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Stimulating through Subsidy -- Does It Work?

Current policies at the state and federal level are extremely supportive of clean energy development. But the structure of subsidies matters. As the stimulus pumps unprecedented billions into renewable energy, it is worth asking whether we are promoting the right kind of investment that will enhance future US competitiveness.

The clean energy revolution is alive and well, despite the sputtering economy, and is widely touted as the growth engine that will lead the way in the overall recovery. As we heard from candidate and now President Obama, public investment in renewable energy and energy efficiency can create a virtuous cycle – sustainable “green collar jobs” for displaced American workers, new markets for American made products abroad, new innovation and private investment riches for venture capitalists in Silicon Valley… it’s a beautiful vision. But will it actually work? The signals at this point are I would argue mixed and the results to date inconclusive.

The current supportive public policy environment is a double edged sword in that it can both mobilize tremendous economic resources but also artificially stimulate demand and raise expectation for markets that aren’t ready for prime time or may not meet the test of future competitiveness. To the extent subsidy policy disguises the true costs of meeting our environmental and energy objectives, it can also distort the debate and postpone the inevitable day of reckoning when energy investments are matched against other budgetary priorities.

Take, for example, the Renewable Portfolio Standards (RPS) in place in California and about half of the other states at last count (plus the federal version currently stalled in the Senate energy and climate bill). RPS has in common with its carbon cousin cap and trade the simplicity of setting a target for an expensive new mandate without imposing an explicit price or tax that would crystallize opposition. So far, we are living with the illusion that we can have our cake and eat it too – get the renewable wind and solar generation we want without big utility rate increases.

To see how this works, let’s zoom in on my home state of California. The three major investor owned utilities in the state have each signed Purchase Power Agreements (PPAs) for thousands of megawatts of renewable projects, including large amounts of energy from concentrating solar thermal power (CSP) that uses mirrors to heat steam and generate electricity from a steam turbine power block. While the basic technology concept is sound, the cost side is still quite speculative. Most of the developers have limited experience in the management of large scale construction projects (though Bright Source Energy’s recently announced partnership with Bechtel is a hopeful sign). Moreover, the projects are all being built in high desert wilderness areas that have little existing transmission capacity and no water resources to speak of, so there are numerous permitting, land use, local zoning, and water rights squabbles to contend with, and long lead times for new transmission interconnection facilities. Not surprisingly, the project developers are running into delays and cost overruns, so the power will ultimately cost more to produce (meaning the PPAs may have to be renegotiated) and the utilities are already well behind on meeting their 20% renewable commitments for 2010 (nevertheless the proposed 33% RPS for 2020).

Another place where the reality clearly hasn’t kept up with the hype is California’s Solar Initiative (CSI), part of the “million solar roof” plan – at last count, there were in fact less than 100,000 rooftop systems installed in the state. Why? Even with the country’s most attractive solar incentives (on top of the federal 30% investment tax credit), rooftop PV remains a fairly expensive proposition with high upfront install costs and a lot of transaction barriers for consumers. Every system is individually design engineered to fit the roof angle, shading, electrical and structural requirements for attachment to a building (in contrast to ground mount PV systems, which can be built more quickly, with standardized components). Furthermore, although California is a sunny place, many affluent homeowners who are the target market for solar live in coastal parts of the state that receive less sunshine, meaning the payback is often in the 10+ year range… while right underneath the solar array is a building that typically has multiple energy efficiency retrofit opportunities with much shorter payback and better ROI. In short, while I believe it is a well-intentioned effort, one might legitimately question whether the CSI subsidy for rooftop PV is the best use of scarce ratepayer resources.

California has always set the bar high in energy policy -- sometimes succeeding impressively (decoupling of utility earnings from kWh sales, the Title 24 building code, 30 years of highly successful utility demand side management programs), sometimes failing miserably (the botched electric deregulation, expensive PURPA QF contracts, MBTE in gasoline, or the ill-fated “zero emissions vehicle” standard whose epitaph was written in the movie “Who Killed the Electric Vehicle?”). RPS will, I believe, turn out in retrospect to be a case where it was okay to set the bar high and fall a little short (is “only” 18% renewables by 2012 really a bad outcome?). While I suspect the rooftop PV initiatives will go down as more of a mixed legacy… time will tell.

Panning back out to the national picture, does all this policy design stuff really matter, as long as we’re employing people by the thousands? Well, if the purpose of the current clean energy subsidies is not only to create make-work jobs but to lay the foundation of future US competitiveness, surely it matters whether those workers are being hired and trained in the right skills. Putting thousands of out of work construction contractors back up on roofs to install solar PV (with today’s labor intensive methods) may be an attractive political position, but it is probably not a great investment in a sustainable business model (compared to, say, investments in R&D and accelerating the commercialization of new technologies, some of which, to be fair, we are also doing simultaneously via the American Recovery and Reinvestment Act, a.k.a. the Stimulus). Proving out the economics of a new large scale energy generation technology like CSP (and developing a domestic industry champion to export that expertise, like Bright Source) would have significant long term employment benefits to the US economy – and is to my mind probably worth some degree of risk and uncertainty on today’s installed cost.

Matt Lecar is a veteran energy industry expert with an 18 year track record of thought leadership in utilities, international business development, cleantech venture capital, and consulting. Most recently, he served as Fund Manager for the CalCEF Angel Fund, a first-in-kind seed stage investment vehicle focused exclusively on clean energy markets. This blog is part of a series of opinion pieces called “View from the Poletop” – broad perspectives on the current state of markets and investment opportunities in renewable energy, energy efficiency, and smart grid.


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