The U.S. renewable energy industry may be heading towards a “clean tech cliff.” Three-quarters of the government incentive funds that have helped drive tremendous growth in industries like solar and wind are set to expire between now and 2014. For good or ill, the political decisions made between now and then will define a pivitol period for clean energy.
Will congressional action deal a severe blow to clean energy technologies that are just beginning to compete with fossil fuels in terms of cost and efficiency? Or deliver a golden opportunity to revisit the way clean tech is subsidized, trimming waste and pushing renewables to start standing on their own economic feet earlier?
“It’s a pretty serious juncture we’re facing,” said Brookings Institution fellow Mark Muro, one of the authors of a new report entitled Beyond Boom and Bust: Getting Clean Energy Policy Right.
The problem, Muro said, is a rapidly approaching, extremely broad pullback in tax credits, grants, and other subsidies. “There’s a massive sea change in the amount of federal support flowing into these industries that still require subsidies to compete with fossil fuels,” he said.
The total amount of federal government spending in clean tech will fall 75 percent from its 2009 high by 2014, if current policies remain in place, the report states. Funding will plunge from 44.3 billion in 2009 to just 11 billion in 2014. In fact by year’s end overall federal support for clean energy will be cut in half compared to 2011 levels.
“By our count, 63 of 92 federal clean energy finance policies in place in 2009 will have expired by the end of 2014 absent congressional action,” Muro and coauthors write.
“What’s unfortunate is that this federal drawdown comes just as some of these industies are beginning to approach competitiveness and are likely to approach a degree of price parity (with fossil fuels) in the next five years or so,” Muro added. “So I think the challenge is for policy makers to figure out how to manage that reduction of support mechanisms at the right pace. If it’s too fast the long-term future of the industry is going to be damaged. If it’s too slow, taxpayers are going to revolt and we’ll be doing energy consumers a disservice. It’s a tricky, fascinating moment.”
Will the Boom Continue—or Bust?
Clean tech growth has been robust during the last decade or so, even as the global economy faced recession and other stiff headwinds. Renewable enegy sectors became more economically viable and efficient, and they’ve created some 70,000 U.S. jobs between 2006 and 2011 in the face of widespread unemployment.
Figures from Clean Energy Trends 2012 show that the solar photovvoltaic industry grew from $2.5 billion (U.S.) in 2000 to $91.6 billlion in 2011. Wind power grew from $4 billion (U.S.) to $71.5 billion (U.S.) over that same period, and biofuels, which were a $15.77 billion business in 2005, the first year stats were available, were worth $83 billion (U.S.) by 2011.
But much of that growth has been spurred by federal policies, now in doubt, which in turn attracted private investment at a rate of 3 or 4 private dollars for each federal dollar, Muro said.
(In the name of keeping consumer costs down federal and state governments also subsidize fossil fuels, to the tune of billions of dollars, with incentives like tax breaks, farm fuel assistance, low-income heating help, and many others.)
One prime example is the production tax credit, which has fuelled a decade’s worth of wind power development and is set to expire at year end. Under this incentive, installed U.S. wind capacity doubled between 2008 and 2010. Muro believes the credit will eventually be extended, but the current uncertainty is a recurring problem that stymies investment and growth. “And that’s just one program,” he added. “There are 91 others.”
Lack of predictability leads to uneven growth, boom and bust cycles in investment and strategic commitments, and potentially longer time periods before renewable energy industries become truly competitive on their own.
But the looming expiration of so many subsidies presents an opportunity to smooth this cycle, produce clean, cheap energy more quickly, and elimate wasteful spending that draws public ire—like the Solyandra loans. Getting there will require a fine balance, Muro cautioned.
“We think it’s right to examine these subsidies and rethink how we support industries,” he said. “First we should make clear that subsidation is temporary, that the goal is to help industries transition to cost competitiveness with other forms of energy, and that in each case they have a predictable phase out.”
“For example the production tax credit for wind has been nearly ended or ended and reuthorized 4 or 5 times in a decade, each time creating disruption to the industry,” he said. “We think instead of having battles every two years about whether a particular subsity is to be ended or resumed why not establish a 6 year downramp? Why don’t we move to a subsidy that stays at the same level for 3 years and then has a 3 year downramp and then that’s it? I think by and large these industries would welcome that and find it preferable to the current reperatory of drama over renewing subsidies.”
Private investors would also be likely to respond to predictability, Muro said, and commit the dollars that really drive growth. Venture Captial funding makes up a big piece of the clean energy pie. In 2001, according to a recent study by Cleantech Group, PricewaterhhouseCoopers, and the National Venture Capital Association, only about 1 pecent of venture capital investments in U.S. companies went to clean tech in 2001. But by 2011 that percentage had soared to 23 percent—and a toal of more than $6.5 billion.
“Federal investments are drawing three to four times the amount of follow-on private investment,” Muro said. “But confusion around the status of particular subsidy provisions discourages investment, disupts the ability of mangers to develop projects, and creates a whole lot of uncertainty that I think is weighing heavily on clean tech.”
That’s one reason why simply re-upping existing subsidies is the wrong approach, the study concluded.
“The status quo is not only not going to continue because there is no public or political appeal for it, it’s also not the best way of supporting these industries,” Muro said. “We certainly think wholesale termination of these is not a viable way to proceed but reupping them as they are is not good policy. There’s a sweet spot somewhere in there and I think it’s politically viable. People on Capitol Hill realize that it’s unthinkable to simply cut all these industries off cold turkey in 2013. So I really remain optomistic for some creative solutions.”
Europe has supported renewables with steadier and larger subsidies, including feed-in tariffs, which enable renewables users to sell electricity back to the grid at a fixed, high price. Amidst this year’s financial turmoil, however, Spain slashed subsidies for renewable energy and other European leaders like Germany and Britain have trimmed funding as well.