Editor's note: this article originally appeared in the National Journal.
Boom and Bust comes at a critical moment for the future of clean energy in the US. On one hand, the recent global scale-up in clean energy deployment has significantly reduced costs in that sector, for example a 75 percent decline in the price of solar panels and a 27 percent decline in wind turbines between 2008 and 2012. On the other, at the very moment when these technologies are becoming economically competitive with traditional generation in many parts of the country, a looming 75 percent contraction in federal support threatens the progress we have made at the exact moment when our major economic competitors are increasing their support for a global industry that is now reaching $260 billion per year.
The report is right to point out that the current lack of action in Congress forces a rethinking of the policy framework for clean energy and an examination of the finance structures developers use to build out their projects – two conversations that we are very interested in having at the Department of Energy.
In this rethinking, let’s focus on two principles that must anchor the next generation of clean energy policy.
- Deployment of proven technology drives innovation by providing market opportunities for innovative companies.
- Using stock and bond capital markets can offer clean energy projects more robust access to cheaper capital than the current private sources of investment.
Deployment, Scale, Market Access, and Innovation. Much of the decline in wind and solar costs stemmed from large-scale deployment policies that brought industries to scale using "good-enough" technology. In solar, for example, due to scale advantages, "old" polysilicon technology has been more competitive than a range of newer technologies, including CadTel, CIGS, thin film amorphous Si, CSP, and solar thermal. Scale also drives down the substantial non-technology costs that are a major part of any project, including installation. In solar, more than half of a system's costs are non-hardware or “soft” costs.
Newer, more innovative technologies will supplant existing ones, but they can’t unless they have market opportunities, which is why it’s critical for policy-makers to pair policies that promote market development with policies that promote innovation. If you don’t, valuable technology advantages possessed by innovative companies dissipate because they can’t achieve the benefits of scale. The development of “feedback loops” between innovation and manufacturing and between manufacturing and markets is critical to harnessing the power of innovative technologies, like those developed through DOE programs.
Think of the fast chip in the new computer you’re using to read this blog. If we’d had a policy of deploying that chip only after innovation in processors allowed it to be sold at its current price, do you think the computer industry would be where it is today? The “Moore’s Law” in the semiconductor industry of continued increases in performance at reduced cost isn’t a law of physics but a law of markets; without a market into which to sell those initial chips, it is unlikely that manufacturers would have had the incentive to invest in innovation and capital to develop ever more powerful chips.
The computer chip analogy is important in another way. There are parts of the electronics industry that have manufacturing offshore, but many Americans are employed in the value-added parts of the industry that are located in the US. The point is that the industry is complex and global, and focusing on developing markets for clean energy technology creates a range of jobs for American workers.
Recent US policy has been appropriate in its balance between innovation and deployment. But with deployment support policies ending or scheduled to, critics are suggesting that we “can’t afford” to extend them, and therefore should focus only on innovation. We’ve tried this tack before, and it doesn’t work.
Capital Markets, Cheaper Capital, More of It. Nearly everyone would agree that clean energy projects are stuck in an old-fashioned and anachronistic model of financing. While other sectors of the economy long ago shifted to seeking investment from capital markets, clean energy is stuck in a time when all sources of capital came from private, non-capital markets sources. Simply put, projects cannot take advantage of the liquidity and pricing benefits of bond and stock markets. Having clean energy make the same migration would open a more robust and lower cost source of capital for project developers. As it is now, we compete with China in non-capital markets sources of finance, where China has a competitive advantage, and not on the basis of capital markets solutions, where the US has competitive advantage. Compared to conventional sources of energy, upfront costs of renewables are higher because feedstock costs are close to zero. We spend lots of time trying to find ways to reduce hardware costs, but not enough time of ways to reduce financing costs. And costs are costs.
It is ironic that when good projects with proven technology and credit worthy counterparties are begging for low cost financing and investors want long-dated, current-yielding instruments, money can't flow from where it is wanted to where it is needed. Furthermore, if we haven't solved the problem of how to readily finance proven technology, it's hard to know how much the problems of financing innovation are due to innovation and how much are due to failures in the underlying financing structure.
Our clean energy goals would be well served, then, by migrating financing for renewable energy to capital markets solutions and away from expensive private sources of capital. REITs and MLPs are examples of structures that are current yield stocks used by real estate owners (in the former) and oil and gas pipelines (in the latter) to tap inexpensive and ample capital from investors on the NYSE. Yields are generally 5-8 percent.
Furthermore, the creation of financial instruments for clean energy to access investment from capital markets could provide a way to finance the deployment of more innovative technologies. As the evolution from investment grade to high yield (and from there, to emerging markets) debt markets demonstrated, it is reasonable to assume that once structures for proven wind and solar technologies were in place, investors would seek higher yields from innovative generation projects – creating markets for American innovations.
