The uncertain future of cleantech subsidies

September 29 2008 / by Garry Golden
Category: Energy   Year: 2009   Rating: 5 Hot

While the fate of a US energy tax bill that includes renewable energy credits remained up in the air on Monday morning, the market implications of federal energy production subsidies are now more clear.

Earlier this month the US Energy Information Agency released a report looking at shifts between 1999 through 2007 for federal energy subsidies. The mechanism with the most direct market influence relates to production tax credits (PTCs). Today, the solar industry is hoping that it will benefit the same way that wind and ethanol have in the past.

Global implications of national subsidies
In all major world economies, public sector subsidies play a key role in the evolution of energy production of traditional and alternative energy sources.

And despite the rhetoric of energy independence surrounding renewable sources of energy, the reality is that energy production based on wind, solar and biofuels is globally integrated across the value chain.

The biofuels industry is a global industry built upon a complex web of financiers, seed companies, producers, refiners, distributors, and equipment manufacturers. Biofuels are also heavily subsidized in the US and Europe.

Solar and wind are no exception. The wind turbine that produces ‘domestic energy’ might have been designed or manufactured abroad. And the future growth of a California solar company is likely dependent on buying ‘foreign’ raw materials or selling units outside the United States. So a dramatic shift in subsidies inside the US, Europe and China will have ripple affect across the world.

Subsidy lessons from wind and ethanol
Subsidies use public resource to assist producers, sellers or buyers in energy specific areas. According to the EIA, the Federal Government spent an estimated $16.6 billion in energy-specific subsidies in 2007- more than than double than 1999 levels.

The EIA report highlighted the market implications of production tax credits in 2007. Not surprisingly ethanol production, which received $3.0 billion in production (blender) credits, exceeded any conventional or renewable fuel subsidy.

The report also highlighted the positive growth implications for production-related subsidies for wind. ‘Between 1999 and 2007, the only primary energy source for which production increased every year was wind power. Over this period, the Btu equivalent of electricity produced by wind increased at a yearly rate of almost 32%, compared with 0.1% per year for coal and 0.3% per year for natural gas.

Next in Line- Solar
The world solar industry is watching closely as the final bill leaves Congress for Whitehouse approval or veto. The US and world solar industry is hoping that the existing solar production credit will be extended through 2016 and continue to support growth in this nascent industry.

Informed consumers are also watching closely as the bill could also expand the $2,000 tax credit cap for home owners wishing to buy solar panels for home energy production.

An uncertain future
Production subsidies are of course- controversial! There is certainly evidence to suggest that production price manipulation of emerging industries can have a negative impact on longer term growth. But the most likely future is a world where emerging energy industries are supported by countries acting upon their own self-interest.

The challenge of real growth around non-traditional forms of energy production might then be more about overcoming political and economic barriers than solely reducing costs of technology.

While the direction of US subsidies remains uncertain, we know that national subsidies will have an impact on world markets as the renewable sector becomes more globally integrated and producers seek growth across all markets.

Graphics, US Energy Information Agency

Comment Thread (2 Responses)

  1. Can you elaborate a bit on how manipulation of emerging industries can have a negative impact on longer term growth?

    Posted by: Mielle Sullivan   September 30, 2008
    Vote for this comment - Recommend

  2. Re: Mielle

    Sorry for the delay in responding here!!!

    Subsidies can certainly play a positive role in launching nascent industries. So there is a ‘return on investment’ reason why gov’ts invest in emerging technologies – mostly around job growth and an expanding tax base.

    But in some situations- subsidies can lead to the wrong types of market dynamics. Overproduction is a great example.

    Let’s say that the govt mandates a certain % of use for a specific new tech like ‘biofuel’. To encourage production they create tax incentives for producers. What happens in the short term is that new producers come out of nowhere! Investors pure money into production, but consumption remains low or stagnant b/c consumers don’t buy as quickly as expected.

    The result is over capacity. Producers have too much supply and the price falls out.

    The result can be loss of investor confidence. So people stay away from what they perceive to be an artificially inflated market. The slowed growth and loses themselves can take longer to recover than what you might see in a less ‘mandated’ market.

    Biofuels in Europe is a great recent example. The EU set high targets—but the market didn’t growh as expected. Meanwhile producers expanded capacity, farmers switched crops to supply soy / rapeseed feedstock, Indonesia sent over palm oil, and American producers used US production tax credits (blended with minimum % of oil) then sold it in Europe. Nobody was happy and the biofuels market stalled.

    Long term growth is of course still there… but the mandates (arguably) led to an unnecessary roller coaster ride.

    The challenge of subsidies is in balancing incentives while preventing abuse and people that are merely trying to take advantage of a favorable situation.

    Beyond over production- another problem can be underinvestment. So a solar panel maker might generate profits b/c of a gov’t tax credit. As a result they under invest in advanced manufacturing processes and fail to drive costs down quick enough to drive future growth.

    So—I’m definitely not opposed to subsidies, but their impact on growth is not always positive. And the reality is that gov’t subsidies are a part of the reality of global trade. So I don’t think we can avoid them… maybe just try to manage them as best we can.

    Posted by: Garry Golden   October 12, 2008
    Vote for this comment - Recommend