Tough Times Ahead: Will the US Industry Need a New Story?

The financial credit crunch has replaced global warming as the current cataclysmic worry among consumers. Certainly, at first blush, these latest findings from the Penn, Schoen and Berland Associates (PSB) 2008 Green Brand Survey appear to support the adage that US consumers are environmentalists only when the economy is strong.

But this time, the shift in thinking comes with a new and more complicated twist, one that has particular significance for renewable energy. Concern about climate change may be ebbing, but that does not mean energy issues are taking a backseat. In fact, the public is more worried about security of energy resources, and links fossil fuel dependence with the bad economy.

‘While climate change and global warming were clearly the most pressing environmental issues last year, this year people’s concerns are more spread across different environmental areas. Most notably, energy and resource-related issues almost doubled in importance’, noted the international market research firm’s latest annual green trends survey. However, at the same time, with financial issues looming large, ‘consumers clearly still prefer the green dollar to green nature.’

Given these complex consumer motivations and hard financial times, what’s ahead for US renewable energy companies, and how can they maintain the government and consumer support they have enjoyed in recent years?

First, the bad news

Given the economic downturn, it is not surprising that government, too, has allowed economic woes to sometimes supersede environmental worries. Indeed, that attitude revealed itself among some state leaders last year, as they tried to find ways to ease the financial pressure on consumers.

For example, over the summer in Connecticut – a state which has among the highest electricity prices in the US – Governor Jodi Rell announced plans to shift money designated for energy efficiency and renewable energy programmes to a rebate for electric ratepayers. The money was to come from the state’s 25 September participation in the nation’s first carbon dioxide cap-and-trade auction, the Regional Greenhouse Gas Initiative (RGGI).

‘This provision is intended to provide real relief at a time when families are struggling just to cover the basics – gasoline, groceries, electricity and heat’, said a prepared statement by Rell.

Environmentalists called the plan irrational, saying it would return about enough money to customers for them to buy a cup of coffee. Further, the state attorney general’s office stepped in and deemed Rell’s shifting of the auction revenue to be illegal. But Rell disagreed and persisted, ordering that above $5 per tonne, all auction money over that price would go to reduce consumers’ electricity costs.

The battle has proved to be moot, at least for now, since the first auction produced allowance prices of only $3.07 per tonne, and the second auction on 17 December, prices of $3.38 per tonne, never making it to Rell’s proposed cap.

Nonetheless, Patricia Stanton, vice president at Conservation Services Group and a former New England state regulator, warned: ‘These are hard times, and any kind of loose money sitting around is always vulnerable.’

In neighbouring Rhode Island, in July Governor Donald Carcieri vetoed a bill which included various green energy incentives. Among other things, the legislation would have allowed utilities to sign long-term supply contracts with renewable energy developers. State deregulation rules currently prohibit such utility deals. Wind and solar developers had pushed for the contracts, saying they needed them to secure financing.

Carcieri said in a letter to lawmakers that the bill failed to ‘balance our desire to invest in renewable energy with the realities that ratepayers currently endure.’ He baulked, in particular, at a 5 MW set-aside for solar energy. ‘It’s unfortunate’, he wrote, ‘that the General Assembly picked perhaps the costliest renewable technology and decided to give it, and only it, preferential treatment’.

However, Carcieri subsequently softened his position somewhat. He informed state regulators that he believed they could mandate the long-term contracts, despite his veto, based on his reading of state energy law. A big proponent of offshore wind for his state, Carcieri is not against long-term contracts as such. But did not like the costs associated with contracts in the bill. In particular, he strongly objected to giving the state’s dominant utility, National Grid, a financial incentive for signing the long-term supply contracts. Lawmakers are looking into the possibility of taking up the issue again in 2009, as REW goes to press. However, Carcieri’s veto of the solar set-aside still stands.

Meanwhile, ratings agency Standard & Poor’s also raised cost concerns related to green energy in 2008, particularly the popular Renewable Portfolio Standards (RPS), now being used in about three-fifths of the states. The standards could harm utility credit ratings in some cases, said S&P in a report last year.

RPS requirements differ from state to state, but generally mandate that a percentage of the power utilities sell comes from green energy sources. The standards are considered one of the most effective ways to spur US renewable development. In fact, Standard & Poor’s called the RPS ‘one of the most significant developments in the electric utility sector since electric restructuring began.’

But S&P nonetheless expressed concern about the financial implications. The RPS is ‘moving utilities and other load serving entities squarely away from least-cost procurement and toward acquiring often above-market renewable generation in unprecedented quantities,’ the agency said. ‘At the same time, consumers have yet to fully experience the cost and retail rate impacts of this shift. The standards are in their infancy, and, in many states, interim targets will not become meaningful for several years (except in California, where utilities are lagging behind short-term goals). As a result, the feasibility and cost ramifications, while imminent, have not yet arrived in most RPS states.’

Standard & Poor’s credit analyst Anne Selting added: ‘We are concerned that the costs of RPS compliance have often not been quantified and that absorbing the full costs of RPS in retail rates could have credit implications for some companies.’

Quality over quantity

The financial downturn opens the door wider for renewable energy to fall victim to such criticism. But it also provides an opportunity for the industry to hone its policy and marketing messages, and drive home the economic benefits offered by green energy.

Renewable energy is a job producer – a point the industry has emphasized for the last few years. Still, the jobs argument has not been fully exploited, says Adam Morse, a wind technician and renewable energy advocate with Portland General Electric’s Biglow Canyon Wind Farm. The industry needs to draw in a broader range of people and show them that when it talks of green workers it is talking of them, he says. This means getting away from its strong focus on quantitative data – the raw job growth numbers produced by development of wind and solar. Instead, the industry needs to ‘provide a more qualitative side, where you are focusing more on people and personal narratives’, he says. Individuals need to understand that the green jobs they hear so much about are not necessarily arcane, but are jobs they can do; in fact are ones they already perform, but with new meaning.

‘You have bookkeepers, welders, technicians, truck drivers, construction people. The jobs are the same as the old economic jobs; the broad overarching aim is different’, he says. ‘That is what I’ve seen at my site. We have a lot of people who bring different skills, people who have worked as car mechanics, in manufacturing, IT, software, at hydro facilities. Just everything.’ What draws people to these new jobs? ‘They are making a good living. The environmental gains are in the back of their minds’, he concludes.

Martha Duggan, SunEdison’s vice president of regulatory affairs and new markets, agrees that it may be time to talk more about green job quality. ‘These are construction jobs, finance jobs, engineering jobs, communications jobs. It is not just guys who need to know how to put panels on a roof. We get loads of interest from MBA students. They are always looking to do internships with us. They see this as a growth area that they can get in to.’

Let innovation reign

As the financial, auto and retail industries falter, the US renewable energy industry expects continued prosperity. The positive outlook comes, in part, because Congress in early October finally voted to extend tax credits for wind and solar development, after two years of false starts and indecision. In addition, the election of President Barack Obama is seen as a win for renewables because he has called for $150 billion over 10 years in federal spending to spur private investment in clean energy. His goal is to create five million new green collar jobs. Obama also supports a national renewable portfolio standard that would mandate 10% of electricity come from renewables by 2012 and 25% by 2025. He is expected to press for national carbon restrictions, but it is not clear how soon.

But tax incentives and federal policy are only part of the story. Another aspect that needs to be highlighted is how product and contract innovation, aimed at reducing consumer costs, can bolster renewable energy even in bad economic times.

For example, SunEdison, with 45 MW of solar in North America, has seen explosive growth over the last year, expanding its employees from 241 to 480. Its success stems from contracts offering upfront savings and stable long-term prices.

‘Rather than a decline in interest, we are seeing an increase in interest because of the way we do solar contracts to hedge energy prices in a volatile energy market’, Duggan says, adding: ‘We expect to grow dramatically again this year’.

Known as a solar power purchase agreement, or SPPA, the hedge mechanism is now used by several solar companies. The approach takes off the table the frequent complaint that while solar energy saves consumers money in the long-run, the upfront costs are hefty. Under an SPPA, a third party owns and operates the solar equipment installed at the customers’ facility. Customers pay only for the electricity they consume. As a result, consumer costs are predictable over the lifetime of the contract, typically about 20 years. Financing for the project comes from an investor which can benefit from the federal solar tax credit.

‘What that does for customers, in these days of rising energy costs and increasing price volatility, is it allows customers to hedge that portion of their electric budget that they are getting from their solar system’, Duggan says.

While the SPPA offers continued promise, its immediate prospects could dim because of the credit crunch. The approach relies on third-party investors which back the projects, so that they can take advantage of federal investment tax credits. Several traditional investors now face financial hardship.

3Degrees, a California-based company that markets renewable energy certificates (RECs) and carbon offsets, takes another approach to both manage costs and pursue green energy. The company pairs energy efficiency and pursuit of carbon reductions and begins by conducting a carbon footprint analysis, with an eye toward the potential for conservation and energy efficiency. If it unearths strong possibilities, it brings in a third party energy efficiency company to make the changes in the facility.

‘There have been a lot of examples where companies achieve such savings through energy efficiency that they can take portion of that and purchase renewable energy certificates for carbon offsets’, says Steve McDougal, 3Degrees’ executive vice president for marketing and business development.

The company began using this approach a couple of years ago, before the economy faltered, because it wanted its customers to take a ‘holistic’ approach to carbon reduction, achieving efficiency as well as purchasing RECs or offsets. ‘We would never advocate taking the offset approach first. Maybe this is more important now. There is just so much savings to be had’, he says.

Business continues to be strong for 3Degrees, which focuses on providing customers with voluntary REC or offset purchases. But it has seen some softening in the market. ‘We’re seeing strong interest, but it has slowed a little from the big boom of last couple of years. People are pulling in the oars a little bit’, McDougal says.

David Boylan, director of marketing for California-based Borrego Solar, says people are thinking twice – they are not as confident – but they are still going forward with solar purchases. ‘I was bracing for the worst. But sales have exceeded expectations’, he says.

The company, a solar PV contractor that installs systems for the residential, commercial and public sectors, markets its wares to middle-America through a permanent store display at Sam’s Club and is looking into similar arrangements with other retail stores. At the same time, it pitches the argument to the more well-to-do homeowner that solar energy is one of a few good investments in these turbulent financial times.

Solar offers higher income consumers a way to be ‘financially savvy and green’, Boylan says. ‘Money is pulling out of the old investments. In the real estate market, this can add value to your home’.

When Borrego installs panels for a business or institution, it often makes special offers to employees of the business who want to do the same - as with the University of California, San Diego, which in September selected Borrego to install a 1.2 MW system.

The company expects to see the market for solar opening up in almost every state with the recent passage of an eight-year federal tax credit. But for the immediate future, it is concentrating on expanding into Massachusetts, where new state incentives are so appealing, at one point the state surpassed California in feeding leads to Borrego.

Internet marketing also continues to be a strong marketing medium for the company, which encourages consumers to test out its online calculator. Customers plug in their average monthly electric bill and the calculator shows the money saved over 25 years and how much value the system adds to their house.

New customers, new money

While some players are offering novel products, Paul Thomas, chief executive officer and president of Green Mountain Energy, says his company is sticking with its tried-and-true marketing theme that green power helps the environment. So far, it has paid off. The company, one of the first to offer green energy to retail customers after states began deregulating the electricity market in the late 1990s, saw unprecedented growth in its largest market last year, the state of Texas.

Whether the high level of interest in green energy will continue remains to be seen. ‘We are in uncharted territory for the economy. Customers are highly interested in renewable energy, but they expect it to be delivered at competitive prices’, Thomas says. ‘We’ve been doing this a long time. Our message changes all the time as markets evolve. As we get into changing economic conditions that may lead us to differ products or pricing strategies. We so far this year have not done that.’

The company has seen a shift in recent years in the type of customer who pursues green energy. Early on, strong environmentalists tended to dominate the market. Now the customer tends to be more ‘mainstream’ and cuts across a broad swath of society, according to Thomas.

He says it is difficult to predict if government support will wane given the economy, but he believes policy arguments in favour of renewables will win out in the long-run. ‘It hasn’t been a straight line over the last 10 years from hydrocarbons to renewable energy, and the future probably won’t be any more of a straight line. But I think the trend is irreversible. One setback we may come into now is the ability to finance new projects. These markets have to get sorted out – it is period of uncertainty.’

Still, as other markets fail, reports keep emerging about the strength of clean energy and its value in the market. The same Standard & Poor’s that warned of RPS costs, also said in a separate report that surging fuel prices will squeeze utilities unless they are green. The report explains how utilities that rely on power from wind and water can hedge against high fuel prices – they can ‘benefit from the rising market price of power by selling surplus electricity without the drag of higher input prices.’

Green energy as the bailout

The global market for environmental products and services is expected to double from $1370 billion per year to $2740 billion by 2020, according to the September 2008 report ‘Green Jobs: Towards Decent work in a Sustainable, Low-Carbon World’ produced by Worldwatch Institute for the United Nations Environment Programme (UNEP). The report finds that, in the US, clean technologies are the third largest sector for venture capital after information and biotechnology. About 2.3 million people have in recent years found new jobs in the renewables sector. The ‘potential for job growth in the sector is huge,’ the report says, forecasting that the wind sector alone, may employ some 2.1 million people while the solar energy industry could employ 6.3 million by 2030.

Such optimistic forecasts sometimes miss their mark – terribly. President Harry Truman’s Paley Commission in 1953 predicted that by 1975 solar hot water heating, alone, would provide 10% of the nation’s total energy requirements, according to Analysis of Federal Expenditures for Energy Development, a September 2008 report by Management Information Services, prepared for The Nuclear Energy Institute Washington, DC. In truth, 33 years beyond the target date, solar heat has is still far from reaching that mark. Recent US Energy Information Administration figures show that all renewables accounted for 10% of domestically produced energy for the first half of 2008 and solar thermal energy only a small fraction of that. Indeed, acceptance of renewable energy has been ‘decidedly cyclical, characterized by periods of intense interest and activity and optimistic forecasts, followed by periods of slackened interest and pessimism’, the nuclear report said.

Today’s story is one of unprecedented expansion for the sector. It is still too soon to say exactly how the financial crisis might influence that story, and if current growth projections will fall victim to a Truman-style Paley report future. But notably, when the crucial clean energy tax credits finally passed in Congress, they were attached to the Emergency Economic Stabilization Act of 2008 – what has become known in common parlance as the bailout or recovery bill, a US$700 billion infusion into the financial sector.

The two initiatives – the recovery bill and the tax credits – were unrelated before they passed Congress in October. It was a matter of coincidence, timing and political expediency that the clean energy bill came to be packaged with the bailout measure. But, given green energy’s ability to create jobs, foster energy independence and reduce resource costs, the pairing could be prescient. The story that emerges from today’s tough economic times may be that green energy is the economic rescue remedy.

Elisa Wood is US Correspondent for Renewable Energy World magazine.

Research assistant Corey Haga contributed to this article.
e-mail: rew@pennwell.com