner fuel comes from a very small group of people. Why do you think that is?

    Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, vans, buses, locomotives, aircraft, ships, tractors, air conditioners, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our blood and money. It is used to make many products. It lowers CO2 emissions, over 3,500 natural gas story links on my free blog. An annotated bibliography of live links, updated daily. The worldwide picture of natural gas.
    ronwagnersrants . blogspot . com

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