May 6, 2012 9:30 pm

Changed climate

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US renewables boom could turn into a bust

On a dreary spring afternoon, with rain clouds rolling in from the Atlantic, New Jersey is not the most obvious place to make a bet on solar power. Yet Ikea, the Swedish furniture retailer, has been doing exactly that.

The roof of its characteristically garishly coloured store in the suburb of Paramus, about eight miles west of New York City, is covered by 4,620 solar panels, each about 1.8 metres long by 1 metre wide, their gently iridescent dark blue surfaces set at a south-facing angle to catch the sun.

Joseph Roth of Ikea says long-term investing in solar power – helped by the falling cost of panels and incentives from the federal and state governments – “makes very good sense to us as a business”.

Renewables charts

Renewables charts

New Jersey may be more famous for its sunbeds than its sunshine, but it is the second largest state in the US for solar investment thanks to an effective programme that subsidises installations.

Although renewable energy – not derived from fossil fuels – still accounts for less than a tenth of total US energy use, it has been growing fast. Between 2006 and 2011 renewable electricity generation, excluding hydro power, doubled to 195m megawatt hours: enough to power 17m American homes, roughly one in every seven.

That boom, however, is on the brink of turning into a bust. As federal government support goes into precipitous decline as time-limited subsidies expire, the clean energy industry is facing a “funding cliff” according to a recent analysis by authors from three leading US think-tanks.

“If we pass these cliffs without taking any action, it will be very difficult for US renewable energy companies to compete internationally,” says Letha Tawney of the World Resources Institute, an environmental research group, who was one of the report’s authors. “This is a critical moment both for cutting carbon dioxide emissions and for the US economy.”

Subsidies including grants, loan guarantees and tax credits for technologies such as nuclear power, electric vehicles and advanced bio­fuels, as well as renewables such as solar and wind, are set to fall from a peak of $44.3bn in 2009 to just $11bn by 2014, according to the paper.

Most of these technologies are unable to stand on their own commercially, particularly in competition with a resurgent natural gas industry that has created a supply glut and driven prices to 10-year lows. Without a change of direction in Washington, the US renewable energy industry faces shrinking markets, business failures and tens of thousands of job cuts.

Case study: Low-cost approach offers a beacon for the future

Not many renewable energy executives are keen to compare their companies to Solyndra, the manufacturer of innovative solar panels that collapsed last year. Jim Nelson, chief executive of Solar3D, a similarly path-breaking solar start-up, is happy to do so. In the comparison, he sees some important lessons for the future of US energy policy.

“Governments should fund basic research; their record there has been relatively positive,” he says. “But when they start trying to commercialise technology, it is a lot tougher for them.”

California-based Solyndra, which went into bankruptcy after being lent $527m by the federal government, has become a byword for failure.

Solar3D, like Solyndra, is based in California. Like Solyndra, it hopes to bring to market a new technology that it believes will deliver superior performance and lower costs. Solyndra had light-catching tubes, Solar3D has cells that can capture light over wider angles and at higher efficiency than traditional flat panels, enabling more power to be generated from the same area.

Yet Mr Nelson – who, like Mitt Romney, is an alumnus of Bain, the management consultancy – argues that there is a better way to commercialise new energy technologies.

Solyndra’s strategy was to build and fit out factories and hire more than 1,000 people. “That’s a high-cost approach and it ate up $500m-plus of taxpayers’ money,” Mr Nelson says.

Paradoxically, exactly that high-cost approach may have helped the company secure federal loans, he adds. “What looks promising to a government is something that is going to create 1,100 jobs and make them look as though they are doing something. What looks promising to a venture capitalist or private equity investor would be very different.”

At Solar3D, he is practising what he preaches. The company has a budget of less than $10m and a staff of just five. It plans to look for a low-cost manufacturing partner, likely to be in the US, when it is ready to go into production and it is not receiving any federal grants or loans.

As the tide of official support for clean energy recedes under the pressure to cut government spending, more companies seeking to develop new technologies are likely to have to look like Solar3D.

Mr Nelson accepts that his company may not succeed, although he says he is “hopeful and confident that we can make it work”.

If it fails, it will at least not go down owing half a billion dollars to the US taxpayer.

As recently as last year, President Barack Obama talked about a “Sputnik moment”, when – as in the cold war space race – America would realise that it had fallen behind in vital technologies, and make the necessary commitments to clean energy to regain leadership. In the 2000s there was a burst of enthusiasm for renewables. Now it looks as though that could fizzle out, just as an earlier episode did in the 1980s.

A few years ago, renewable energy was touted as the way to save the planet and the nation; an answer to the threat of catastrophic climate change, high oil prices and to US industrial decline.

The industry has made real progress, and some companies have built good businesses in the sector. General Electric, for example, has a large wind turbine operation, which is still thriving even though its profit margins have been squeezed as prices have fallen in a competitive market.

As the world’s largest investor in clean energy, and the biggest energy consumer after China, the US plays a uniquely important role in the global industry. But it now looks as though the US industry is stalling, and may be about to go into reverse. It is not alone. Governments all over the world have been curbing support for renewable energy. Germany, the UK, Spain, Italy and other European countries have been cutting subsidies for solar power, for example. Even China has applied the brakes to its previous headlong rush into renewables.

In the US, as in those other countries, there is pressure to cut subsidies to ease the strain on the national budget and household finances, in terms of taxes and energy bills. In America, though, the issue has become particularly highly politicised.

“The clean energy industry has become identified with President Obama’s agenda, and so is under extreme attack from Republicans as the election approaches,” says Christine Tezak of Baird, a Wisconsin-based investment firm.

The collapse of Solyndra, a California-based maker of innovative solar panels that went bankrupt last year having borrowed $527m from the federal government, has been seized on by Republicans as an example of Mr Obama’s mismanagement.

Paul Ryan, the Republican chairman of the budget committee in the House of Representatives, described Solyndra as “industrial policy and crony capitalism at its worst ... picking winners or losers in Washington”. Mitt Romney, who is set to face Mr Obama in the presidential election in November, has taken up that line.

Republican opposition has meant that attempts to renew time-limited subsidy programmes – some from Mr Obama’s 2009 economic stimulus, some from the clean energy push under George W. Bush, his predecessor – face an uphill battle. The biggest to expire this year is the production tax credit for onshore wind power, the most important factor behind the fourfold expansion of US wind generation since 2006. Recent attempts in Congress to extend it have failed.

Tulsi Tanti, chief executive of Suzlon, an Indian wind turbine manufacturer that employs nearly 600 people in the US, warns of dire consequences if the tax credit expires without alternative federal support to replace it. “It needs to be extended for at least another year, because we are not ready for the next step,” he says. “If the PTC just disappears, then the industry will collapse.”

The American Wind Energy Association warns that 37,000 US jobs – in turbine factories, construction companies and support services – will go if the tax credit is not renewed.

State-level incentives, which often have greater support, are also under pressure. There are 29 states with mandatory standards, setting the proportion of electricity that utilities must draw from renewable sources. Seven others have non-binding goals.

As federal support declines, state programmes will help cushion the blow, but are unlikely to sustain the industry’s growth. In many states, however, there have been attempts to loosen those standards or stop them being tightened further. Chris Christie, New Jersey’s Republican governor, has backed the state’s solar power programme but blocked attempts to set more ambitious targets, saying he did not want to put an excessive burden on consumers’ and businesses’ energy costs.

In hindsight, some industry executives say, the administration made two central mistakes in its clean energy strategy. The first was to be confused about its objectives. Mr Obama and his advisers were enthused by the idea of the double pay-off: that support for renewables would develop cheaper, cleaner, more secure sources of power and create urgently needed jobs.

The problem was that the two objectives often conflict. “The moment you start loading jobs on to renewable energy, it stops being cheap energy,” says Michael Liebreich of Bloomberg New Energy Finance, a research firm.

Manufacturing equipment such as solar panels in the US is typically not the most co-effective option. The rapid growth of solar installations in the US has been driven by cheap Chinese panels, which has made solar generation more competitive but squeezed American manufacturers to the extent that some have launched an anti-dumping complaint with US authorities.

Carol Browner, until last year Mr Obama’s most senior adviser on energy and climate change and now at the Center for American Progress think-tank, accepts that the development of the clean energy industry has been slower than she would have liked. “The purpose in putting in taxpayers’ money was to create a bridge to commercial viability for these technologies,” she says. “Let’s look back in five years and see if we have created a new industry. I think in time it will be proved that we did.”

The administration’s other mistake, though, was to underestimate how long that bridge needed to be. There were hopes that renewables would soon be able to compete with coal and gas without much government support. That day has been pushed further into the future by the North American shale gas revolution, which has unlocked vast reserves that were previously uncommercial through hydraulic fracturing or “fracking”.

Costs for wind and for solar power in particular have fallen rapidly as a result of technical progress and investment in new capacity. By last year – at certain times and places such as windswept Midwestern states or the Californian desert – they could complete with conventional generation on almost even terms.

The slump in natural gas prices has thrown those calculations up into the air. “As fast as renewables’ costs have been falling, gas has been falling faster,” Ms Tezak says.

With gas-fired plants offering the flexibility to meet demand as needed, unlike wind and solar, in an entirely free market gas would be the utilities’ first choice.

As Greg Hayes, chief financial officer of United Technologies, put it when discussing the manufacturing group’s plans to sell its wind turbine business: “We all make mistakes.” He explained: “With the ad­vent of fracking, and natural gas prices coming down, it really has made wind power less economic than anybody had anticipated two years ago.”

The industry still hopes that the wind tax credit can be extended, perhaps in the “lame duck” session of Congress after the November elections but before the new session convenes in January.

In the longer term, Mr Tanti argues, the best way to secure the industry’s future is to create a federal standard requiring renewable energy use, like that adopted by the EU. This would have the great advantage of bypassing the tax system.

Mark Muro of the Brookings Institution, a Washington-based think-tank, another of the authors of the “funding cliff” report, says the crisis may offer an opportunity for Republicans and Democrats to agree a more rational energy strategy, to avoid a “chaotic” phase-out of subsidies.

However, there is one fundamental problem that may prevent that. Ultimately, the US debate over renewable energy is about climate change. Supporters of renewable energy often try to make their case in terms of the cost and security of supplies, pointing out the huge US oil import bill and warning about the threat to global supply routes.

Yet with the revival of US natural gas and oil production, which raises the prospect of greatly reducing or even ending oil imports, it is harder to make those arguments. The one clear advantage of renewables is that they help cut the carbon dioxide emissions that threaten to cause catastrophic global warming; but, in today’s Republican party, climate change is difficult even to discuss. “With a financially stressed electorate, it’s really hard to go to them and say: ‘Gas is cheap, but we’ve decided to build wind farms for no good reason that we can articulate,’” says Mr Liebreich.

Until a consensus forms about the need to address the danger of climate change, the US renewable industry is likely to carry on sliding down that subsidy cliff.

Additional reporting by Jeremy Lemer

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