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Economic stimulus in the USA

Dr Marianne Osterkorn

Things appear to be moving fast in Washington, as President Obama already seems to be living up to his promise of supporting renewable energy development. But do those in the industry think his policies will work?

Dr Marianne Osterkorn, Director General of the Renewable Energy and Energy Efficiency Partnership (REEEP), speaks to members of the Alliance to Save Energy (ASE) and the American Council on Renewable Energy (ACORE) on the prospects for both energy efficiency and renewables in the USA.

As credit availability in the USA increased in the years leading up to 2008, several things started to happen. Global consumption rose, as did commodity prices. The market for renewable energy and energy saving products was growing healthily.

Emissions, meanwhile, had been increasing on the back of higher consumer demand, given the lack of a comprehensive Federal greenhouse gas emissions policy. But now that the bubble has burst, a big question arises: Will the fall in emissions linked to lower economic output weaken the drive for new energy efficiency and renewable energy investment?

On the surface, it looked likely. In a recession, a particular form of energy conservation kicks in that can in some cases replace typical energy efficiency investment: energy demand decreases because there is more unemployment and less disposable income to spend. So far, US consumption has neatly followed this pattern.

In mid-2008, when the US economy was already slowing, it was importing, and therefore burning, 500,000-750,000 barrels less than usual per day. August 2008 saw the largest single month’s year-on-year fall in vehicle miles travelled (VMT) since World War II.

This decrease in VMT was also partly responsible for the decline in oil prices, although some oil industry production factors played a part in that too. As the economy continues to slow down, some companies may opt to shut down their less efficient plants, and that too will contribute to lower emissions. Chemical company BASF, for example, has shut down production at one of its plants in Geismar, Louisiana for two months until the end of January 2009 due to a fall in demand.

As Lowell Ungar, Policy Director at the Alliance to Save Energy (ASE) in Washington, D.C., confirms, energy pricing is a very important factor affecting investment in energy efficiency equipment: “there is much more energy efficiency investment in a period of very high energy prices,” he states.

That was indeed the case less than a year ago, when Americans began to buy smaller and more fuel efficient cars. Oil prices are at nearly half their spring 2008 levels, and that would seem to point to lower energy and fuel efficiency investment in the short term.

At the same time, the funds available for investment in renewable energy have taken a hit. Afflicted by the market’s overall woes, clean energy stocks fell by 61% over the first three quarters of 2008. Liquidity in the wind market is inadequate, because an enormous chunk has been taken out of tax equity capacity, while debt financing for new projects is weak or expensive. Solar is in a similar position for the same reasons; its future growth rate is likely to be considerably restricted in comparison to its extraordinary performance over the last few years. Current tight credit and falling solar panel prices may lead to business failures.

In the biofuels sector, the biggest-listed US ethanol producer, VeraSun Energy, has gone bankrupt following poor hedging on cereal prices. In the construction sector, some building supplies companies producing energy-efficient materials have begun to make redundancies, such as USG, a Chicago-based insulation producer. The company announced in November that 900 jobs or 20% of its salaried workforce was to go. One reason for redundancies in this sector is the lack of re-financing mortgages. These were previously used, in some cases, for home improvements that included upgrades to better insulation or energy efficient equipment.

All bad news?

Fortunately, a few bright spots liven up this distressed picture. Emissions are not, of course, the only motivation underlying energy efficiency and renewable energy investment, and in December 2007, the Energy Independence and Security Act was introduced. This set a mandatory Renewable Fuel Standard (RFS), requiring fuel producers to use at least 36 billion gallons of biofuel in 2022, representing a nearly fivefold increase over current alternative fuel use. It also improved fuel economy standards by 40%, mandated a complete phase out of incandescent bulbs by 2012 and set new appliance efficiency standards.

In a sector conceived as a result of environmental and energy security concerns that become part of Government policy, the regulatory drive has a greater force than in many other industries; it is designed to override short term economic fluctuations. According to Joe Loper, Vice President of Policy and Research at ASE, over the last 35 years about a fifth of US energy efficiency and conservation investment has been driven by Government and utility policies and programmes.

Government and utility support for energy efficiency – including appliance rebates, low interest loans, energy audits, research and development – currently exceeds US$3 billion, according to ASE. Continued Governmental attention to the need for increased energy efficiency could drive substantial energy efficiency investment activity throughout a US recession.

And the unexpected energy addendum to the US$700 billion bank bailout funding Emergency Economic Stabilization Act agreed in early October 2008 is probably the brightest lining in the gathering clouds. It pledges to extend Investment Tax Credits (ITC) – a form of tax refunds – for the solar industry for another 8 years and the Production Tax Credit (PTC) for wind, biomass, hydropower, landfill gas and energy from waste facilities for another year; this will buoy up struggling renewable energy projects and help maintain employment while existing projects continue.

“There was a great flurry to finish projects [before the production tax credit was due to expire]. In the last quarter of 2008 there was a pickup of new construction activity for existing projects in their early stages,” states Rob Church, Vice President of Industry Research & Analysis at the American Council on Renewable Energy (ACORE). However, the one year production tax credit extension will have a limited effect, he predicts: “the finance industry’s ability to utilise tax credits will decline next year, and the number of companies active in this area have gone down.” According to Church, wind power, and corn-based ethanol may be the hardest hit because of their size and growth rate. [As we go to press] The Bill is currently winding its way through both the House and the Senate.

However, energy utilities are entitled for the first time to claim the PTC in the bailout bill, which is likely to have a positive effect on EE/RE investment. “Coupled with a declining interest from traditional tax equity investors, this will probably push things towards more utilities providing equity financing, but that won’t happen quite yet,” suggests Church.

While project and debt finance for renewable energy are severely affected by the financial crisis, venture capital (VC) is in reasonable shape. “Whereas the banking business has been heading for the doors, there is not a sense that the situation is particularly grim for the VC sector, rather that it’s something of concern, that will slow down but not reverse investment,” Church says. That is, of course, partly because the VC sector has poured less money into renewable energy than banks and partly because it is focusing on future technologies such as second and third generation biofuels.

On the energy efficiency side, the picture is also mixed. Large industrial groups such as General Electric (GE), whose revenues from this sector are forecasted to rise by 21% to US$17 billion in 2008, will bolster up long-term investment. Existing government incentives are attractive, but as Loper puts it, “they make a difference when people purchase, but not if they’re not buying anything.”

Energy service companies (ESCOs) could also be affected by the credit crunch. ESCOs carry out energy service performance contracts (ESPCs), which are arranged as an alternative to Federal spending. Budgetary restrictions relating to energy efficiency could increase the need for alternative financing of Government energy efficiency projects, which could increase the use of ESPCs, according to Loper. On the other hand, ESCOs are heavily reliant on financing and could have difficulty obtaining financing for ESPC projects.

The Obama-effect

In December, President-elect Barack Obama called for an effort to make public buildings more energy-efficient. Obama announced a plan to seek energy-efficient upgrades for Federal and public school buildings. “First, we will launch a massive effort to make public buildings more energy-efficient. Our Government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs,” he said in his radio address.

The new Obama administration is also strongly supporting the renewable energy sector. Barack Obama has pledged to double alternative energy production in three years. In previous speeches he has pledged to enact climate change legislation and a cap and trade scheme. According to Reuters, an Obama aide said the administration would seek to add 20 GW or more of wind power and 4 GW of geothermal and solar power in the next three years, doubling the nation’s current renewable power base of 24 GW through loan guarantees and, eventually, national renewable energy requirements.

The Obama Administration is well on its way to providing the leadership and support required to further accelerate renewable energy in light of the financial crisis. The new president says his administration wants 10% renewable electricity by 2012, and will put one million plug-in hybrid cars on the road by 2015. He has also said he will catalyse the private sector to invest in clean energy through US$150 billion in cash injections over the next ten years.

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