Clean Energy Boom Heading to the Abyss

By. Devon Swezey
Breakthrough Institute
July 11, 2011

The global clean energy industry is set for a major crash. The reason is simple. Clean energy is still much more expensive and less reliable than coal or gas, and in an era of heightened budget austerity the subsidies required to make clean energy artificially cheaper are becoming unsustainable.

Clean tech crashes are nothing new. The U.S. wind energy industry has collapsed three times before, first in the mid 1990s and most recently in 2002 and 2004 when Congress failed to extend the tax credit that made it profitable. But the impact and magnitude of the coming clean tech crash will far outstrip those of past years.

As part of its effort to combat the economic recession, the federal government pumped nearly $80 billion in direct investment and tax credits into the clean energy sector, catalyzing an unprecedented industry expansion. Solar energy, for example, grew 67% in the United States in 2010. The U.S. wind energy industry also experienced unprecedented growth as a result of the generous Section 1603 clean energy stimulus program. The industry grew by 40% and added 10 GW of new turbines in 2009. Yet many of the federal subsidies that have driven such rapid growth are set to expire in the next few years, and clean energy remains unable to compete without them.

The crash won’t be limited to the United States. In many European countries, clean energy subsidies have become budget casualties as governments attempt to curb mounting deficits. Spain, Germany, France, Italy and the Czech Republic have all announced cuts to clean energy subsidies.

Such cuts are not universal, however. China, flush with cash, is bucking the trend, committing $760 billion over 10 years for clean energy projects. China is continuing to invest in low-carbon energy as a way of meeting its voracious energy demand, diversifying its electricity supply, and alleviating some of the negative health consequences of its reliance on fossil energy.

If U.S. and European clean energy markets collapse while investment continues to ramp up in China, the short-term consequences will likely be a migration of much of the industry to Asia. As we wrote in our 2009 report, “Rising Tigers, Sleeping Giant,” this would have significant economic consequences for the United States, as the jobs, revenues and other benefits of clean tech growth accrue overseas.

In the long-term, however, clean energy must become much cheaper and more reliable if it is to widely displace fossil fuels on the scale of national economies and become a commercially viable industry.

Breaking the Boom-Bust Cycle

Why is the United States still locked in this self-perpetuating boom-bust cycle in clean energy? The problem, according to a new essay by energy experts David Victor and Kassia Yanosek in this week’s Foreign Affairs, is that our system of clean energy subsidization is jury-rigged to support the deployment of only the least-risky and most mature clean energy technologies, while lacking clear incentives for continual innovation that could make clean energy competitive on cost with conventional energy sources. Rather, we should “invest in more innovative technologies that stand a better chance of competing with conventional energy sources over the long haul.” According to Victor and Yanosek, nearly seven-eighths of global clean energy investment goes toward deploying existing technologies that aren’t competitive without subsidy, while only a small share goes to encouraging innovation in existing technologies or developing new ones.

This must change. Rather than simply subsidize production of current technologies, we need a comprehensive energy innovation strategy to develop, manufacture, and deploy riskier but more promising clean energy technologies that may eventually compete with fossil energy at scale. Instead of rewarding companies for building the same product, we should reward companies who continuously improve designs and cut costs over time.

Such a federal strategy will require major federal investments, but of a different kind than the subsidies that have driven the clean tech industry in years past. For starters, we must dramatically ramp up funding for early-stage clean energy research and development. A growing bipartisan group of think tanks and business leaders have pushed an investment of at least $15 billion annually in energy R&D, up from its current $4 billion level.

Targeted funding is needed to solve technology challenges and ensure that innovative technologies can develop and improve. One key program that helps fulfill this need is ARPA-E, which funds a portfolio of innovative technology companies and helps connect them with private investors. But ARPA-E’s budget has continually been under assault in budget negotiations, hampering its ability to catalyze innovation in the energy sector and limiting its impact.

We also need to invest in cutting-edge advanced manufacturing capabilities and shared technology infrastructure that would help U.S. companies cut costs and improve manufacturing processes. As the President’s Council of Advisors on Science and Technology wrote in a report released last week, manufacturing is vital to innovation, “because of the synergies created by locating production processes and design processes near to each other.” Furthermore, bringing down manufacturing costs, such as by supporting shared infrastructure for small firms, or offering financing for the adoption of innovative technologies in manufacturing, will be a key component of reducing the costs of new clean energy innovations.

Lastly, the nation’s hodgepodge of energy deployment subsidies is in dire need of reform. As Breakthrough and colleagues wrote in “Post-Partisan Power,” we need an energy deployment regime that demands and rewards innovation, rather than just supporting more of the same. Brookings’ Mark Muro (a co-author or PPP) expands, “targeted and competitive deployment incentives could be created for various classes of energy technologies that would ensure that each has a chance to mature even as each is challenged to innovate and locate price declines.” Rather than create permanently subsidized industries, such investments would “provide the opportunity for opportunity for all emerging low-carbon energy technologies to demonstrate progress toward competitive costs,” while speeding commercialization.

It is clear that the current budgetary environment in the United States presents challenges to the viability of the fast-growing clean energy industry. But it also presents an opportunity. By repurposing existing clean energy policies and investing in clean energy innovation, the United States can be the first country to make clean energy cheap and reliable, a distinction that is sure to bring major economic benefits in a multi-trillion dollar energy market.

U.S. Fed Commits to Erasing the Dollar

Ben Bernanke and his cabal of governors approved the expenditure of at least $600 billion to buy U.S. debt.  This move makes the private Federal Reserve Bank the largest holder of U.S. even debt above China.

CNBC/Reuters

The Federal Reserve launched a controversial new policy on Wednesday, committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy.

The decision, which takes the Fed into largely uncharted waters, is aimed at further lowering borrowing costs for consumers and businesses still suffering in the aftermath of the worst recession since the Great Depression.

The U.S. central bank said it would buy about $75 billion in longer-term Treasury bonds per month. It said it would regularly review the pace and size of the program and adjust it as needed depending on the path of the recovery.

In its post-meeting statement, the Fed described the economy as “slow”, and said employers remained reluctant to add to payrolls. It said measures of inflation were “somewhat low.”

“Although the committee anticipates a gradual return to higher levels of research utilization in a context of price stability, progress toward its objectives has been disappointingly slow,” the Fed said. (Click here to read Fed statement.)

Stocks showed relatively little reaction to the news. The Dow Jones Industrial Average bounced around between positive and negative, a day after closing at its highest level since April 26. The S&P 500 Index and the Nasdaq also were mostly flat.

Longer-dated U.S. Treasurys shed gains, with 30-year bonds falling more than a point.

The US dollar fell against the euro and also pared gains against the yen.

The central bank repeated its vow to keep the federal funds rate on overnight loans ultra-low for an extended period. Some analysts had speculated the Fed might broaden this commitment.

Kansas City Fed President Thomas Hoenig continued his streak of dissents, saying the risk of additional securities purchases outweighed the benefits.

In a separate statement, the New York Fed said it would temporarily relax a rule limiting ownership of any particular security to 35 percent.

It said holdings would be allowed to rise above that threshold “only in modest increments.” Including the Fed’s ongoing plan to reinvest maturing assets, the New York Fed expects to conduct $850 billion to $900 billion in Treasury purchases through the end of the second quarter of 2011.

With the U.S. economy expanding at only a 2 percent annual pace in the third quarter of this year and the jobless rate seemingly stuck around 9.6 percent, the Fed had come under pressure to do more to stimulate business activity.

The central bank had already cut overnight interest rates to near zero in December 2008 and bought about $1.7 trillion in U.S. government debt and mortgage-linked bonds.

Those purchases, however, occurred when financial markets were stricken by crisis, and economists and Fed officials alike are divided over how effective the new program will be. Further bond purchases, however, are viewed with a skeptical eye by many economists and some Fed officials.

Indeed, some worry further bond buying could do more harm than good by providing tinder for inflation that will ignite when the recovery finally gains traction.

Markets had already seen sharp moves in anticipation of a resumption of bond purchases by the Fed. U.S. stocks and government bonds have rallied, while the dollar has taken a drubbing in advance of the decision.

Stocks have also been supported by expectations—now validated—that Republicans, viewed as more pro-business by investors, would seize control of the House and pick up Senate seats in elections on Tuesday that were seen as a referendum on the economy.

Since Republicans campaigned on a platform for smaller government, Congress may be less likely to offer fresh stimulus spending if the economy sputters, leaving the Fed as the primary source of support.

With the prospect of a long period of ultra-low returns in the United States, investors have flocked to emerging markets, pushing those currencies higher. Emerging economies, worried about a loss of export competitiveness, have cried foul.

“We are all under attack by the relaxed monetary policy of the United States,” Colombian Finance Minister Juan Carlos Echeverry told investors on Tuesday.

The Bank of Japan, which meets on Thursday and Friday, is also poised to launch a new round of bond buying. The European Central Bank and Bank of England also meet this week, but are not expected to shift policy.

The Fed move is likely to weaken the dollar further, which will helps big exporters like CNBC parent General Electric

Strikes costing up to $557 million per day in France

AP

France’s massive strikes are costing the national economy up to 400 million euro ($557 million) each day, the French finance minister said Monday as workers continued to block oil refineries and trash incinerators to protest a plan to raise the retirement age to 62.

Rotting piles of garbage — now at nearly 9,000 tons — are becoming a health hazard in the Mediterranean city of Marseille, which has been hit hard on land and at sea. Striking dockers at France’s largest port are intermittently blocking ships trying to unload fuel there.

France’s 12 striking refineries have been shut down for nearly two weeks, and the government has forced some of them to make stocked fuel available, but at least one in four gas stations in France has run dry.

President Nicolas Sarkozy stood firm amid the growing pressure, determined to reform the retirement system to ensure funds for future generations as life expectancy increases and the nation’s debt soars.

The bill to overhaul France’s pension plan is to be definitively voted on this week by the two houses of parliament, likely by Wednesday, officials said after a meeting of a committee that wrote a final version of the legislation to raise the retirement age from 60 to 62. It is all but certain to pass.

“We must be aware that in a world without borders we can’t have a French exception … that exists nowhere else,” said lawmaker Pierre Mehaignerie, of Sarkozy’s UMP party.

Strikers were clearly counting on derailing the measure before it is signed into law after this week’s final voting.

Garbage and gas are critical weapons for the strikers, who decry the reform as unjust. Besides raising the minimum retirement age to 62, it increases the age to access full retirement benefits from 65 to 67. It was only in 1982 that French employees won the right to retire at 60, and since then it has been considered a well-earned right.

“We aren’t going to work on the docks until 65. It’s just not possible,” said Frederic Chabert, 47, at Fos-sur-Mer, a Marseille area port. Strikers unblocked the town’s fuel depot Monday after negotiations with regional officials.

Workers at a large Paris waste incineration plant, in their fifth day of a strike, were catching up with colleagues who have let trash pile up in Marseille, the nation’s second-largest city.

“If we manage to get to a point where unfortunately Paris becomes like Marseille, covered in garbage, I think then the situation could change because Paris is France’s showcase,” said Olivier Nave, a 39-year-old garbage collector.

“No one wants Paris to look bad with tourists,” he told Associated Press Television News.

Currently, the French capital’s trash is being rerouted to several other waste treatment sites.

Marseille has requisitioned workers to try to clean up some of the mounds of filth after warning Friday of a “growing risk for people’s safety.” The regional prefect, Michel Sappin, spoke last week of “a pre-epidemic situation.”

Final passage of the pension reform legislation through parliament this week has not deterred unions, which have already announced two new nationwide protests — for Thursday and Nov. 6.

The strikes have hit a wide swath of the economy and life in France, sporadically in some cases, like at schools and post offices. A national train strike that started Oct. 12 has been tapering off, but oil refinery workers, who have been striking steadily for about two weeks, are chipping away at the economy.

Finance Minister Christine Lagarde said on Europe-1 radio that it was difficult to put a daily price tag on the strikes, but she estimated it at between euro200 million ($278 million) and euro400 million ($557 million). Beyond that, the strikes are damaging France’s image, she said.

Lagarde said foreign news stations were constantly playing clips of the French protests.

“The territory’s attractiveness is put into question when you see images like that,” she said.

The gas-dependent trucking industry is among the sectors suffering. Nicolas Paulissen, deputy head of the French trucking industry body FNTR, said the industry was losing money due to lost business and an “explosion of costs.” He said it was too early to pin down a figure.

The demonstrations against the retirement reform have brought millions into the streets, and polls have shown that a vast majority of French people support the strikers. Meanwhile, the conservative Sarkozy’s popularity is plummeting.

A poll published in Sunday’s Journal du Dimanche newspaper showed that only 29 percent of those surveyed were satisfied with Sarkozy’s performance. It was the French leader’s lowest rating since taking office in 2007.