by Candice D. McLeod*
On February 6th, the American Council on Renewable Energy (ACORE) held its 10th annual Renewable Energy Policy Forum on Capitol Hill. The event featured a host of industry, financial and government leaders, who spent the day discussing the progress of the renewable energy industry, from the industry’s current purgatorial state due to impending policy deadlines to the potential implications of the current fiscal and partisan climates.
The overall themes were clear – more financing options for renewables, renewable energy policy stability, and China setting the global rhythm.
Here are five main insights drawn from the forum:
- Renewable energy markets continue to grow significantly. Perhaps we should stop referring to them as “alternative sources” of energy
- Economic security -keep your eye on Iowa and rural America
- More policy stability, please
- More financing options -MLPs & REITs
- Don’t throw the baby out with the bathwater
1. Renewable energy markets continue to grow significantly. Perhaps we should stop referring to them as “alternative sources” of energy
John R. Norris, Commissioner, U.S. Federal Energy Regulatory Commission (FERC) opened the panel Renewable Energy Market Growth with the statement, “[if] it wasn’t for an economy that’s walking with a limp and a dramatic decrease in natural gas prices, the renewable energy market would be twice the size.”
Meanwhile, the health and continued growth of the renewable energy sector, both domestically and internationally, were illustrated with graphs and tables by Ethan Zindler, Head of Policy Analysis, Bloomberg New Energy Finance (BNEF). His key points included that the U.S. has seen a two-fold increase in renewable energy investment from 2009–2012, (investment grew from $43.5 bn in 2010 to $65.4 bn in 2011). However, its steady growth fell almost 30% in 2012, to $44.2 bn, as a result of the hedging climate created by expiring governmental renewable energy incentive policies.
Mr. Zindler identified the Department of Energy’s (DOE) Advanced Research Projects Agency – Energy (ARPA-E) program, the National Renewable Energy Laboratory (NREL) and the DOE’s solar loan guarantee program as the primary drivers of innovation for the U.S. renewable energy sector. Nancy Pfund, Managing Partner of DBL Investors (a venture capital firm that manages investments in renewable energy powerhouse companies such as Tesla Motors), corroborated Mr. Zindler’s point by highlighting several successful examples, including FloDesign Wind Turbine Corp., which acquired an $8.3 million grant from the ARPA-E program for their innovative jet-engine inspired wind turbine.
In terms of global renewable energy growth, to no one’s surprise, China continues to be the industry pacesetter, both in exports of supplies and construction for renewable energy projects. However, given the newly imposed tariffs on Chinese solar cells and panels manufacturers, BNEF predicts a decrease in Chinese suppliers to the U.S. In addition, based on BNEF’s data, China has pledged 43 gigawatts (GW) in new capacity from renewable energy development in 2013. Considering that no country has ever pledged more than 7 GW, it would be an understatement to call this record growth, if accomplished.
Finally, Germany also received an honorable mention. The European country has proved to be very efficient in developing its renewable energy industry, particularly, with its streamlined process and cheaper end cost for downstream players, which are two current goals for the U.S. renewable energy industry.
2. Economic security -keep your eye on Iowa and rural America
The Department of the Interior is responsible for executing significant portions of the U.S. energy policy. Afternoon keynote speaker, Ken Salazar, Secretary of the U.S. Department of the Interior, reinforced the commitment of his agency to the development of renewable energy, as well as discussed its benefits to rural America, a key message throughout the conference.
Ken Salazar, Secretary of the U.S. Department of the Interior
Jeff Lautt, CEO of POET, a bioethanol company, stated that the positive impact of the renewable energy industry in rural America has been significant, lifting many rural areas out of poverty, increasing food security, a growing concern, as well as job security for farmers. He also noted that the presence of renewable energy projects in rural America helped the region to weather the economic downturn the best.
The conference’s opening keynote speaker, U.S. Congressman Steve King (R-Iowa), reminded the audience that not all Republicans oppose renewable energy, and advocated that renewable energy development in rural America has been translated into increased job security for the region, using his home state of Iowa as the prime example. Congressman King indicated that Iowa has become the heartland of renewables’ development, particularly for biofuels and wind. His highlights included that Iowa is the leader for biofuel production in the U.S., producing almost one-third of the nation’s ethanol, with a total of 41 refineries -28 for bioethanol and 13 for biodiesel. He added that the bioethanol industry has matured and is now able to compete in the marketplace.
3. More policy stability, please
Almost every panel conveyed the same underlying message that the U.S. needs stable and consistent policies for renewable energy sources. As policies approach their expiration dates, investors close their wallets and subsequently squelch growth. Mr. Zindler and Ms. Pfund revealed that the lack of stability in U.S. policy has driven some U.S. manufacturers of innovative equipment to China, where they have easier access to the market.
Currently, the wind-power tax credit expires at the end of 2014, after being extended this January, while the extended tax credits for advanced plant fuels expire at the end of 2013. The uncertainty surrounding the extension of these tax credits and other subsidies has caused the industry to scale back in various ways, from part-makers such as Siemens AG laying off employees, to a decline in the availability of investment dollars.
The uncertainty also forced some companies to operate with more haste than care.
In 2012, companies scrambled to finish installations by the end of the year to ensure that they capitalized on expiring government incentives. Mr. Zindler stated that “2012 was a party for wind energy installation, and 2013 will be the hangover”, which couldn’t be a better description for the massive wind energy growth of 2012, and the subsequent somber predictions for 2013. Based on BNEF’s projections, despite the extension of the wind-power tax credit to 2014 (an additional $12 billion was brokered as part of the fiscal-cliff deal), it is hard to expect as many wind energy projects in 2013. Long-term security is still absent and, more importantly, thanks to 2012’s “scramble”, many parts of the pipeline for future projects have already been installed. Heading into 2012, 6.2 GW of wind energy projects had already been financed and, for 2013, that number has been sliced by almost 94 percent, with only 0.4 GW of projects financed.
Mr. Zindler also noted that state policies had not been driving as many programs in the past, However, Mr. Lautt advocated for the development of more state-level renewable energy policies, and was adamant that the strength of state-level policies as a catalyst for renewable energy development should not be ignored. Meanwhile, Morgan Stanley’s Chairman of their Institutional Securities Group, Jeff Holtzchuh, indicated that he would be comfortable with a FERC-based policy.
4. More financing options -MLPs & REITs
There has been talk of creating a permanent tax credit for renewables, to provide this industry with the same advantage that fossil fuels have had for years. Two additional advantages, which the renewable energy community would also like access to, are master limited partnerships (MLPs) and real estate infrastructure trusts (REITs; pronounced “reets”).
The fact of the matter is that tax credits are unreliable because they have to be periodically reauthorized by Congress. Mr. Holtzchuh commented that from his experience “although an investor will pay attention to environmental concerns, at the end of the day, he or she will opt for stability.” Patrick Eilers, Managing Partner at Madison Dearborn Partners, echoed this statement, saying that while the role of an investor is to take risks with minimal information, the instability of renewable energy policies thwarts potential investment.
MLPs and REITs are favorable investment structures with tax benefits that would allow renewable energy industries the ability to capture more risk capital by granting them access to a broader base of investors, as well as, the additional benefit of the protection of the U.S. Securities and Exchange Commission (SEC).
Dan Reicher, Director of the Steyer-Taylor Center for Energy Policy and Finance at Stanford, and moderator for the panel Finance meets Policy stated that qualifying as an MLP or an REIT beneath the tax code of the U.S. Internal Revenue Service (IRS) has the potential to make financing renewables easier and cheaper by at least a third of their current costs.
5. Don’t throw the baby out with the bathwater
The renewable energy industry in the U.S. is certainly undergoing some growing pains at the moment. The hope is that these growing pains do not overshadow or, more importantly, offset the significant progress that has been made.
The most prevalent concern from this group of influential renewable energy advocates was that this industry might experience significant setbacks from the governmental level, whether it is from partisan red-tape, budget cuts, or severe lobbying from oil and gas supporters. In turn, these barriers might potentially derail the U.S. renewable energy industry’s attempts to reach its four overarching goals: global competitiveness, climate change mitigation, economic security and energy security.
Towards the end of the conference, I had the opportunity to speak with Mr. Zindler and asked what concerned him the most. Surprisingly, it was the fact that the market may face over-consolidation and over-contraction as a result of its current state of being oversupplied, particularly for wind projects, photovoltaics, and lithium batteries.
Despite these obstacles, the panelists at the forum asked the audience of private and public sector leaders not to be discouraged. Instead, the audience was asked to maintain their focus on the current short-term goals:
- Long-term capital formation strategies to drive down financing costs, which would lead to decreased costs for the end-user
- Technological innovation for increased efficiency of renewables
- Lobbying Congress for policy stability.
Finally, one of most important insights that I left with is that the renewable energy industry is not trying to single-handedly supplant the more traditional methods of energy; rather, it is simply trying to compete fairly in the marketplace. During the session A Legacy of Bipartisan Support for Renewable Energy, one of the panelists indicated that the overall objective for the nation’s energy agenda is not to replace 100 percent of energy generated by fossil fuels with renewables, but rather to have a balanced energy portfolio. Or as Mr. Zindler aptly summarized it, “Wind and gas…frenemies forever.”
*Candice received a Master’s degree in Environmental Studies, concentrating in Energy Management & Policy, as well as a bachelor’s degree in Chemical & Biomolecular Engineering from the University of Pennsylvania. You can follow her @candicedmcleod