Powerful Economic Engines

Powerful Economic Engines

February 13, 2009

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief

Green groups are embracing the White House's motto that a new day is ahead. But if their clean technologies are to spur the nation's economy, they say they need practical tax breaks so that the current demand remains steadfast.

Rather than using production tax credits at a time when most businesses will owe the government substantially less, green developers need the cash now. By making the current tax credit refundable, those advocates say that it will have an immediate effect -- and all in keeping with the Obama administration's stated goal of creating 3-4 million next-generation jobs. Legislation is now floating on Capitol Hill to do exactly that.

"Congress must use the stimulus bill to move us away from our backwards-looking, recession-burdened economy and toward a new era of recovery and prosperity with solar and wind leading the way," says Rhone Resch, chair of the Solar Energy Industries Association. "Our industries have become powerful economic engines, each year creating tens of thousands of new jobs and billions of dollars in economic investment."

In 2007 and 2008, more than 50 wind energy manufacturing facilities were opened, expanded or announced in this country, adding 14,000 employees. More than half of those jobs were added in 2008, even as the overall U.S. economy was faltering. The solar energy industry employs more than 80,000 people here and created more than 15,000 jobs in the last two years. According to Navigant Consulting, the solar energy sector alone will create 440,000 permanent jobs and spur $325 billion in private investment by 2016 with the investment tax credit in place.

Like all energy projects, wind and solar are capital intensive. While banks may have more cash after fresh infusions by the feds, they are unwilling to lend it to those developers without proven track records and especially to finance those projects that are not backed by blue chip customers. Consider Germany's solar energy start-up Schott Solar, which delayed its initial public offering until it can get the cash.

In a market-based economy, capital will flow to where risk takers perceive the most opportunities. Public policy is instrumental, creating the tax incentives and regulatory mandates that can give emerging technologies the break they need to make it. In that regard, cash payments -- not credits against taxes owed -- would be used to move viable projects forward.

"The solar and wind industries have lobbied heavily for a 'refundability' substitute program, arguing that it is necessary to get renewable projects off the ground in the tight credit market," says Christine Tezak, regulatory analyst for the Stanford Group. "We believe the program in final stimulus language may expand on the House proposal to include all projects which begin construction in 2009 and 2010 and are placed in service before the tax credits expire."

Adding Value

The financial incentives may be necessary in the short run but over time, the green sector must be able to thrive in free markets. Favorable legislation and regulation is more credible, if it lead to long-lasting consumer behaviors. That, in turn, will give developers the motivation to enter markets. Ultimately, though, wind and solar manufacturers must reduce their costs and add value.

Critics of the subsidization plan say that it will only serve to raise the cost of electricity. While that may benefit the developers who will profit from such an expansion, it will in the long run hurt American businesses. They say that wind and solar have their places in the overall generation mix. But the implementation of such programs has to be done in such way that makes economic sense.

Wind and solar may be competitive with traditional fossil fuels if they are heavily backed with federal subsidies. But such energy forms require huge investments in ancillary services and transmission, all of which add tremendously to their costs. It's all tantamount to the current mortgage crisis, the critics add, noting that the lenders and the builders made out like bandits. Ultimately, however, homeowners have suffered the most.

Greenies contend that once their industries reach economies of scale they will no longer need tax credits. But until such point, the government's investments are paying off.

The American Wind Energy Association says that last year the wind industry installed a record 7,500 megawatts of capacity in the United States, bringing total wind capacity here to about 24,000 megawatts. The solar industry is estimated to have nearly doubled growth of solar photovoltaic installations in 2008. Altogether, renewable energy sources excluding hydropower make up less than 2 percent of the national electricity mix.

But it's a rough time out there. If wind and solar manufacturers expect to compete, they will be forced to reduce their costs. It's about creating innovative products and services and improving their efficiencies. Stated differently, those developers must be able to generate more kilowatts per hour for the same dollar.

"For technology developer to be successful in the next five years, they have to reduce costs and improve quality," says David Lee, head of BioSolar. "Long term, I have no doubt about the huge expansion of the solar industry. But the next five years will be the trial period. During this time, the solar industry will do better than others as a whole."

Green technologies will assuredly be tested. But the movement fears that the present economic turmoil will undo its progress. Through the enactment of immediate cash tax breaks, the industry says that it can meet that threat and that such policies are in tune with the White House's overall agenda. Jobs, fuel diversity and clean air are the rallying points. If the greenies and their supporters can deliver while keeping prices down, resistance to their cause will fade.