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Rethinking the Role of Government in Cleantech

Another year, another wringing of the hands over tax credits and incentives for clean technology.

Lobbyists and vendors in the U.S. are once again singing the blues, calling for continued and expanding government investments in clean technology. At the same time, political challengers continue their Solyndra hootenanny, raking the current administration for how it spent hundreds of millions of taxpayer dollars.

One can’t help but wonder whether it’s time for a different tune when it comes to government involvement in cleantech.

Perhaps conversations about policy support should be less about giving more taxpayer money to prop up the space, and more about elected officials setting long term market stability and enabling the private sector to deploy capital to assume risk in cleantech.

Why? First, some background…

Down with incentives
Every time U.S. tax credits for renewable energy development come up for renewal, the cleantech sector cringes at having to once again “play chicken” with whichever administration is incumbent at the time.

The U.S. Production Tax Credit (PTC), which provides a 2.2-cent per kilowatt-hour benefit for the first ten years of a renewable energy facility’s operation, was born in 1992. But it’s had a hardscrabble life, clinging to life support after seven one and two-year extensions bestowed alternately by Republican and Democratic Congresses. Neither major American party has been willing to show long term incentive support for renewable energy.

The PTC for incremental hydro, wave and tidal energy, geothermal, MSW, and bioenergy was extended until the end of 2013. But the production tax credit for wind expires at the end of 2012. And that’s got wind lobby groups girding up. In a recent statement, American Wind Energy Association (AWEA) CEO Denise Bode cited a study suggesting Congressional inaction on the PTC “will kill 37,000 American jobs, shutter plants and cancel billions of dollars in private investment.” The same study suggested extending the wind PTC could allow the industry to grow to 100,000 jobs in just four years. Expect this battle to simmer all summer.

The unpredictability around cleantech incentives is taking its toll. “The U.S. is hitting a brick wall with the cessation of benefits,” remarked John Carson, CEO of Alterra Power, on the subject at a recent cleantech investment conference I co-chaired in Toronto. He wasn’t happy, and do you blame him? Nobody likes living hand to mouth. But that’s what happens when you rely on credits and incentives like the PTC or its loved and loathed counterpart in the U.S., the Investment Tax Credit (ITC).

And then there are the cleantech subsidies provided by the American Recovery and Reinvestment Act of 2009 (ARRA), which are now winding down.

If it feels that clean technology vendors and lobbyists are spending an undue amount of energy and resources chasing such subsidies worldwide, they likely are.

Up with mandates and standards
Rather than funding and administering subsidies to help the clean and green tech sectors find their footing, a case could be made that governments should focus on passing aggressive policy mandates, standards and codes.

Instead of using taxpayer money to make technology bets, regional and national governments could focus on passing laws, including broad brush stroke ones like the renewable portfolio standards in the U.S. that mandate a certain percentage of power from renewable sources by certain dates, and then step back and let the private sector figure out how to deliver. Or mandate change more granularly—for example, that coal power plants need to meet certain efficiency or emissions standards by certain dates, and, again, let the private sector figure out how. (Ironically, if there were more public support to actually clean up coal power instead of simply disingenuously parroting, beginning in 2008, that “there’s no such thing as clean coal” and throwing up our hands because environmental ads told us “clean coal doesn’t exist today”—and if that translated into political will and a mandate—cleaner coal power could exist today. Yes, there’d be a penalty on the nameplate capacity of plants’ output, but there’d also be billions saved in health care costs. But we digress.)

Taxpayers should take their politicians to task for trying to play venture capitalist, i.e. by investing their money in trying to pick winners (a la Solyndra) in complicated markets. Professional venture capitalists themselves, who focus on their game full-time, barely pick one winner in 10 investments.

Drawbacks of incentives
How could government grants, loans, tax credits and other subsidies possibly be bad in cleantech? Free money is good, right? Here’s a list of drawbacks to these incentives, some of them not as obvious as others:

  • They can go away and cause market disruption – to wit, the points earlier in this article.
  • The existence of loans and grants silences critics – Few speak out against pots of free money, because they might want or need to dip into them in the future.
  • Incentives favor only those willing to apply for them – and therefore are often missed by companies working on disruptive, fast-moving tech, or who are focused on taking care of customers’ needs.
  • Criteria are often too narrowly defined – Criteria for incentives often favor certain technology (solar photovoltaic over other solar, or ethanol over other biofuels), and as a result, lock out other legitimate but different approaches.
  • Picking winners means designating losers – Recipients of government grants or loan guarantees get capital and an associated halo of being an anointed company. Those that don’t are comparatively disadvantaged.
  • Not the best track record – Incentives go to companies best staffed to apply for and lobby for them. And those aren’t necessarily the companies that could use the capital the most effectively, e.g. to compete in world markets, or create the most jobs.

What governments could and should be doing
In the cleantech research and consulting we do worldwide at Kachan & Co., we’ve come to believe that governments are best focused on activities to create large and sustained markets for clean technology products and services.

Doing so gives assurance to private investors that there will be continued demand for their investments—one of the most important prerequisites to get venture capital, limited partners and other institutional investors to write large checks.

Given that objective, governments should, in our opinion, pursue:

  • Setting mandates and standards – e.g. the amount of power generated from renewable sources, new targets for fuel efficiency, green building or other dimensions.
  • Improving codes and other regulations – making building codes more stringent could drive energy efficiency, green building and smart grid investment.
  • Building the talent pool
  • Stabilizing the economy
  • Fostering political stability
  • Commitment to infrastructure projects – including water, transportation and grid.
  • Building showcase projects – regions wanting to foster local cleantech can do as Abu Dhabi has done with itsMasdar initiativeas Saudi Arabia is now doing with solar, or as China has done with hundreds of green development zones; in doing so, all three of these countries have sent strong signals to large corporations and investors that they view clean technology as strategic.
  • Rolling back so-called perverse government subsidy support today of the fossil fuel industry, including direct and indirect subsidies.

Cities as test beds of policy innovation
Interestingly, cities are emerging as petri dishes of progressive cleantech policy, and are increasingly where such innovation is taking place.

For instance, Barcelona has established that large companies need to create as much as 30% of their power from solar thermal technologies. The city of Berkeley, California pioneered what is now known as Property Assessed Clean Energy (PACE) financing, wherein property owners are able to pay for energy efficiency and renewable energy improvements on their property taxes. This month, Phoenix, Arizona introduced what it calls the largest city-sponsored residential solar financing program in the U.S. And New York City is taking the lead in residential demand response by trialing a program to curtail the consumption of 10,000 room air conditioners at times of high demand.

Given the world’s current financial malaise, and especially in light the Occupy momentum globally, I’m surprised more folks aren’t questioning how their governments spend their money in cleantech. Because, as described above, there are other arguably more effective ways elected officials can help usher in a cleaner, greener future than throwing around billions in incentives.

After all, how much fun would a pristine planet be if we’re all destitute because governments have crumbled under crushing debt?

This article was originally published here. Reposted by permission.

 

A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. The company publishes research on clean technology companies and future trends, offers consulting services to large corporations, governments and cleantech vendors, and connects cleantech companies with investors through its Hello Cleantech™ programs. Kachan staff have been covering, publishing about and helping propel clean technology since 2006. Details at www.kachan.com. Dallas is also executive director of the Clean Mining Alliance.

Efficiency, Meet Elasticity

by Richard T. Stuebi

I sometimes receive criticism for not sufficiently promoting energy efficiency as a means of reducing our reliance on fossil fuels. I don’t think that the criticism is justified – I do strongly support the pursuit of energy efficiency – but I am willing to admit that I spend more time and attention focusing on energy supply technologies.

This is for two reasons. One is that we can’t realistically shrink our way to zero energy requirements – or even close. Yes, we must stop wastage, but for continued human progress over the centuries to come, we will always need a substantial supply of energy, from more benign and everlasting sources than the fossil fuels we depend upon today.

Second, and more subtly, the adoption of energy efficient technologies often begets a perverse reaction from the market – increased energy consumption — due to the effect of the economic concept of income elasticity.

This concept is illustrated by a paper entitled “Solid-State Lighting: An Energy-Economics Perspective” by Dr. Jeff Tsao and colleagues at Sandia National Laboratories in the Journal of Physics D: Applied Physics, assessing the long-run implications of the adoption of more efficient lighting technologies. Their study indicates that, by 2030, LED lighting will be three times more efficient than fluorescent lights – but that customer demand for lighting (as measured in lumens) will increase by a factor of ten, meaning that electricity requirements to supply lighting demand would have to double, even with elimination of incandescents and replacement with LEDs.

Again, I support the transition to LEDs. It should be noted that LEDs have much less of a thermal footprint, so even if the paradoxical results suggested by Dr. Tsao et al come to pass, there may still be a substantial reduction in energy requirements associated with air conditioning as LEDs come to replace incandescent lights.

The moral of this story is that energy efficiency is not a panacea for our environmental challenges. It is easy for advocates of energy efficiency to overlook consumer behavior when considering the aggregate impacts of a new technology – and thereby may overstate the potential environmental benefits associated with energy efficiency innovations. As a result, the search for new and better energy supply approaches remains an imperative – even while more aggressively promoting more efficient energy consumption technologies.

Richard T. Stuebi is a founding principal of NorTech Energy Enterprise, the advanced energy initiative at NorTech, where he is on loan from The Cleveland Foundation as its Fellow of Energy and Environmental Advancement. He is also a Managing Director in charge of cleantech investment activities at Early Stage Partners, a Cleveland-based venture capital firm.

New Cars that Already Meet 2016 Fuel Economy Standards

By John Addison. President Barack Obama announced that automakers must meet average U.S. fuel-economy standards of 35.5 miles per gallon by 2016. This will be an exciting opportunity for automakers that already deliver vehicles that beat 35.5 mpg such as the Ford (F) Fusion Hybrid, Mercury Milan Hybrid, Toyota (TM) Prius, Honda (HMC) Insight, Honda Civic Hybrid, and the Mercedes Smart Fortwo. You can buy these gas misers today. A number of other vehicles offered in the U.S. now come close to the 2016 standard, and will see mileage improvements next year.

In Europe, over 100 models can be purchased that meet the 2016 standards, thanks to the popularity of cars that are smaller, lighter weight, and often use efficient turbo diesel engines.

Over the next three years, dozens of exciting cars will be introduced in the United States. Here are some offerings that we are likely to see in the next one to three years from major auto makers.

Ford (F) will extend its current hybrid success with added models. During my recent test-drive of several vehicles that meet the 2016 requirement the midsized Ford Fusion Hybrid demonstrates that you can enjoy fuel economy in a larger car with comfort and safety. The Ford Fusion Hybrid has an EPA certified rating of 41 mpg in the city and 36 mpg on the highway. The car can be driven up to 47 mph in electric mode with no gasoline being consumed. Ford will start selling pure battery electric vehicles next year that will lower its fleet mileage average.

The best mileage SUV on the market is the Ford Escape Hybrid with 32 mpg. In 2012, Ford will also offer a plug-in version of the Escape Hybrid that will blow-away the 35.5 mile standard. Bringing the popular Fiesta to the U.S. with a 1.6L gasoline engine will also attract budget minded buyers looking for good mileage.

In discussing the new standards, Ford CEO Alan Mulally stated, “We are pleased President Obama is taking decisive and positive action as we work together toward one national standard for vehicle fuel economy and greenhouse gas emissions that will benefit the environment and the economy.”

General Motors (GM) plans to be the leader in plug-in hybrids starting with the Chevy Volt. It has a major opportunity to extend its E-Flex architecture to SUVs and trucks by 2016. For the price conscious buyer, the Chevy Spark hatchback with a 1.2L gasoline engine should deliver over 40 mpg.

There are almost 40,000 Chrysler GEM electric vehicles in use today. The GEM 25 mph speed limits them to only being popular in fleets, university towns, and retirement communities. Chrysler will extend its early U.S. electric vehicle leadership in 2010 with new freeway speed plug-in hybrids that can be driven 40 miles in electric mode, before engaging the gasoline engine – the Jeep Wrangler, an SUV, and the Town and Country Minivan. Over time, Chrysler can expand its ENVI family. Chrysler’s new stockholder Fiat will bring in exciting smaller cars and help expand the EV success.

Toyota (TM) will expand on the success of the Prius with more new hybrids. Since 2002, I have been driving a Prius that has averaged 41 mpg in real world driving that has included climbing hills with bikes on a roof rack and driving through snow with skis on the roof rack. The Prius will also be made available as a plug-in hybrid – hundreds of these PHEVs are now being tested by fleets. The modestly priced Yaris, which gets 32 mpg, is likely to also be offered as a hybrid that delivers over 40 mpg.

Honda (HMC) is likely to be the first maker to meet 2016 CAFÉ requirements, building on its historical leadership in fuel economy. My mother has easily achieved over 45 mpg with her Honda Civic Hybrid. Now Honda is going after the Toyota Prius with the Honda Insight. The popular Fit, which gets 31 mpg, is likely to also be offered as a hybrid offering over 40 mpg. Look for more high mileage offerings from both Honda and Toyota as they compete for hybrid leadership.

Nissan’s (NSANY) Altima Hybrid delivers an impressive 34 mpg. Beyond hybrids, Nissan is determined to be the leader in battery electric vehicles. Working with fleet consortiums and major electric utilities, next year Nissan may seed the market with thousands of freeway speed electric vehicles. The Nissan EVs have ranges of at least 100 miles per charge. Clean Fleet Report EV Test Drive

This article does not pretend to be a complete review of what is coming, rather a taste of what is here and what will soon be here from six major automakers. Given economic challenges, not all forecasts will happen. There will be surprises, more new models, and new model names. Not all plans will be executed as Chrysler deals with bankruptcy reorganization and as GM considers one.

Meeting the CAFÉ standards by 2016 will not be a slam dunk for all of the automakers, but they will make it. Historically, CAFE standards have not aligned with the EPA fuel economy determinations used in this article. For better and worse, flexfuel vehicles get artificially high numbers, making it easier for GM, Ford, and Chrysler to meet CAFE targets. Plug-in hybrid and EV ratings need to be finalized. To meet fleet average requirements, cars will need to average higher than 35.5; light-trucks and SUVs lower.

Trends to more efficient drive systems are a certainty. With oil prices now close to double the recent lows of earlier this year, these new vehicles bring important relief to every driver who wants to save at the pump.

John Addison publishes the Clean Fleet Report and details the future of transportation in his new book Save Gas, Save the Planet.