Make or break for US renewables, says report
The clean energy sector has been a rare bright spot for the ailing US economy since the financial crisis took hold
Strong political support from the Obama administration and generous stimulus spending has fuelled a golden age for wind and solar technologies and led to a resurgence in the moribund nuclear industry.
Non-hydro renewable electricity generation in the US, including nuclear power, doubled from 2006 to 2011, even if it still accounts for less than a tenth of electricity produced. But the good times could soon come to an end, though, as stimulus funds run dry and a host of subsidy programmes expire over coming years, potentially creating a ruinous “funding cliff”, a report from three think tanks has warned.
The report, Beyond Boom and Bust: Putting Clean Tech on a Path to Subsidy Independence, was written by authors from The Breakthrough Institute, the Brookings Institution Metropolitan Policy Program and the World Resources Institute.
It points to 2012 as a make-or-break year for the sector. Federal funding for clean energy – wind, solar and nuclear primarily – is expected to fall by nearly half this year, from $30.7bn in 2011 to around $16bn.
That is down from a peak of $44.3bn dollars in 2009. And spending is projected to continue its precipitous decline. By 2014 federal spending on clean energy technologies is projected to fall to $11bn, a decline of 75% from 2009, the report’s author’s claim.
Last year, for example, a crucial grant programme known as Section 1603, which BP took advantage of to approve an $800m wind farm in Kansas, was allowed to expire. That led to an increase of some 50%-130% in the cost of financing new wind projects, according to the report.
Dozens of similar subsidy programmes, representing 70% of all clean energy support measures, are scheduled to expire by 2014.
“In the first quarter of 2012, global clean energy investment dropped to its lowest level since 2008. Good news stories are being replaced with headlines about closing factories, bankruptcies, and cancelled projects. Clean tech appears to be at a crucial inflection point,” says Letha Tawney, a co-author of the report and senior associate at the World Resources Institute.
It is a crucial turning point because the industry remains reliant on government support to be cost competitive with its fossil fuel rivals.
That is not to say that the billions of dollars spent on the wind, solar and nuclear sectors have not resulted in some major gains in recent years. Technological breakthroughs and cheaper manufacturing in China have helped solar photovoltaic (PV) system costs fall by more than 50% between 2007 and 2011. Costs for solar PV projects have come down so far that they can even be cost competitive with other forms of energy without subsidies in the sunny climes of California, Texas, Nevada and Florida.
Wind project costs, too, have come down considerably. New wind turbine costs decreased by 27% between 2008 and 2011 in the US, and new projects can be cost competitive with natural gas and coal in prime wind areas such as the gusty plains of the Midwest.
Meanwhile, the US has given the green light to Southern Company to build the country’s first new nuclear reactor since 1978 in Georgia – a project that would not have been possible without generous federal loan guarantees.
Despite the progress, the renewable sector has not advanced as fast in making cost reductions as backers had hoped when allocating tens of billions of dollars in stimulus spending. Meanwhile, the boom in shale gas production has made the quest for cost competitiveness with fossil fuels all the more difficult by pushing natural gas prices lower.
Natural gas prices in the US collapsed from a pre-crisis high of around $15 per million cubic feet (cf) in 2008 to a low of $1.82/m cf in late April of this year.
Prices rebounded somewhat to around $2.40/m cf in May, but they would have to rise much further to make unsubsidised clean energy projects competitive.
With natural gas prices at $3 per million cf, for example, a typical conventional combustion gas-fired turbine plant (with which solar projects typically compete) would cost around $71.50 per megawatt-hour (MWh). By contrast, solar PV project costs currently range from $111/MWh at the low-end, rising to $181/MWh at the high end.
Even if natural gas prices more than doubled to $6/m cf, a conventional combustion plant would beat the cheapest solar projects at $103.50/MWh.
Wind energy projects face similar challenges from cheap natural gas. The unsubsidised cost of new wind power projects ranges from $60-90/MWh, according to the report. At $3/m cf, new advanced combined cycle gas plants – with which wind projects typically compete – cost $52.10/MWh, though that cost rises to $66.10/MWh when natural gas prices rise to $5/m cf. That makes unsubsidised wind projects generally more cost competitive than solar projects.
There is some hope for clean energy, as shale gas drilling may not remain economically viable at current low gas price levels, raising the prospect of higher gas prices in the future. However, gas prices are expected remain low for the time being.
The US Energy Information Administration (EIA) projects long-term natural gas prices of $5-$7/m cf, a range at which, even today, many wind and solar projects could compete. But the EIA does not foresee natural gas prices breaking the $5/m cf threshold until the early 2020s.
That means that the clean energy sector needs continued political support. But the political landscape has shifted since the 2009 stimulus spending package was passed and it is doubtful that the industry will find the same level of support in Washington DC today.
Republicans, in particular, appear increasingly hostile to new subsidies, claiming they are misguided attempts by the government to intervene in the market to “pick winners” that will only add to the US’ budget woes. Many Democrats, meanwhile, support the industry but are loathe to leave themselves open to charges of worsening the deficit. Moreover, few expect a productive year from congress with a presidential election looming in November.
That is very bad news indeed for an industry that is facing its most uncertain period in years. Without an intervention that does not look likely, financing for the US clean energy sector could collapse and the industry could be in for another major shakeup.