Saturday, April 28, 2012

Green Energy Girds For Dark Times As Subsidies Expire

By TOM GRAY, FOR INVESTOR'S BUSINESS DAILY
Posted 04/27/2012 08:02 AM ET
A red light is flashing for the green energy business.
After a three-year boom, the outlook for wind, solar and other renewable energy companies has turned sharply negative. The tax credits, grants, loans and other subsidies that sparked the growth of these technologies are shrinking fast. It has been called a "subsidy cliff." The question now is who will fall and who will fly.
Green power skeptics say most businesses in this sector are not ready to face the market on their own. "They're basically going to disappear," said economist Benjamin Zycher, a visiting scholar at the American Enterprise Institute. "They're woefully uneconomical."
Even those who see a bright future see near-term trouble. In a recent study titled "Beyond Boom & Bust," analysts from the Brookings Institution, Breakthrough Institute and World Resources Institute warn of "more bankruptcies, consolidations and market contraction" without "timely and targeted policy reform."
Another study this month by McKinsey Consulting sums up the long-term sunny but short-term grim outlook in its title: "Solar Power: Darkest Before Dawn."
Why are things suddenly so dark for an industry that, according to the "Boom & Bust" report, received $110 billion in federal support from 2009 through 2011?
The short answer is that the money is drying up. The "Boom & Bust" study estimates that federal support for what it calls "clean tech" will be just over $40 billion from 2012 through 2014. (The study includes funding not only for renewable energy but also for nuclear power, high-speed rail, grid improvements and energy efficiency).
One reason for the drop-off is that spending from the 2009 stimulus bill has mostly run its course. The bill was very good to green energy, giving it about $44 billion through last year. From 2012 through 2014, that support is expected to shrink to about $6.5 billion.
Several tax programs aimed at boosting green power are either set to end soon or have already done so. According to the Congressional Budget Office, tax preferences for renewable energy and energy efficiency totaled about $16 billion in 2011. Several of these, worth about $12 billion in all, expired at the end of 2011. An additional $1.4 billion came last year from the Production Tax Credit, which supports mainly wind projects. It will expire for these at the end of 2012.
Financial support is also shrinking overseas. Germany and the U.K. are both rolling back programs that subsidize solar panels on homes and commercial buildings.
First Solar (FSLR), the largest U.S.-based maker of panels, noted this "reduction of subsidies in key legacy markets" when it announced earlier this month that it was closing a factory in Germany and laying off 2,000 workers worldwide. Other private-sector players are pulling back as well.
According to the research firm Bloomberg New Energy Finance, the $26.7 billion in clean energy investment during the first quarter of this year was the lowest since the first quarter of 2009, at the depth of the global financial crisis. It was down 28% from $37.2 billion in Q4 2011 and 50% from $53.2 billion in Q3.
Bloomberg New Energy Finance CEO Michael Liebreich blamed the investment drop on "the destabilizing uncertainty over future clean energy support" in Europe and the U.S. Feeding that uncertainty are questions about green energy itself, and whether it will ever be able to stand on its own. In some ways, the hurdles ahead of it may be getting higher.
The drilling boom that has sent natural gas prices to historically low levels in the U.S. has further raised the competitive bar for wind and solar power generation. Even with gas prices at $8 to $10 per million Btus, said Zycher, "wind and solar were never economic." Now, with gas near $2.00, "it's even worse."
On the manufacturing side, the U.S. solar industry is fighting an uphill battle with China to keep a foothold in the global market. Several American solar panel makers, such as the federally backed Solyndra, have closed plants or gone into bankruptcy over the past year.
In March, the Obama administration imposed tariffs on Chinese solar panels. But in doing so it raised costs for the businesses that install solar panels — and these are the firms that are creating most of the new solar-sector jobs.
Trade protection also risks stifling innovation, says Letha Tawney, a researcher at the World Resources Institute and one of the authors of the "Beyond Boom & Bust" study: "My worry about tariffs is that they don't make U.S. companies competitive in the international space."
If there's an upside to the brutal price competition, it's the fact that it leads to cheaper power. This means, as the McKinsey study says, that the future at this point seems to belong to the "downstream players," such as businesses (in solar) that sell rooftop systems or sell small power generating systems for local grids.
Likewise, Tawney says, future public support for green power should focus on making it competitive. "An innovation-centric approach" is key, she said.
The target of that innovation — cost parity with fossil fuels — is still somewhere beyond the range of current technology. The debate lies in how far out of reach it really is, and when or if it ever will be reached.

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