December 15, 2010

Subsidies for renewable energy could be on the chopping block

The relationship between the government and renewable energy has always been a close one — but also a difficult one. The relationship is going to get more difficult as stimulus programs and tax cuts run out in two weeks — and that may throw America’s alternative energy programs up in the air.

The problem is this: The renewable energy sectors — including companies that make technologies for wind, biofuels and solar energy — depend on government subsidies. The solar industry, for instance, relies almost entirely on government dollars.

The Cape Wind project, which appears close to becoming the first offshore wind farm in the United States, will rely on government loans to make up at least some of the $2 billion it needs to get started, according to people briefed on the matter.

It does not help the financing outlook that renewable energy has been snubbed repeatedly during this session of Congress, while old-line energy, including nuclear energy, still gets significant government subsidies.

For instance, Congress seems to have dispensed with one major program that has been a boon to solar and wind companies: a grant program that provides 30 percent of the cost of developing alternative energy projects through tax breaks. That has disappeared from the Congressional agenda twice, including in the tax-cut bill that Congress is working on. The end of the tax breaks are likely to result in the loss of about 15,000 jobs, according to industry estimates.

That loss may be mitigated if a provision in the tax bill survives that would allow some companies getting some grants in cash, instead of tax breaks, but this is still uncertain at this point.

The tax bill also does not provide any more money for an advanced manufacturing tax credit — a $2.3 billion program that gave tax breaks to companies that manufacture solar energies.

The bigger energy companies could embrace more renewable energy, but they are unlikely to make up the shortfall in government money. In the first half of this year, according to the Cleantech Group, which collects data on the sector, corporations invested $5.1 billion in clean technology — a 325 percent increase from the comparable period last year. That is promising, but the trend in clean-tech financing has been choppy — with investors of all kinds pouring money in one year and pulling back sharply during another — and so it is difficult for young companies to rely on it. If corporate profits fall, the older energy companies may well back away from supporting new technologies.

Meanwhile, the dependence on government has become more apparent as venture capitalists and private equity firms reduce the number of companies they are willing to back. The Cleantech Group found that venture capitalists invested $4.02 billion in clean-technology companies in the first half of 2010 — a 43 percent increase from the comparable period in 2009 and nearly tied with the record in 2008. Those private investors are, however, choosing fewer deals.

This results in what Paul Dickerson calls “the commercialization valley of death,” in which clean-tech companies run out of financing before they can actually produce a viable product. Mr. Dickerson is head of the clean-tech practice group at the law firm Haynes & Boone and a former chief operating officer of the Energy Department’s office of energy efficiency and renewable energy.

Mr. Dickerson noted that venture capital and private equity firms can often be daunted by the amount of money and the long time it takes clean-tech investments to pay off.

Experts say that something in this equation has got to give — and it might as well be the government. They only differ on how.

Mr. Dickerson, for instance, suggested that government should do more to lure private investors, like providing more loan guarantees. Or, he said, government should stop focusing so much on the early stages of renewable energy and provide subsidies for the manufacture of it. If government provides loans or manufacturing tax breaks, Mr. Dickerson argued, it would drive down the technology risk and encourage private equity firms to get in the game.

Others think the government is not doing enough to encourage research and development — at least the right kind.

Government subsidies for developing clean energy technology are inefficient and favor the wrong kind of investments, said Jim Nelson, a former private equity investor and the chief executive of Solar 3D, an alternative energy company that is backed by a number of individual investors and produces a new kind of solar chip that aims to maximize the amount of energy it pulls from the sun. “We have a great government system, but they get confused by accomplishing objectives versus getting re-elected,” Mr. Nelson said.

Mr. Nelson said, for instance, that solar energy provides less than 1 percent of all the energy in the world, but accounts for around 50 percent of government renewable energy financing. The problem, he argued, is that the government is backing technologies that are too expensive or inefficient to be widely adopted. That, he said, creates a sinkhole for government dollars.

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