The Crisis in Clean Energy?

David Victor & Kassia Tanosek recently published an article in Foreign Affairs on the future of renewable energy that would be an excellent student reading.

Among the take-aways from the piece:

  1. The clean energy industry in Western countries is “heading for a crisis” as a consequence of substantial cuts in public subsidies by cash-strapped government. Early manifestations of this crisis include a drop in the number of new wind turbine installations in 2010, the first time that has happened in 20 years, and substantial drops in the value of clean energy companies;;
  2. The fundamental cause of these foreboding trends is a policy focus on projects that are quick and easy, usually deploying off the shelf technologies, rather than investments in innovative technologies that might be competitive without the help of government subsidies;
  3. Development of clean energy businesses face two primary obstacles, a technology gap, and a commercialization gap, or the failure to obtain the massive investments in commercial-scale testing that is required prior to full funding of such enterprises by the private sector. The latter problem is more imposing since it requires a “delicate balancing act” in which government must work with the private sector without undermining market competition.
  4. The federal government in the United States often support the least risky projects, which are often the least innovative, including biofuels and windfarms. These projects are often unable to scale up without government investments and subsidies. Clean energy subsidies often are subject to a boom and bust cycle; as a consequence, private investors often focus on low-risk conventional technologies that can be deployed quickly before the next bust cycle in government investments;
  5. State often also provide subsidies to clean energy producers and impose mandates to purchase clean energy, e.g. renewable energy portfolio standards. This patchwork of of standards also creates uncertainty and volatility that favors investments in conventional renewable energy sources;
  6. A similar crisis in European clean energy markets is occurring, with the need for fiscal austerity leading to substantial cutbacks in subsidies. While government support has been much steadier in China, it lacks the infrastructure to utilize a substantial portion of the clean energy being produced;
  7. If the U.S. government wishes to make substantial advances in clean energy deployment in the future, it needs to to change its orientation in three ways: 1. Adopting more policies that are more “pull” oriented, i.e. pull technologies into the market rather than push technologies, e.g. subsidies. Cap and trade is one example of this approach; a federal clean energy standard would be another potential approach, with the latter including other clean sources beyond those traditionally supported, including nuclear power and low-pollution coal plants. A federal standard should also shift away from mature renewable energy technologies toward more innovative technologies that compete on performance standards; 2. The U.S. government should focus subsidies in a smarter fashion. This includes closing the technology gap by backing more fundamental research in universities and government laboratories and early stage technologies that industry will not adequately fund. The federal government should also seek to close the commercialization gap by by lowering financial risks associated with new energy technologies, e.g. by improving and expanding loan guarantee programs; 3. The U.S. government should do more to engage with emerging markets, including more partnerships and encouragement of corporate joint projects.

Among the class discussion questions suggested by the piece:

  1. Would increased government funding of potential “breakthrough” technologies pose the risk of the government picking “the wrong horse.” While the authors suggest that the government could obviate this risk by funding a variety of technologies and letting the private sector pick winners, would this prove easier said than done?,  That is, would the government influence private sector decisions by aiming more subsidies at the technologies it deemed most desirable, including from a political perspective?;
  2. While more emphasis on “pull” oriented technologies might be desirable, what is likelihood that such approaches are viable in this political environment in the United States. How should such proposals be framed to engender the requisite bi-partisan support to implement such approaches?;
  3. What are the incentives that drive government decision makers to back the least risky technologies? How do we change these incentives?

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