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The Pending Subsidy Cliff, And the Way Out

It's a daunting reality, yet one that's been years in the making. And it's a scenario that's shaping up from the wind-swept coasts of California to the solar rooftops of New Jersey. The renewables industries — all of them — are not only approaching a subsidy cliff. They already have one foot dangling over the edge.

These cliffs are seen as a part of the renewables landscape, and the hope has been that the perceived drop would be too steep for lawmakers to ignore. In the past, that’s been a successful strategy, but the new state of politics dictates that subsidies will be phased out. Though some may yet be extended for at least the short-term, we’re likely entering a new era of energy policy in the United States.

A new report, “Beyond Boom and Bust,” by policy leaders at the Breakthrough Institute, the Brookings Institution and the World Resources Institute, details the subsidy collapse that has already begun in the U.S., and it lays out a blueprint for a long-term approach that deconstructs the fits and starts that have become the norm.

The report is especially well-timed as the renewables industries head into a period of uncertainty magnified many times by the posturing that comes with presidential elections. The numbers, though, are real and they mostly point one way.

In 2009, backed by ample stimulus funding and solid political support, federal clean tech spending, including everything from energy to electric vehicles, reached $44.3 billion. That spending has dropped steadily to an estimated $16 billion this year. By 2014, the federal government will spend $11 billion, or about a quarter of what it did five years earlier, on clean technologies.

This is a problem, write the report authors, because this drop has not coincided with a comprehensive new energy approach — one that aims to lower costs of energy with clear requirements and predictable policy. And it has not included a phase-out of fossil fuel subsidies that long ago matured past the point where they needed federal support. The other side of reform, the one that gets far fewer headlines, is in the amount of money invested in research and development, an area of the clean energy sector that has been woefully underserved in recent years.

The following is a breakdown of key points and suggestions made by the authors as they envision a blueprint for a new energy strategy.

Policy Reform

Current policy has enabled greater capacity, and that has in turn allowed processes to scale-up. But what do you have when the policies go away? Right now, you’d have technologies that except in rare cases cannot compete dollar for dollar against low-cost options like natural gas.

The problem, the authors say, is that the policy mechanisms haven’t demanded that the technologies bring their costs down to levels that compete with fossil fuels. This is kind of like the current flat production subsidies given to support certain crops. An example of this would be the Production Tax Credit that has fueled explosive growth in the American wind industry. The credit gives 2.2 cents per kWh generated, and that figure has only been readjusted to reflect inflation. A more demanding policy structure that forces a downward trajectory in pricing would better force companies to meet targets — or risk losing that policy support.

“We would favor some kind of extension of the PTC,” said Mark Muro, a policy analysts at the Brookings Institution. “At the same time, some predictable downramp would extend the wind industry’s competitiveness.”

Muro realizes this isn’t an easy time to be having this discussion. The wind industry in particular has a lot of political backing, but dwindling hopes that an extension can get done before the end of the year. The outlook may drive the industry from as much as 9,500 MW installed in 2012 to 500 MW in 2013.

“The wind industry is a sophisticated industry with lots of success and lots of people who understand the value of competing on price, and I think they’d be willing to look at these ideas. There’s a readiness to address some of these issues.”

According to the report, subsidies should be reconfigured to meet stringent, yet consistent new measures. The report makes several specific suggestions in which the authors say new policies should do the following:

  • Create market incentives that demand — and reward — technology performance and cost.
  • Set policies that decline as technologies improve in price and performance. They should be terminated if certain types of technology fail to improve on price and performance, or if they achieve the goal of becoming competitive without support.
  • Open opportunities for technologies at all stages of development. Technologies with a similar level of maturity should be allowed to compete amongst themselves to determine which is best suited to move forward.
  • Ensure that the process is clear, transparent and predictable for many years down the road. The uncertain and short-term nature of current policy does as much to hinder investment as the cost considerations.

Strengthen Innovation

The policy piece that’s been largely missing from American clean energy strategy is research and development. This have been a fundamental element for the growth of military technology, the space program and medical sciences. But it’s been conspicuously absent as a major driving force for renewables.

The lack of research, development and deployment (RD&D) funding really starts in the private sector, where U.S. energy firms reinvest about 1 percent of their revenues. In the information technologies, semiconductor and pharmaceutical industries, these numbers usually run between 15 and 20 percent. The federal government isn’t doing much better in this respect. In 2012, federal RD&D spending will fall below $4 billion. That compares unfavorably with the levels of early funding received by NASA ($19 billion), health research ($33.5 billion) and defense ($80 billion). Even pushing energy related RD&D funding to $15 billion would have profound effects.

This may be an area with political common ground. Republicans who have been against the government “picking winners and losers” are usually quick to respond that federal investment should come in the research phase of new technologies.

Below are some of the recommendations for rethinking RD&D funding for clean energy techologies:

  • Funding in clean energy shouldn’t end once they reach subsidy independence. The emergence of shale gas shows how persistent research can lead to continued breakthroughs.
  • Spanning the “Valley of Death” for both technology and commercialization remains a critical obstacle. This is when funding usually dries up, yet on the other side is when significant breakthroughs can emerge.
  • The DOE loan program should be replaced by the Clean Energy Deployment Administration, which would leverage private finance to support entrepreneurs with innovative technologies.
  • A National Clean Energy Testbed should be established on public lands to give pre-permitted, grid-connected space for emerging technologies to blossom without the hassles typically involved with demonstration projects.
  • Harness advanced manufacturing in the U.S. Innovation suffers when it is divorced from the manufacturing process. So, there’s a natural investment to realign these two industry forces.
  • Invest in education, from grade school through graduate school. And then work to employ the international students who come for an education but leave because of immigration barriers.
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