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By Catherine Lacoursiere
February 08, 2006
In his State of the Union address, President Bush dangled more carrots in
front of the American electorate in an effort to rid America of Middle East
oil once and for all. Specifically, he increased government funding for
renewable energy technologies by 22 percent. Few disagree that the
displacement of 75 percent of Middle East oil by 2025 is a bad idea,
however, there is much disagreement over how the United States should get
there.
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There are two major shortcomings of US renewable energy policy. The first is
short-termism. One need only observe the zigzag that plots 10 years of wind
energy sales in the United States to understand the impact of short-term
subsidies. Sales shoot upwards in years when wind subsidies are in place but
sharply fall off when these incentives are suspended, or in suspended
animation as myopic politicians debate reinstatement. Regulatory uncertainty
impeding technological progress is more certain than death and taxes. To get
to 2025, we need 20-year subsidies. No one disputes that Germany’s wind
feed-in tariffs (FIT), which are guaranteed for 20 years, are behind its
global lead in wind installations. Spain, also a major wind player, has
similar feed-in tariffs.
A second deficiency of US energy policy is a lack of stronger incentives to
improve the cost competitiveness of renewable energy over fossil fuels.
Jeffery Bencik, an energy analyst with Jeffries & Co says President Bush’s
Advanced Energy Initiative “does not address the cost side.” One model to
consider says Bencik is Germany’s solar industry incentives. Germany reduces
its solar incentives by five percent each year, thereby inducing
manufacturers to reduce costs by five percent each year.
Germany uses such digressive tariffs in both the wind and the photovoltaic
market, says Mark Timmer, Director of The European Forum for Renewable
Energy Sources (EUFORES), a renewable energy research and advocacy group
comprised of European Union and national parliamentarians. “Tariffs ensure
security of investments over a long period of time and the digression rate
takes into account technology progress.” In Europe, says Timmer, that
security of investments is crucial for the relatively young sector of
renewable energies.
What’s more, businesses propped up by subsidies are less apt to attract much
needed private investment. “Investors need to see a path to profitability.
We need to see that companies can survive in the absence of subsidies,” says
Alex Illingworth, Director of Global Fund Insight Investor and fund manager
of the Insight European Evergreen and Ethical Funds. Ilingworth says that
technologies that are self sufficient are receiving investment interest.
Solar power is becoming more attractive, he says. Even though the industry
still depends on subsidies, feed-in-tariffs are helping companies turn the
corner to profitability. In contrast, Illingworth considers wave power and
low-temperature fuel cells “too far off.’ “In Germany, [because] we have
relief on the sale of solar installations, the subsidies decrease over time
but the company should be able to maintain profitability in line with the
reduction in subsidies.”
Thus, Bush also needs to put pressure on costs in his Advanced Energy
Initiative if he wants to advance his ethanol (renewable energy) agenda by
2025. To be sure, the United States is gearing up for an ethanol economy. At
present, 33 plants are actually under construction with 150 more in various
stages of planning. Today, the US has 95 ethanol plants. Only five million
of the 230 million cars on the road accommodate flex fuel, or E85 blends,
however, both Ford and GM have announced they are ramping up production of
flex fuel cars.
Technically, the means exist to meet President Bush’s 2025 target by ethanol
alone, according to the Renewable Energy Fuels Association. Currently, the
US ethanol industry produces 4 billion gallons of ethanol a year. To meet
the 75 percent displacement target of Middle East oil, a 3 to 3 1/2 –fold
increase in production by 2025 to 10 billion gallons is required, estimates
REFA. The industry expects to reach 7.5 billion gallons of ethanol
production by 2012, in line with the mandate of the 2005 energy bill.
The trouble is that taxpayers will have to pony up the new subsidies to
incentivize refiners to triple their ethanol production by 2025. Corn crops
already attract a higher amount of subsidies than any other crop in America.
Supporters of California’s Clean Alternative Energy Act have a better
idea—tax oil producers. The group proposes an extraction cost that, they
believe, will reduce petroleum fuel consumption by 25 percent over 10 years.
Of the $4 billion in tax revenue expected to be collected from the
extraction tax between 2007-2017, $380 million each year would be allocated
to alternative energy programs. The tax rate would be linke! d to the cost
of oil production.
It is an interesting tax scheme and one that has already been implemented in
a handful of states. And Europe also is learning from the United States, as
is evident in its just released and aptly named report Market-based
Mechanisms Spreading Across Europe, wherein it concludes that taxes and
emissions trading have the potential to improve the “cost-effectiveness” of
environmental policy. Still, it is hard to ignore Europe’s experience, where
feed-in-tariffs, guaranteeing price and providing certainty, have proven to
be more effective than government subsidies, taxes or sticks.
Disclaimer
Catherine Lacoursiere is an independent columnist for this web site.
Catherine Lacoursiere may hold long or short positions in any of the stocks
mentioned in this article and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
Catherine Lacoursiere is a freelance writer. Nothing in the articles should
be construed as an offer or solicitation or recommendation to buy or sell
any specific products or securities. Past performance does not guarantee
future results.
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