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Consistency Key to Renewable Energy Policy

A new report on funding renewable energy projects offers a primer on how policy decisions are best engineered to boost the industry.
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The bankruptcy of the solar startup Solyndra last month has placed government funding for renewable energy projects under a microscope. Were the government-guaranteed loans a wise way to use public funding to help green technologies?

An analysis conducted by the George Soros-funded Climate Policy Initiative (“Evaluating Policies for Low Carbon Growth”) looked at six large-scale renewable energy projects in the United States and Europe, seeking answers about how their real costs matched up with their estimates, and "how policy affects project economics."

The six projects were: wind farms in the U.S. and Spain, solar photovoltaic facilities in the U.S. and Italy, a concentrated solar power tower in the U.S., and an offshore wind farm in Denmark.

Governments trying to reduce national rates of carbon emissions and decrease the use of fossil fuels have often spent public money to level the energy playing field for renewables. Techniques include restructuring the marketplace so initially expensive renewables can compete with cheaper established technologies, and encourage private investment by decreasing the risk for entrepreneurs and investors.

According to the report’s authors, led by physicist Uday Varadarajan, “Very few investors are willing to bear re­newable scale-up risks — which include getting a first-of-a-kind project up and running on time and on budget, revenues dependent on the weather, regular and reliable operation of a first-at-scale technology, and a cost of electricity so far above market rates as to lead to dependence on govern­ment incentives. And when they do invest, they demand a premium to do it.”

"The projects would not have attracted investors without policy support,” the initiative found. “Policy supports provided 36 to 81 percent of the cost of electricity from these projects."

Crucially, the study found, government support is most effective when it is dependable – both in duration and certainty. If that support – whether through tax credits, subsidies or feed-in tariffs – is thought to be vulnerable after the next election, investors feel they are taking on a much bigger risk and want a much bigger return.

“Perhaps the hardest policy lesson that has come out of the American wind effort has been the repeated crippling effect on the industry from discontinuity in government support,” said wind power entrepreneur Jim Dehlsen in testimony before a U.S. House subcommittee in 2009. Our Melinda Burns wrote about Dehlsen last summer, and quoted one of the investors in Dehlsen’s company, Sidney Tassin:

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“I tend to be a strong free-market oriented person. I’m not looking for the government to decide who’s going to get the money and who’s going to have the better idea. But I think a nascent industry like renewables is an appropriate place for government research dollars to help prime the pump of innovation. … Government funding helps energize the entrepreneurial part of it.”

One interesting takeaway is the contrast between financing methods in use in the United States and in Europe. Renewable projects in the U.S. more often use some form of tax money for funding, such as providing tax credits to participants or, as in the case of Solyndra, guaranteeing loans. In Europe, costs are borne instead by the ratepayers.

Our Michael Scott Moore wrote in January about Germany cutting its subsidies for solar — not a change in policy away from solar, but instead because the subsidies had worked so well that the solar market had become competitive with other energy sources.

In cost-support measures borne by taxpayers, in contrast, the costs of the project can be higher. The numbers may spike as participants hurry to take advantage of an expiring tax credit. This is why a longer-term, more reliable policy support can stabilize the growth of the renewable energy source and keep costs down.

Speaking in Santa Barbara, California, this week, energy analyst and Pultizer Prize-winning author Daniel Yergin repeated a story told by Dehlsen in which the entrepreneur spent one New Year's Eve atop a wind turbine on a snowy California pass trying to get the darned thing running before midnight in order to tap an expiring tax credit.

Yergin, who argues a government role in buttressing innovation has been key "since George Washington started research on improving muskets," said such help must offer sustained and steady financing for what could be an important leg of the economy. “Renewables may be small in their overall scale,” he observed, “but they are still a very big business.”

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