Wednesday, June 29, 2011

Is There a Clean Energy Crisis?

David G. Victor and Kassia Yanosek would answer in the affirmative. They have produced an article if Foreign Affairs titled The Crisis in Clean Energy: Stark Realities of the Renewables Craze. These authors argue that the investment strategy in renewable energy has been poorly conceived, and that these conceptual problems are leading to a stall in forward momentum.

Of necessity, renewable energy technologies need government support to get off the ground. That has provided both positive and negative influences. The government and industry, naturally, want to bet on a sure thing. That leads to emphasis on the most attainable technologies, not necessarily the best long-term options. Government funding is also uncertain and can fluctuate with the political winds.

“The root cause of today's troubles is a boom-and-bust cycle of policies that have encouraged investors to flock to clean-energy projects that are quick and easy to build rather than invest in more innovative technologies that could stand a better chance of competing with conventional energy sources over the long haul. Indeed, nearly seven-eighths of all clean-energy investment worldwide now goes to deploying existing technologies, most of which are not competitive without the help of government subsidies. Only a tiny share of the investment focuses on innovation.”

“In the United States, tax credits and depreciation benefits account for more than half the after-tax returns of conventional wind farms, for instance. Investors in solar energy projects depend on U.S. government subsidies for at least two-thirds of their returns. And the U.S. government lavishes on producers of corn-derived ethanol between $1 and $1.50 per gallon of ethanol produced -- just about the costs of production -- despite the fact that almost no one considers corn-derived ethanol to be an economically viable fuel that can protect the environment or reduce dependence on oil.”

The authors argue that this era of shortsighted investment is now beginning to wind down.

“In most of the Western countries leading the industry, the public subsidies that have propelled it to 25 percent annual growth rates in recent years have now become politically unsustainable. Temporary government stimulus programs -- which in 2010 supplied one-fifth of the record investment in clean energy worldwide -- have merely delayed the bad news. Last year, after 20 years of growth, the number of new wind turbine installations dropped for the first time; in the United States, the figure fell by as much as half. The market value of leading clean-energy equipment manufacturing companies has plummeted and is poised to decline further as government support for the industry erodes.”

Perhaps there is no greater example of the pressure building to rein in costs than the recent decision, in a bipartisan vote, to end the tax credit and tariff on ethanol—a politically difficult move. The Economist provides this chart to help visualize how dependent production was on government subsidies.

The authors contend that few of the technologies being supported can be economically competitive in the near future. This leads to the suggestion of a change in strategy.

They describe the current approach as mainly a “push” strategy. By that they mean that specific technologies are supported by subsidies and encouraged to expand their capabilities. They favor more of a “pull” strategy. This would consist of specifying energy goals that have to be met. This could consist of a carbon tax, a cap and trade policy, or just a national clean energy standard that must be met. Combining this with increased investment in universities and government labs in search of more commercially viable solutions is the most promising approach.

“More than half of all research-and-development money in clean energy comes from the government -- proof that private investors are unlikely to fill this gap on their own. (Keeping political support for this funding is particularly important in this era of tight government budgets.) It can also support early stage technologies that private investors will not adequately fund, expanding mechanisms such as the U.S. Department of Energy's new Advanced Research Project Agency-Energy (ARPA-E). Such programs have been controversial with analysts who fear that the government might back the wrong horse. ARPA-E reduces this danger by funding a variety of competing technologies while leaving the private sector to pick the winners. Indeed, ARPA-E was modeled on effective schemes at the Pentagon that back risky, novel technologies [DARPA].”

Along with this change in focus should come a loosening of the definition of “clean energy.” If it does not include cleaner burning coal-fired plants, nuclear power and strict energy efficiency requirements, there is little chance that a “revolution” in energy production will occur.

The authors also argue that collaborations with developing countries, especially China, will be necessary. It is the developing countries who are presently in the process of building new power sources. Their efforts could provide vehicles for experimenting with new production technologies.

The authors allow that some of the current technologies are taking hold, not so much for their commercial viability, but because the consumers have been willing to bear the additional costs.

“To be sure, some pockets of robust growth remain, especially where governments have not wavered in their support and found more palatable ways of hiding the full cost of subsidies -- for example, by passing the costs directly on to consumers through taxes in electric power bills. These pockets include offshore wind in northern Europe, onshore wind in China, and residential rooftop solar energy in the United States....”

This issue of commercial viability seems to be based on the notion that clean or renewable energy has to be competitive with current energy “costs.” These costs do not consider the environmental, health, and climate ramifications of utilizing the various energy sources. When a more enlightened costing is done, these alternate sources look a lot better.

The authors have provided a valuable perspective on current renewable energy policy. The idea of a “crisis” might be a bit of a stretch. There are certainly going to be funding problems given the state of the economies of the developed nations, but this could be just another example of the “boom and bust” cycle they decry rather than a loss of will. They also point out that many of their suggestions are already being pursued. What they are really asking for is a change in emphasis rather than moving in a new direction.

I am not sure they have provided a sufficient basis for declaring a crisis.

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