Yet I was skeptical regarding the business model. I know that intense competition and large scale production have been driving down solar prices in the last couple of years, but I’ve still been reading total installation costs of about $6-8 per peak watt (pW). Yet it seems that prices are now even lower than that. Solarbuzz, a solar consultancy, reports that average retail module prices in May 2010 have fallen to around $4/pW, but that the lowest cost multi-crystalline modules are now $1.74/pW retail, while mono-crystalline is $2.07/pW. Inverters, balance of system, and installation add another $2.50 to $3/pW. Installation on parking canopies rather than rooftops adds another $1/pW or so.

Even with total installed costs as low as $4.50 to $5, and a 30% credit on capital costs thanks to the generosity of US taxpayers, the numbers still didn’t add up. What makes Apogee’s business model possible is the value of solar renewable energy credits (SRECs). US states that enact renewable portfolio standards (RPS) have created local markets for renewable energy credits, allowing utilities to meet their requirements by buying RECs. In order to stimulate solar, a number of states have created “solar carve outs”, i.e. a separate standard for solar energy with its own SRECs, which have initial market prices in the 30-60c/kWh range – Massachusetts has set a floor price of 30c/kWh (astute readers will observe that SREC is an anagram of SERC, our very own center for Center for Sustainable Enterprise and Regional Competitiveness here at UMass-Boston).  

This is a massive subsidy indeed, and raises significant policy issues. Even for those who are fervent advocates of renewable energy, does it make sense to provide such huge subsidies to solar, when modest subsidies for land-based wind power of around 2-3c/kWh serve to make it grid competitive in many regions? Would the money be better spent on research and development, and the development of local workforce skills and business clusters? Subsidizing installation at the retail level will generate a few local jobs for developers, electricians and installers, but the panels will mostly be imported. There is a serious risk of consumer backlash when people realize the extent of the subsidies and the impact on their utility bills – just as the proposed cost of offshore wind power from Cape Wind has shocked even some of its supporters. Perhaps these subsidies are needed to jump start commercial scale installations and overcome industry inertia and perceived risks, but in themselves they also constitute a barrier to scaling up new renewables beyond a few percent of grid supply.

In return for discussing the business and economics of SRECs, I promised to give David Weinberg a chance to explain Apogee’s business pitch, so here it is:

Imagine that you’re a business owner or a University president in the Northeastern United States.  Over the past 10 years you’ve watched your cost of electricity soar 69%, and it could double in the next ten years.  Compete with China?  You can’t even compete with most states here at home.  Those high prices will crimp your growth and extinguish your profits.  In fact, if you stay in the northeast, you probably won’t survive another 10 years.

What if you could use solar energy to cut your energy bill 30-40%?  “No way”, you’d respond.  “Not enough sun” or “too expensive to install upfront”. New England averages 4.3 hours of sun per day, almost double that of Germany, the world leader in solar power. As to the upfront cost, what if it didn’t exist? If there is no upfront cost and the solar power costs 30-40% less than what you are currently paying, would that be attractive?

Apogee Solar is a solar energy developer in New Jersey, Massachusetts or Pennsylvania, who harnesses the power of Solar Renewable Energy Credits (SRECs) to lower your energy bill. An SREC is an energy tariff that is amortized over everyone’s bill, so it is a tiny part of the rate base.  Every megawatt of energy that your installed system produces earns me one credit.  I can then take that credit and sell it into the marketplace.  The sale of the credit is what allows me to finance your system with no upfront costs.

How much are SRECs worth?  That depends on where you are located.  New Jersey has a current price of around $650 per credit.  Massachusetts has set a yearly floor of $300 per credit.  Energy systems are designed so the credits depreciate over time.  A system that is 10 years old will generate SRECs that are less valuable than a system that is two years old.  What does that mean to energy prices?  In Massachusetts and New Jersey I can negotiate a starting electricity price of 9 cents/kWh, and in 15 years your price will still be below 13c/kWh. At the end of 15 years you own the system, so for the next 15 years your cost of power is free.

Solar installations are financed with what are called ‘Power Purchase Agreements’ (PPAs).  I like to call them solar mortgages, except that your property and assets remain free and clear.  The collateral for the financing are the generated SRECS.  Like any mortgage, only businesses or universities that are in good health will qualify. You might be wondering if you can finance an installation on your own to save even more money.  That depends on how much time and effort you want to spend.  Because of the variability of SREC prices, most commercial banks won’t finance them. Assuming that you could find financing, you would then have to identify the right solar modules, the right inverters, hire the right design firm, hire a really good union electrical installation firm, and then take your system through the local planning and zoning board for approval. After you have your system installed, you’d have to maintain it. Apogee brings together the whole package: finance, design, installation and maintenance. We save you money and help the planet.

Yet there are substantial behavioral, institutional, and financial barriers. As I’ve discussed in this blog post, there may well be free lunches available, but they are hidden away behind misaligned incentives, inertia, and market barriers. Consumers are often unaware of the potential cost savings, cannot afford the upfront costs, or fear that home efficiency upgrades will not add much to the market value of a home. For renters, new construction, and commercial property, the people who pay energy bills are often not the same people as those who design buildings or invest in efficiency. At our university, capital budgets for buildings and operating costs come from two separate pockets that don’t necessarily communicate. In the corporate world, few have traditionally paid much attention to potential energy savings because nobody was paid to do so.

Demand response systems raise some particular issues relating to fears regarding privacy and corporate intrusiveness. The Economist article highlights a survey by Parks Associates, a Texas-based market-research company, that indicates that only 15-20% of US consumers would be willing to sign up for DR programs that enable utilities to control their thermostats. Yet the survey also shows that over 80% of households would pay up to $100 for cost-saving equipment if it chopped at least 10% off their monthly electricity bills. Utilities, however, are still in the business of selling electrons, and incentives for energy efficiency, such as California-style rate decoupling, is only making slow progress toward adoption in other states.

Real-time feedback to customers on the price and quantity of electricity they are using can help cut consumption, and new devices can give an analysis by appliance, illustrating the savings from cutting usage or running appliances on lower-cost night-time power. Google announced last year that it’s developing software package called Powermeter to provide real time information about home energy usage by communicating with household devices. But few appliances are ready for smart meters, standards don’t yet exist for Google or other smart meter devices (Google just released the API in early March 2010), and systems will cost several hundred dollars per home. Moreover, as The Economist points out, trying to run a home using this information could become a complex and time-consuming job.         

The next stage in smart buildings is to move from real time information to direct control of power consumption, from devices to heating, and cooling. Companies such as PassivSystems are developing intelligent home controls using multiple sensors, but they are expensive and would still require a lot more programming regarding preferences and trade-offs between cost, convenience, and comfort than your average consumer might be willing to take on. And as the surveys indicate, consumers are wary about ceding control of their homes to computer algorithms. Commercial and industrial buildings are likely to be more lucrative markets than residential in the early stages of this new market, because of the larger scale of opportunities for saving energy, not just in HVAC and lighting but in industrial processes that have some flexibility in load and timing, such as water treatment. Nevertheless, target markets are fragmented by sector and solutions frequently need to be customized.

In my MBA class on Business and Climate Change, several student groups are working with regional companies interested in demand response and smart grid. From my conversations with firms active in the area, a major problem is finding the right channel to potential customers. Facilities managers tend toward a conservative outlook and generally lack the funding and also the authority to implement systemic controls that affect operations. As with other areas of clean energy, the gadgets are cool but the implementation requires overcoming a host of organizational hurdles.

The country faces a serious long-term strategic threat from climate change. The largest population centers are along the coastal plain, just a few meters above sea level, and regional projections point to a decline in winter precipitation of 10-20%, increasing the likelihood of severe droughts. Although more than half the population considers climate change to be a serious threat, there has been little governmental attention to emissions until recently, and even the McKinsey report neglects the potential physical impacts of climate change.

During my visit to Israel in December 2009, I gave a talk at the Hebrew University, Jerusalem, on climate governance (drawing from A Tale of Two Meltdowns), and my Israeli colleague from the university organized a meeting with the Minister of Environmental Protection, Gilad Erdan, and several of his staff, to talk about Israel’s plans for reducing GHG emissions and ways of engaging Israeli industry. Historically, environmental protection has been a relatively low priority in Israel, in light of more pressing security and economic development concerns. Israel has a standard of living approaching European levels, yet because it’s still classified as a developing country in the climate regime, it did not have binding obligations under the Kyoto process. Nevertheless, Erdan has been pushing for the country to adopt aggressive emissions targets, and is seeking ways to get the government as well as industry on board.

The key to advancing the climate agenda in this particular environment is to link it to other national priorities, in order to elevate its strategic significance and build the political coalition needed for action and investment. The Environment ministry recognizes this, and the McKinsey report notes four benefits that would accompany climate action:

An important motive for Israel’s ambitious GHG goals is to graduate from developing to developed country status, with a view to joining the OECD. This would offer broader economic benefits through trade and investment as well as improved international legitimacy. Israel’s active engagement in promoting clean development regionally and supplying critical technologies for global emissions reductions would also bolster its international status, enhance exports, and potentially provide a source of carbon credits.            

Energy security is clearly an important goal, as Israel is almost completely dependent on imported fossil fuels, including natural gas from Egypt. Yet current thinking is that energy security means independence through greater reliance on local renewables, primarily solar. My own view is that energy security can be linked to national security and pursued through regional energy collaboration, primarily with Egypt and Jordan. Though the McKinsey report lists solar power, both CST (concentrating solar thermal) and PV as the single largest contributor to Israel’s GHG reduction potential, the reality is that suitable land is quite limited, even in the southern Negev desert. Collaboration with Egypt and Jordan would open up the possibility of developing a regional grid drawing from large-scale CST in the Sinai desert, southern Jordan, even perhaps northern Saudi Arabia. Moreover, the intermittency of solar can be somewhat offset when complemented with wind power, which has very limited potential in Israel (McKinsey estimates at around 600MW), but is far more abundant in neighboring countries.

Of course, Israel does not want to be dependent on its Arab neighbors for energy. A regional grid would provide security through interdependence. Israel could be a key supplier of technology, as well as a conduit of power between Egypt and Jordan. Economic and technological collaboration on the scale required would also, one hopes, improve political relations. During the 1950s and 1960s, Israel made considerable diplomatic gains in Africa and parts of Asia from its contributions to international economic development. More ambitiously, if a Mideast regional grid were tied into the proposed Desertec supergrid, European participation would provide a strong political guarantee of supply security, as well as smoothing out supply intermittency issues (update: PWC released a report in April 2010 with a roadmap to 100% renewable power based on an integrated Europe-N. Africa supergrid).

Israel has a strong clean tech sector as part of the larger high-tech cluster and entrepreneurial culture in the country (see Start-up Nation: The Story of Israel’s Economic Miracle). The solar thermal and PV clusters are particularly well developed, and the country is home to major firms in water purification and desalination, geothermal energy, and other areas (see here and here, and Jonathan Shapira’s excellent blog on Israeli clean tech). The internal market, however, is far too small to benefit very much from Israel’s own emissions reductions efforts. The large economic payoff will come from exports, technology licensing, and international joint ventures in which Israel is the source for R&D, software, and high value components. BrightSource Industries Israel, for example, a descendent of the CST pioneer Luz, is now a subsidiary of California-based Brightsource Energy, and supplies R&D, engineering services, and key components for the company’s global markets. In fact, the Israeli tech sector is remarkable for its success despite the absence of advanced local markets – during my MBA at Tel Aviv University, I wrote some case studies on how Israeli companies operated within virtual clusters, with their major markets and sources of capital in Europe and the US.

Israel’s Greenhouse Gas Reduction Potential

Though Israel’s total emissions are tiny in global terms, at 71 MtCO2e in 2005, they are growing rapidly, and expected to double by 2030 in a “business as usual” scenario. Emissions per head are already 10.2 tons, about the European average, and expected to rise to more than 14 tons by 2030. The structural reasons for this relatively high and growing carbon footprint are the country’s dependence on coal for power, under investment in public transportation, weak building standards, and high rates of economic and population growth. The country is also committed to energy gobbling large-scale water desalination projects.

The McKinsey report estimates that implementation of abatement measures could reduce emissions by about 45 MtCO2e, corresponding to 2/3 of the expected GHG emissions growth and about 1/3 of total expected BAU emissions in 2030. Behavioral changes, such as reduced air conditioning and greater use of bikes and public transportation, could reduce emissions by a further 7 MtCO2e. With characteristic optimism, McKinsey suggests that the net cost would be zero, with negative cost activities such as efficient lighting and car engines offsetting more expensive measures such as solar power. McKinsey’s estimates for large quantities of solar PV at a cost of under €10/tCO2e seems unduly sanguine.

Ten measures account for about 2/3 of the reduction potential:

As always, the core question is how to implement these measures. Just because more than half the abatement potential can be achieved at negative cost does not mean that it will occur spontaneously, due to the multitude of market failures and institutional hurdles (see McKinsey’s Expanding Free Lunch Program). McKinsey recommends four rather uninspiring steps for the Israeli government to consider:

1. Establish ambitious national GHG abatement goals as government policy.
2. Formulate Israel’s Low Carbon Growth Plan (LCGP) defining the mechanisms and timing of implementation.
3. Translate the national abatement plan into detailed operational measures including ways to finance the upfront investment.
4. Establish a central body to monitor progress in implementation.

What is really needed, in Israel and elsewhere, is a much broader mobilization of the public, government agencies, and business to position climate change at the top of the agenda as the critical strategic threat of the century. At the same time, it offers unprecedented potential for innovation, economic transformation, and regional collaborations. Outside the clean tech sector, Israeli business does not yet take climate seriously – my own research shows that the best way to shift perspectives is to engage people with leaders in the field. In addition to the targets and implementation plans, the Israeli government could partner with charismatic climate champions such as Shai Agassi and local clean tech companies to promote the issue and organize a high profile conference of international businesspeople, policymakers, and experts to jumpstart the process and generate local commitment.

Generating more energy from renewable sources will be crucial to our survival: not just as individual countries, but as a planet. With this in mind, Marie Shields takes a look at the current state of the renewables sector in two key regions: the US and Europe.

Europe and the United States: both Western, developed economic powerhouses, and by extension, voracious consumers of energy. Both also chasing ambitious targets for generating a portion of this energy from renewable sources: in the US, 10 percent by 2012, rising to 25 percent by 2025; and in Europe, 12 percent by 2010 and 20 percent by 2020.

What are the differences that lie under these surface similarities? Below, we take a look at the unique challenges faced by each region in its quest to safeguard our energy future.

Current status

Known primarily as Kyoto foot-draggers under the Bush Administration, the US government is once again a friend of the environment thanks to the election of President Obama last year. The Bush government gave $72 billion in subsidies to fossil fuels between 2002 and 2008, with renewables receiving $29 billion in the same period. Obama and his team must now try to redress this imbalance, starting with the $6 billion earmarked for renewable energy and electric transmission technologies loan guarantees in the American Recovery and Reinvestment Act

The countries of the European Union, regarded by many as the global leaders in renewable energy development, have a longer track record of environmental consciousness. As long ago as 1997, the EU set a target of working toward 12 percent of energy from renewables by 2010.

David Levy, Director of the Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, and author of the blog Climate Inc., points out that while renewables have traditionally been lower on the radar in the US, Americans are also very good at pushing ahead with an idea once they latch on to it. “I think it’s true that there is some catching up going on,” he says. “There’s a huge amount of wind power that is now being installed in Texas; and California is leading in terms of really large grid scale solar thermal installations.

“It’s been hard to get financing. Renewables haven’t had the kind of sustained, predictable subsidies here in the US that Europe has had, and we lacked a mandatory cap-and trade-system. The European Trading System for carbon and national targets provided a clear signal for business to take renewables seriously. It has been slower here in the US.”        

Despite its slower start, the US appears to have already moved ahead of the EU in terms of renewable energy consumption. According to the Energy Information Administration, renewable energy accounted for around 11.1 percent of energy produced in the United States in the first half of 2009. In Europe, meanwhile, figures from Europe’s Energy Portal indicate that 9.2 percent of Europe’s final energy consumption came from renewable sources in 2006, the last year for which confirmed data are available.

It should be noted, however, that 7.4 percent of the US total came from conventional hydroelectric power, with only 4.7 percent coming from ‘new’ sources such as biomass, geothermal, solar and wind.

As things stand, the EU may not succeed in reaching its original target 12 percent in 2010. In an attempt to address this situation, in 2008 the European Commission released its Renewable Energy Framework Directive, with an even more ambitious target of achieving 20 percent of generation from renewables by 2020.

Christine Lins, Secretary General of the European Renewable Energy Council, believes that Europe can meet the 2020 goal: “We are on track, but we must see some further impetus that this development will really happen. Progress so far has been made by five or six EU member states. The challenge we have ahead of us is to make sure that all 27 member states are being serious about renewables and developing them to their full potential.”

Lins’s point is that the overall figures mask a large variation between individual countries. Sweden topped the list of renewable-friendly countries at 41.3 percent according to 2006 figures, with Latvia at 31.4 percent, Finland at 28.9 percent, Austria at 25.1 percent and Portugal at 21.5 percent. At the bottom of the list, Malta generated none of its energy from renewables in 2006, with Luxembourg and the UK not doing much better, at 1 percent and 1.5 percent respectively.

Says Lins, “At the moment, development as far as renewables are concerned is coming from certain countries. However, there is a lot of potential in all the other member states. One of the major outlines in the renewables directive is that countries by June next year have to come up with national renewable energy action plans, outlining how they foresee reaching their binding national renewable energy targets. The hope is that these action plans will effectively provide the stability and framework for making sure that the objectives are achieved.”

Blown away

Wind and solar are two main areas of focus for renewables on both sides of the Atlantic. Wind energy is starting to take off in the US, according to figures from the American Wind Energy Association, which put installed wind power capacity at the end of the third quarter of 2009 at over 31,000 MW, generating enough electricity to power the equivalent of nearly nine million homes.

The state posting the fastest growth was Arizona, which installed its first utility-scale project. Pennsylvania ranked second in growth with 29 percent, followed by Illinois with 22 percent, Wyoming with 21 percent and New Mexico with 20 percent. Texas remains firmly at the head of the pack overall, however, with 8797 MW of operating capacity.

“Wind power installations are up, and that is good news for America’s economy, environment and energy security,” said AWEA CEO Denise Bode in a statement. “But manufacturing, which has the potential to employ many more Americans in good, clean energy jobs, remains uncertain. A firm, long-term national commitment to renewable energy is still needed for the US to become a wind turbine manufacturing powerhouse.”

AWEA says that since the early July announcement of rules to implement the American Recovery and Reinvestment Act, the wind industry has seen more than 1600 MW of completed projects, and more than 1700 MW of construction starts, which equates to about $6.5 billion in new investment. AWEA does not expect the fourth quarter of 2009 to be as strong as the fourth quarter of 2008, since the 5000 MW now under construction is nearly 38 percent lower than the 8000 MW under construction at this time last year.

In Europe, a report by the European Environment Agency confirmed that wind power has the potential to meet and even exceed the continent’s energy needs. The report, entitled ‘Europe’s Onshore and Offshore Wind Energy Potential’, states that in 2020 the amount of electricity that could be generated from wind power could be as much as three times greater than demand.

Germany, Denmark, Spain, Portugal and Ireland have particularly strong bases in wind power. Figures from the German Wind Energy Association show that 19,460 wind turbines, with a total capacity of 22,247 MW, were installed in country by the end of 2007, and that 39.5 TW of wind electricity were generated during that year, equalling more than seven percent of Germany’s electricity consumption. As of 2009, its installed capacity is 25 GW. Denmark has been vying with Germany for the top spot, with 19.7 percent of electricity production and 24.1 percent of capacity in 2007.

The European Wind Energy Information Network puts the annual median growth of the European wind power market at 35 percent, with EU member countries contributing about 75 percent of the world’s wind power. The wind power market is estimated to have helped create 25,000 jobs within the EU.

Sunny days

“The US solar energy industry grew to new heights in 2008.” So proclaims the Solar Energy Industries Association’s report ‘2008 Year in Review’. The report points out that capacity grew by 1265 MW in 2008, up from 1159 MW installed in 2007. “This brings the total installed capacity up by 16 percent to 9183 MW,” it goes on to say. “Capacity in both photovoltaic (PV) and solar water heating systems grew at record levels. And while no new concentrating solar power plants were completed in 2008, projects totalling more than 6000 MW are in the pipeline, most with signed purchase power agreements. Solar pool heating capacity grew at a slower rate than in 2007, reflecting conditions in the residential real estate market.”

The growth rate was found to be highest for grid-connected PV electric systems, with an increase of 58 percent, to a total of 792 MW. Domestic PV manufacturing capacity also increased by 65 percent, with preliminary estimates putting the total PV manufacturing capacity at 685 MW per year as of the end of 2008.

Photovoltaic solar power also has a strong base in Europe, at least according to the European Photovoltaic Industry Association (EPIA). The association recently commissioned a study on PV power in Europe, ‘SET For 2020′, from the management consultancy AT Kearney. The study concludes that PV power can supply as much as 12 percent of Europe’s electricity needs by 2020, assuming appropriate policy-driven support and evolution in the set-up and functioning of the electricity distribution system.

“The fundamentals of the PV industry are and remain strong,” said Secretary General of the EPIA Adel El Gammal at the sixth European Photovoltaic Industry Forum held in September in Hamburg. “It needs an ambitious policy support for the next three to nine years, until photovoltaic power is able to compete with conventional electricity on price.”

Solar thermal power is also growing in the US. The largest solar thermal generating installation in the world – the Solar Energy Generating Systems (SEGS), a group of nine solar thermal power plants – is located in California’s Mojave Desert.  The plants use parabolic trough solar technology along with natural gas and have a combined generating capacity of 354 MW.

On the European side, the European Solar Thermal Industry Federation conducted a study “to provide the European Union and its member states with substantiated information on the contribution solar thermal can make to the 20 percent renewable energy target set by the RES Directive.” Market statistics released by the ESTIF show that the solar thermal market in the EU and Switzerland grew by more than 60 percent to 3.3 GW of new capacity.

Despite the positive messages put out by both sides of the solar energy sector, UMass’s David Levy believes the focus is shifting from PV to thermal. He points out that the economic crisis has prompted several countries, including Germany and Spain, to cut back on subsidies to consumers for the installation of PV panels – although he also underlines the cyclical nature of such interest: “Solar thermal was doing well a few years ago, but then when Luz went bankrupt, many people said, ‘We can’t do solar thermal.’”

Israel-based Luz Partners were the original builders of the SEGS solar thermal plants in California. The company failed in the early 1990s after drastic cuts in federal tax credits to the solar thermal industry.

“In Arizona and the Southwest, we’re seeing much bigger solar thermal installations,” Levy continues, “whereas with solar PV, companies are losing money because of the cut-throat competition. PV is selling below cost, and even so, power generation is still too expensive for grid scale production.”

Further evidence of solar thermal’s resurgence may be exemplified by the re-emergence of Luz as Luz II, now called BrightSource Industries. The new company claims to have advanced solar thermal technology by developing a proprietary design that increases solar-to-thermal conversion efficiency from about 36 percent (for the older parabolic trough technology) to above 40 percent.

Future directions

The US and Europe may both be moving full steam ahead with wind and solar power, but there are other areas in which they remain quite far apart. The US, for example, with its long history of coal-fired power generation, will not easily give up its dependence on carbon. This may explain why it is investing so much time and effort into developing new carbon sequestration technologies, despite widespread disapproval from environmental groups.

In Europe, where the coal lobby is not as strong, carbon capture has a much weaker focus. David Levy also mentions geothermal as a high area of interest in the US, less so in Europe. By contrast, Europe is far more advanced in the development of wave power.

In the end, though, it doesn’t really matter what the differences or similarities are, or who achieves their target first – the US with its can-do attitude under the new administration, or Europe, with its stronger historical groundwork. What matters is that we get there, somehow. The future of our planet depends on it.

Renewables in Europe

EU countries with the highest share of renewable consumption to gross final energy consumption:
Sweden 41.3 %
Latvia 31.4%
Finland 28.9%
Austria 25.1%
Portugal 21.5%
Denmark 17.2%
Romania 17%
Estonia 16.6%
Slovenia 15.5%
Lithuania 14.6%

[Source: www.energy.eu]

US wind power

The top five states in total operating wind capacity are:
Texas 8797 MW
Iowa 3053 MW
California 2787 MW
Minnesota 1805 MW
Oregon 1659 MW

Solar energy systems

Photovoltaic
A photovoltaic system uses solar cells to convert light into electricity. It contains multiple components, including cells, mechanical and electrical connections and mountings and means of regulating and/or modifying the electrical output. Because each individual cell has a low voltage (typically 0.5V), several cells are combined into photovoltaic modules, which are then connected together into an array.

Thermal
Solar thermal technology harnesses solar energy for thermal energy (heat). Solar thermal collectors are defined as low-, medium-, or high-temperature. Low temperature collectors are flat plates generally used to heat swimming pools. Medium-temperature collectors are also usually flat plates, but are used for creating hot water for residential and commercial use. High temperature collectors concentrate sunlight using mirrors or lenses and are generally used for electric power production.

Other renewable energy sources

Bioenergy
European bioethanol production equalled 1592 m litres in 2006. Germany is the leading producer in Europe, at 431 m litres, with Spain running a close second with 396 m litres. France was the third largest European producer in 2006 with 293 m litres.

According to the US Department of Energy, bioenergy ranks second to hydropower in renewable primary energy production and accounts for three percent of the primary energy production in the United States.

Wave power
The first 2.25 MW of electricity produced from wave power was expected to be brought ashore by submarine cable at Aguçadoura, in northern Portugal, in October. The electrical energy produced will be enough to power 1500 homes.

In the United States, the Pacific Northwest Generating Cooperative is funding the building of a commercial wave-power park at Reedsport, Oregon. The project will use a system of modular, ocean-going buoys: the rising and falling of the waves moves the buoy-like structure, creating mechanical energy that is converted into electricity and transmitted to shore over a submerged transmission line.

by David L. Levy

The transition to a global low-carbon economy will require the large-scale mobilization of financial, technological, and organizational resources. With government coffers depleted by the recession and bailouts, the vast majority of these resources will have to come from the private sector (see Beyond Copenhagen). Understanding the decision processes behind corporate strategy is therefore essential. We need to know the factors that lead some companies to invest billions of dollars to develop new low-carbon products and technologies and which sectors they are choosing. In light of current concerns about green jobs and regional competitiveness, it’s also important to know how companies choose where to invest.

The Harbor at UMass-Boston

The Center for Sustainable Enterprise and Regional Competitiveness at the University of Massachusetts, Boston, is part of a new international comparative study of corporate climate strategies in energy intense industries, a project designed to tackle these important questions. The research is a collaboration among Oxford University’s Smith School for Enterprise and Environment, the University of Western Sydney, and UMass-Boston, and is funded by a AUD300,000 3-year award from the Australian Research Council under the National Competitive Grants program. We’ll be examining corporate strategies in several energy-intense sectors, including oil, utilities, automobiles, chemicals, and metals, in the US, Germany, the UK, and Australia. We will also be looking at the influence of governmental policies and NGO strategies on corporate strategies.

The importance of corporate strategies was made clear this week with the news of Exxon’s $41 billion acquisition of XTO, a major player in the US gas industry with substantial interests in unconventional shale sources (see The Economist on Exxon’s long term strategy). Private decisions to allocate large chunks of capital to a particular technology or fuel source have a significant impact on the direction of energy development and the trajectory of carbon emissions. Burning natural gas to generate electricity creates only half the CO₂ emissions of coal, so offers the prospect of large-scale reductions in greenhouse gas emissions in countries where coal still accounts for a large share of power, such as Australia, China, and the US. There has been considerable uncertainty regarding the technical difficulties, the costs, and the environmental impacts of recovering shale gas. For Joe Romm, shale gas is a game changer that will make it easy for the US to meet a 20% emission reduction target (and see this NYT piece). The environmental impact of deep drilling and injection of chemicals near groundwater resources is giving cause for concern, however. Tom Konrad thinks shale gas has been somewhat over-hyped.

The biggest energy deal of the year signals that Exxon, a very risk averse company, has enough confidence in shale gas for this investment, and assures that the company’s vast resources will be devoted to developing the technologies needed to recover gas in a cost effective manner – and perhaps to overcoming the environmental concerns. For Ed Crooks at the Financial Times, it’s also “a play on the likelihood that that the US will make further moves to curb greenhouse gases.” Exxon has long been the most powerful corporate opponent of mandatory emission curbs, so its encouraging to see the company look past the chaos and deadlock in Copenhagen. The other oil companies have also been increasing their gas investments, and climate change is not the only driver. As Crooks observes:

Getting XTO gives Exxon a powerful position in US “unconventional” gas, including shale gas, where it has not been one of the leaders in the revolution that has opened up the huge new source of US gas supplies. With many of the resource-rich countries around the world still making life difficult for foreign investors (viz Exxon’s travails in Russia and Venezuela), resources in a stable developed country are attractive, and in Exxon’s own back yard particularly so.

In addition to those attractions, however, an important part of the case for buying gas assets in the US today is the prospect that energy and climate change legislation will tilt the balance of the energy mix away from coal and towards gas for power generation.

In an earlier post, Back to Petroleum, I explored the US-European oil industry convergence on a compromise strategy of “hydrocarbon neutrality.” While retreating from heavy investments in renewables, the industry realizes that it can live with inevitable advent of carbon controls, in the form of a flexible regime with low carbon prices. This would not threaten core business operations in the short-to-medium term, leaving adequate time and resources for longer-term strategic repositioning as the climate issue plays out. Gas is the perfect medium-term play.

Exxon knows that its core expertise lies in geology, hydrocarbon chemistry, extraction technologies, and distribution, and the XTO acquisition allows it to extend these capabilities to a vast new market. Exxon has also joined the other oil companies in making more modest investments in biofuels. It announced in July 2009 a $600 million algae biofuels project with biotech company Synthetic Genomics. Biofuels clearly represent a better strategic fit than solar or wind, and though more risky than gas, promise to extend the age of liquid hydrocarbon fuels.

The corollary, of course, is that several decades of plentiful natural gas (and nuclear) might hurt investment in renewables and delay the era of zero-emission power. There have recently been setbacks with geothermal power, the only other prospect for short-term renewable (baseload) energy [see Tom Konrad's comment below].

This is a second guest contribution by Tom Konrad Ph.D., CFA, an investment analyst and policy wonk specializing in clean energy.  This is an edited version of two articles that first appeared on AltEnergyStocks.com, where he blogs about investing.  He also writes about energy policy and economics on Clean Energy Wonk. It’s worth burrowing down into some of the links to find out more about prospects for specific sectors and companies.

A reader of my article on asset allocation for green energy investors brought up an important point: we may have green opportunities in our own lives, such as improving the energy efficiency of our homes, which will return much safer and higher returns than green stocks, especially when the market as a whole is as overvalued as I currently believe it is.

Homeowners typically have a large number of high-return energy efficiency investments they can make.  Since energy efficiency reduces energy use, it both produces returns and is very green, since pollution from fossil fuels is reduced.  Even reducing the use of renewable energy is green, because all energy production has some impact on the environment and uses resources.  Furthermore, energy efficiency reduces financial risk, because you are less subject to fluctuating energy prices if you use less energy.

Assess Your Opportunities

An energy audit is a good way to discover your opportunities.  Many utilities have programs to give customers free or subsidized energy audits.

Check with your utility (gas and electric) first to see if they have such a program.  If not, and you are a do-it-yourselfer, visit a website dedicated to helping you improve your home’s efficiency, such as the EnergyStar site. If you’re not a do-it your selfer, look for a RESNET certified energy auditor and pay for an energy audit.  Prices for audits vary a lot, but I’ve heard that $200 – $300 is a good ballpark figure.

You will be amazed, or even shocked, at how many opportunities for savings you find, even in a brand-new home. The improvements you make usually qualify for federal tax credits, as well as (possibly) rebates from your utility or state tax credits.

Any energy efficiency or renewable energy measure with a payback of less than 10 years is likely to be a better investment than green stocks or funds, especially in today’s overvalued markets.  Here are ten that almost always have great financial returns, many of which are good enough to perform even if you rent and plan to stay in one place for a year or two. 

1. Keep your car tires inflated to the proper pressure.
2. Change and clean your air furnace filter regularly. Take a hose and get the dirt off the coils in the outside heat exchanger as well.
3. Caulk air leaks.
4. Use Compact Fluorescent Lights.
5. Install a Water Heater Blanket.
6. If you have an old fridge in the garage or basement, unplug it.
7. Install low-flow showerheads.
8. Use an intelligent Power Strip to turn off standby mode.
9. Get a power meter to hunt for energy hogs around the home.
10. When replacing electronics, computers, cars, and appliances, get energy efficient ones, especially anything that’s often on or in standby when plugged in. (cordless phones, TVs and set-top boxes, clocks, etc.)

Lists like this abound on the internet. Consult several for ideas.

How Much to Invest

An informed decision of how much to invest in green energy is at least as important as how you make the investment.  The choice between green Exhange Traded Funds (ETFs) and green Mutual funds rests on a difference of about one percent per year, caused by differences in fees.  Yet in the first three quarters of 2009, the S&P 500 (general stocks) returned 17%, ICLN, a green ETF returned 21%, and my ten green stocks for 2009 returned 41%.  With differences between performance as large as 20-30% a year (green stocks did much worse than the market as a whole in 2008,) the decision between investing 10% of your portfolio or 60% of your portfolio in green stocks will make a large difference (8% to 12%) in your total returns for the year, far more of a difference than how you invest.  The other important factor will be sector selection within green energy.  I believe that the main reason my Ten Green Stocks for 2009 have done so much better than the benchmarks is because I emphasized sectors I believed would benefit from the stimulus package.  At that time, the stimulus was  only something that I (and other green commentators) were predicting as part of Obama’s response to the financial crisis (He had not yet been sworn in.)

Your Allocation Decision

How much of your savings you put into green energy will depend on two things:

1. Your risk tolerance and market expectations.
2. Why you are investing in green energy in the first place.

All further discussion in this article assumes that either:

1. You have chosen not to time the market.
2. You have faith in your own predictive ability, and believe the market will continue to rise, OR
3. Your portfolio will be hedged against major market moves.

Risk Tolerance

Many green energy investments are more volatile than other sectors.  This is because the majority of green energy stocks are not yet profitable, and do not have the internal cash to see them through hard times.  This can force companies to raise money from the financial markets when those markets have fallen, and will cause the stock prices to fall further in market declines.  Such stocks are especially concentrated in the domestic and specialty green ETFs, such as PBW, TAN, and KWT.  Most of the green energy mutual funds, and the international green energy ETFs such as ICLN and PBD are less volatile due to a higher concentration of established companies.

Investors can deal with the greater volatility of green energy in several ways:

1. Stick to the less volatile green energy investments.
   1. Stock investors can emphasize profitable green companies over unprofitable ones.  Almost all of my 10 for 2009 picks referenced earlier are profitable companies, and those that are not currently profitable had a history of profitability prior to the financial crisis.
   2. Stick to the less volatile ETFs that contain a broad base of profitable global companies, instead of the more volatile domestic ETFs.
2. When hedging your portfolio, use a larger market hedge than you would otherwise.  The method I outline in my hedging strategies article automatically incorporates this adjustment.
3. If replacing an allocation of normal stocks with an allocation of green stocks in a larger portfolio,
   1. Replace an equally volatile sector allocation with your green energy allocation, or
   2. If replacing an allocation to ordinary stocks, replace part of that allocation with less volatile bonds, and part with green energy stocks.

Investment Motivation

It makes sense that the more confident you are that green energy will outperform other sectors, the more money you should allocate to it.  Keep in mind, however, that almost everyone has a strong overconfidence bias. That is, we believe we are going to turn out to be right a lot more often than we actually do.  This bias persists even when we are aware of overconfidence bias.

Hence, we should only let our confidence in green energy have a small influence in our overall allocation decision.  Like market timing, this is another rule that I honor in the breach: my entire stock portfolio is in some way related to green energy.  In ten or twenty years, we’ll find out if I actually know what I’m doing, or am just overconfident like most everyone else.

Motivation: Doing the Right Thing

If your main motivation for investing in green energy is to be more environmentally responsible, you are faced with a trade-off: the more you invest in green energy, the more volatile your portfolio will become.  However, feeling better about your investments may make you more comfortable with the added volatility.  This may allow you to hold more green energy because of your increased risk tolerance.

However, if you don’t believe that green energy will outperform, there are less risky ways to do the right thing.  You could instead replace your stock holdings with companies that are more green than most companies in their sector.  In a recent paper by Meir Statman and Denys Gluskov entitled “The Wages of Social Responsibility”, the authors found that socially responsible investment managers were able to achieve higher returns by favoring “best of class” companies in each sector, a process they described as socially responsible “tilt.”  In contrast, they found that completely shunning sectors such as alcohol and firearms led to lower returns over time.  Based on theses results, there is a win-win available for environmentally responsible investors who want to do the right thing: they can rebuild their entire stock portfolio by keeping the same sector allocations they had made before the change, but replacing the stocks in each sector with the greenest stocks from lists such as Newsweek’s rankings of the 500 largest US Corporations that I wrote about in September.

Motivation: Fighting Climate Change

If your motivation for investing in green energy is to fight climate change, you must balance the trade-off of increased risk from concentration in one industry, with your expectation that that industry will produce higher long-term returns because of increasing regulation of greenhouse gasses, and support for alternative energy.  In general, I find it very difficult to predict which companies are going to benefit from climate change regulation.  Will politicians choose to subsidize solar, wind, biofuels, or energy efficiency?  Will carbon credit giveaways create a windfall for utilities and other large emitters of greenhouse gases.

Not being able to predict politicians, I instead choose to focus my investing based on the (clearly false) assumption that politicians will do (roughly) the right thing. How do we know what the ideal actions are?  We look at reports from relatively unbiased sources that recommend particular actions.  I recently wrote two articles based on an article from two economists that looked at what Modern Portfolio theory has to say about the best technologies for climate mitigation (here and here.)

In terms of how much of your portfolio you should devote to fighting climate change, it should depend on how quickly you expect the effects of climate change to occur.  The biggest gains from a climate change focused portfolio will occur as more and more political leaders stop being able to ignore the urgency of responding to climate change.  I personally feel that this will be triggered by the increasing frequency of climate-related disasters, caused by the increasing severity and frequency of unusual and dangerous weather events such as hurricanes, droughts, floods, and blizzards.  This is something that I already see happening, but I don’t expect it to be obvious to the many people who want to ignore the effects of climate change for another 5-15 years.

Based on your own belief of when you expect this political transition to occur, you should only allocate money to climate change mitigating investments if you do not need to withdraw that money before the expected political change is likely to occur.  In some ways, this political change has already begun, and money is being awarded to deserving green energy firms.  However, investors should not ask what has already happened, but what unexpected changes are likely to occur.  The unexpected (by most other investors) change that I expect is the realization that Climate Change will not only be a serious problem, but that it will be a serious problem in our lifetime, and that it’s worth risking damage to the economy by devoting massive resources to the project of combating it.

In my case, my investment horizon is about 20-30 years, which is longer than the 5-20 I expect for the political change, so I consider fighting climate change as a good motivation to increase my portfolio’s allocation to green energy.

Motivation: Peak Oil

The connection between fossil fuel prices and the performance of green energy stocks is tenuous at best.  Investors should not expect their solar stocks to go up or down with the oil price.  After all, we do not yet have a fleet of plug-in vehicles which might let us substitute electricity from solar for gasoline from oil.  Hence, investors motivated by peak oil should stick to green energy sectors which reduce the need for liquid transportation fuels.  These sectors include biofuels, hydrogen fuel cells, technologies which make transportation more efficient, and technologies such as batteries which enable the electrification of transport.

Like climate change, how soon you expect to see the effects of peak oil should affect how much money you invest.  I feel that the effects of peak oil in terms of the reduced affordability of gas and diesel are already upon us.  This does not just mean high oil prices (which we have), but decreasing ability to purchase oil due to the economic disruption and contraction caused by those prices.  Low oil prices make our economies vibrant, which provide the money needed to buy oil.  High oil prices cripple the economy, which in turn means that we’re less able to buy oil at any price.  This is what I mean be “reduced affordability.”

In a recent report, “The Peak Oil Market,” Deutsche Bank predicts that post peak, both oil prices and oil demand will fall due to the introduction of disruptive technology: plug-in vehicles (If they’re right, investing in oil or oil companies is not the best way to profit from peak oil, but rather the potential disruptive sectors.  Of the sectors I mention above, efficient transportation, hydrogen, and electrification are the only ones that can possibly scale to replace a significant portion of our fossil fuel demand.  Biofuels are limited by the available supply of biomass.  Biomass can more efficiently power a vehicle when burnt to produce electricity to charge an electric vehicle’s battery than when converted into liquid fuels for an internal combustion engine.  A similar efficiency argument applies to hydrogen, although breakthroughs in electrolysis and fuel cell technology could change this.  However, I don’t consider betting on possible technological breakthroughs a sound investment strategy.  After all, even if a breakthrough occurs, it’s at least as likely to come from a new player than an industry incumbent.

Batteries will need some technological breakthroughs in order to make plug-in vehicles economical enough to displace gasoline. However, the needed improvements to the electric grid needed to accommodate electrified transportation (as suggested in the Deutsche Bank report) can be accomplished with existing technology.  Hence, investors motivated by peak oil should be looking to investments in transport efficiency, transmission and smart grid stocks.

In terms of how much to invest in these strategies, it probably should be a lot (at least if you believe as I do that the peak in oil production has either already happened, or will happen soon), and it should probably be accompanied by a hedge using shorts in oil intensive industries such as airlines.  The hedge is necessary because a peak in oil supply will hurt the world economy, and is likely to make stock prices as a whole fall, quite possibly even the stock prices of the companies which are working to displace oil with disruptive technology.  However, it is a good bet that these companies are likely to fare better than companies whose economics depends on the large scale consumption of cheap oil.

Conclusion

Your goals, expectations, and risk tolerance will affect both how you invest in green energy, and how much you invest.  Before you make any decisions, answer these questions for yourself:

1. Do I believe investing in green energy is the right thing to do? Will this help me bear the pain of declines in my portfolio?
2. How soon will Climate Change reach the top of the political agenda?  Do I have the time to wait for the expected investment returns?
3. How soon will oil production peak?  Do I have time to wait for the expected returns?
4. How confident am I about my answers?  Do I have reason to be confident, or is my confidence based on self-delusion?

This is a guest contribution by Tom Konrad Ph.D., CFA, an investment analyst and policy wonk specializing in clean energy.  This article first appeared on AltEnergyStocks.com, where he blogs about investing.  He also writes about energy policy and economics on Clean Energy Wonk. I’ve found AltEnergyStocks.com to have some of the most insightful economic and financial analysis of clean energy sectors and specific companies.

Investing in green energy can be good for both the climate and your wallet.  How good depends on choosing the right investment vehicles (mutual funds, ETFs, or stocks) and sectors to invest in. This will get you started.

More and more investors are investing in green energy.  According to the Cleantech Group, the Cleantech sector is now the largest sector for venture capital investment.   Green Energy is not just for venture capitalists.  Small investors have done well in 2009.  Since the market bottomed at the start of March, the average green energy mutual fund topped the S&P 500 by 13%, while the average clean energy ETF beat the S&P 500 by 18%.

Knowledgeable investors will scoff at that last statistic because, of course, most green energy companies are riskier than the tried-and-true companies of the S&P500, and what out-performs in an up market will under-perform in a down market.  That is true, but only to a point.  When I investigated it this Spring, I found that green energy stocks had outperformed the rest of the market even on a risk-adjusted basis.

Nor are all green energy companies risky.  While the sector has more than its share of profitless startups, there are also established companies which have been making the planet a greener and safer place for a long time, but now have the opportunity to benefit from rising public awareness of the need to do something about climate change. By knowing what to look for, an investor can be green without taking on excessive risk.

Stocks, Exchange Traded Funds, or Mutual Funds

The small investor has three basic options:

1. Green Energy Mutual Funds,
2. Green Energy Exchange Traded Funds (ETFs), or
3. Individual Green Energy Stocks.  

Green Energy Mutual Funds

Mutual funds will be the most familiar option to the small investor.  The available green energy mutual funds are all actively managed, which means they try to choose the best green companies.  Mutual funds charge high fees for this service, but I have been unable to find evidence of skill among green mutual fund managers which would justify the cost.  Numerous studies of the mutual fund industry also find that manager skill is very rare and difficult to distinguish from (much more common) manager luck.  Green mutual funds are not the best way to gain exposure to the sector: even compared to most actively managed mutual funds, the green energy mutual funds are quite expensive, and so they make sense only for investors who have no other option.

I took an in-depth look at the available green energy mutual funds here.

Green Energy ETFs

The second option is green energy Exchange Traded Funds, or ETFs.  ETFs are like mutual funds in that they allow an investor to own small stakes in a large number of companies with a single investment, but, unlike mutual funds, they do not have managers who try to pick the best investments.  Instead, their goal is to gain exposure to a wide range of green energy companies by buying the companies in an industry index.  Investors buy ETFs from other investors on a stock exchange, much like they would by individual stocks; the ETF manager seldom deals directly with individual investors.  This hand-off approach means that they can charge investors much smaller fees for their services.  Furthermore, since there is little evidence that active mutual fund managers add value, the ETF investor benefits from cost savings, but probably does not lose any benefit from active management.

ETFs are an appropriate investing strategy for a hands-off investor with a few thousand dollars or more to invest.  I published an in-depth look at the available green energy ETFs here, which includes recommendations of the best ETFs for different types of investors.

Green Energy Stocks

The final option is investing in green energy stocks.  This can deliver significant cost savings relative to investing in green ETFs (and almost certainly will deliver cost savings relative to mutual funds), but typically requires considerably more investment of time than does using the green ETFs.  This must be weighed against the additional work required to select individual stocks instead of ETFs, but carries the advantage of access to green energy sectors which the mutual funds and ETFs neglect, better control of both sector and stock selection..

In order to give readers a relatively simple option to invest in green energy stocks without a lot of work, I have published a list of 10 stocks on January 1st for the last two years.  My ten green stocks for 2008 lost 55% that year, but this was still better than all the ETFs and all but one of the mutual funds in 2008.  Most of these lost between 60% and 70% of their value in 2008.  In the first three quarters of 2009, my ten picks returned 41.5%, handily beating the green ETF I chose as a benchmark (by 20%).  (I have not looked into the performance of all the ETFs over the same period.)  As with mutual fund managers, it’s impossible to say if my 1 3/4 year track record is skill or luck, but at least the costs are low.

I’ll publish a new list of ten on AltEnergyStocks.com at the start of 2010.

Four Articles on Sector and Stock Selection

No matter which investment vehicle you use, understanding a little about the clean energy sectors can lead to a stronger, safer, and more profitable portfolio.  It can also lead to a greener portfolio, in the environmental sense of the word.

I’ve published a series of articles to help investors make the right decisions.  Two are based on research into which technologies would be most effective against climate change.  The first looked into those technologies which would have a significant impact on climate change, and the second looked into those technologies which were not going to make significant contributions.  I  believe it makes sense to structure your portfolio to reflect the technologies which are actually going to make a difference.  People who want to do the right thing will know that the companies they own are doing the right thing about climate change.  People who want to make money will know that rational investments to fight climate change will also benefit the companies they have invested in.

The third article looked at the types of questions investors should ask when selecting stocks or sectors, as part of a basic framework for investment decision-making.  We are currently inundated with information about companies, but most of it is useless when trying to predict stock returns, because it is already reflected in market prices.  Knowing the difference between useful information and useless information can dramatically reduce research time and lead to better decision-making.

The final article in this series looked at psychological factors which can lead incautious investors to invest unwisely, and how investors who are aware of this tendency can do better. The article also includes a list of twenty green energy stocks and sector ETFs that I think have the best prospects in their sectors.

Stock Selection Shortcuts

Individual stock selection is also more complex than selecting a few companies from stock lists, even my lists.  Selecting stocks requires a level of due diligence when looking into each company.  However, for investors who would like a shortcut and don’t want to use my lists, another trick would be to choose stocks from the portfolios of the green mutual funds to match your intended sector allocation.  Even if we can’t be sure that the mutual fund managers are good at stock picking, we can be fairly confident that they have looked into the companies in their portfolios and avoided the obvious scams.

I tried such an approach by using stocks from the mutual funds’ portfolios when I constructed my Quick Clean Energy Tracking Portfolio earlier this year.  The purpose then was not to outperform the mutual funds by better sector selection, but instead to match their performance at lower cost.  It didn’t work out that way.  The portfolio vastly out-performed, which turned out to be due in large part to an unexpected bias towards riskier stocks than those in the funds, in combination with a strong upward trend for the overall market over the period in question.

Even though that particular experiment did not work, the portfolios of the green energy mutual funds and ETFs are good places to start when selecting green stocks, and I will continue to do so myself.

For investors following the mutual fund or ETF routes to green portfolios, I give breakdowns by sector of each fund’s portfolio in the linked articles on Green Energy Mutual Funds and Green Energy ETFs.

Part II of this series will attempt to help you decide how much to invest in green energy. (Link will be broken until publication.)

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AltEnergyStocks DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Concerns about the future of the US clean energy sector were heightened last week when John Rudolf ran a New York Times article describing plans for a 600-megawatt $1.5 billion wind farm in West Texas. With construction set to begin in March 2010, the wind farm will use 240 2.5MW turbines manufactured by A-Power Energy Generation Systems in Shenyang, China, and the capital cost is mostly financed by Chinese banks. Though pitched as a “joint venture” among a consortium of Chinese and American companies, the US contribution is mostly limited to federal loan guarantees and cash subsidies from stimulus funds for about one-third of the total cost. The utility-scale wind farm will be operated by a Texan company, Cielo Wind Power, and the financing was arranged, in part, by the U.S. Renewable Energy Group, an American private equity company (see this Jan 2010 NYT update on China’s clean energy industry).

Clean energy has been pushed as a “win-win” solution to reduce greenhouse gas emissions while simultaneously stimulating a high-growth technology-based sector with a broad range of employment opportunities. Yet while the proposed wind farm will generate plenty of clean power, it is expected to create only about 300 temporary and 30 permanent jobs. Reaction to the proposal has been harsh, judging by the comments mentioned in a follow up piece. One captured the mood saying: “Why are U.S. stimulus funds being used to subsidize manufacturing jobs in China?”

It’s important to disentangle the issues here, as government subsidies have at least three goals: short term demand stimulus, emissions reductions, and longer-term creation of a competitive clean energy cluster. As a short term Keynsian economic stimulus for the US economy, this is clearly not a good use of funds, considering how much of the spending is “leaking” internationally. On the other hand, US firms are in line to benefit from stimulus spending in other countries, so we need to be wary of protectionist “Buy American” constraints to stimulus spending. As a mechanism for reducing carbon emissions, wind farms are a relatively effective way to spend money, in terms of cost per ton of carbon, certainly more so than the “cash for clunkers” program, which has been estimated to cost more than $200 per ton. If we take a view as global citizens concerned about the climate, then the location of jobs does not matter. Indeed, finding the lowest cost source for blades ensures the maximum carbon reduction per dollar expenditure.  

The creation of a competitive clean energy cluster in the US is an important longer-term policy goal. Clusters such as life-sciences in the Boston area and electronics/software in the San Jose/Silicon Valley region provide high-income employment opportunities and a strong tax-base. Clusters, by their nature, are enduring and “sticky” – businesses are willing to locate in high-cost regions to be close to customers, suppliers, specialized services, competitors, skilled labor, university research centers, and sector specific sources of capital. Clusters become self-sustaining economic ecosystems that stimulate innovation and enhance specialized skills and corporate capabilities. They are geographically bound not so much by the physical flows of components but by the dense human networks that enable rich information flows.

Once technologies stabilize to some degree, manufacturing becomes less “sticky” and easier to relocate to low-cost offshore sites in Asia (I did my PhD thesis on this topic, you can download my articles on international sourcing here and here). In the computer industry, the US has retained plenty of high-paying jobs in product management, design, software, finance, and marketing. In clean energy, however, production is moving astonishingly quickly to China even while there is still rapid technological evolution. This week, Evergreen Solar of Massachusetts announced that it would shift panel assembly to China, with the loss of about half of the 800 jobs at a new factory opened last year with $58 million of state aid. Of even more concern, the technological center of gravity might also be shifting. First Solar’s deal last month to build a 2 GW solar farm in Inner Mongolia is reported to include the construction of a manufacturing plant in China and the transfer of expertise, including First Solar’s unique cadmium/tellurium technology. China is perhaps intent on replicating in clean energy Japan’s earlier success in consumer electronics, which was built on the transfer of Western technologies during the 1960s and 1970s.

Intense price competition is part of the reason for the rapid move offshore. Product cycles are speeding up for clean energy, as for other sectors, resulting in a rapid commoditization and falling prices. This trend is reinforced by the recession and overcapacity. But China is also putting into place massive subsidies, in the form of feed-in tariffs for renewable power combined with grants and cheap finance for construction of projects and factories. In a reversal of tradition, the path for foreign companies is being smoothed with the elimination of bureaucratic red tape.

In this context, a new report from Deutsche Bank published October 2009 and reported in the Wall Street Journal makes for interesting reading. The report assesses country-level risk from the perspective of clean energy investors. The key conclusion is that:

Investors want TLC— transparency, longevity, and certainty –  in government energy policies. Countries that offer that—Australia, Brazil, China, France, Germany, and Japan—will attract capital. Countries that don’t—including the U.S. and the U.K.—will struggle….Investors will become increasingly concerned about regulatory risk and thus countries that deploy a transparent, long-lived, comprehensive and consistent set of policies will attract global capital.

The report analyzes more than 270 climate policies in more than 100 countries, and provides an aggregate risk rating of countries based on the strength of policies. The implication is that investors are looking to commit capital in countries with a strong commitment to addressing climate change. Echoing my own sentiments (see: Carbon Markets to Serve the Planet), the report favors clear mandates over weak and volatile price signals:

While emissions targets express an intention and carbon markets might deliver a price signal in the long-term, governments must strengthen underlying mandates and incentives immediately if capital is to be deployed to cover the gap, creating more investment and jobs.

Specifically, the report suggests that, to be effective, policies must:

• Be Transparent, Long-term and exhibit Certainty through consistent, secure and predictable, payment mechanisms

• Introduce incentives that decrease over time as technologies move towards market competitiveness;

• Eliminate non-economic barriers (grid access, administrative obstacles, lack of information, social acceptance)

• Provide fair and open access to distribution channels (e.g. transmission grid);

• Be enforceable.

The Deutsche Bank report’s focus on mandates and subsidies misses other important aspects of competitiveness suggested by the cluster approach, such as labor force skills, infrastructure, and research and development activity. Not surprisingly, the US, UK and Canada do not fare well on the report’s risk rating, but have nevertheless attracted significant clean energy capital. The report attributes this to the large size of their capital and energy markets overall, and the existence of state level incentives in the US and Canada. To this list should be added the high technological sophistication of these countries in clean energy and related sectors, both in the university and corporate sectors.

It’s ironic that the Deutsche Bank report recommends stronger climate policies to attract investment capital at the same time as some are raising concerns that putting a price on carbon in the US will drive jobs overseas (see this recent WRI report). Yet building a dynamic regional clean energy cluster requires more than subsidizing power generation or putting a price on carbon. Denmark was able to build a wind industry by being a first-mover in creating large scale demand that stimulated the emergence of a local industry with strong research, design and production capabilities. But countries that only subsidize demand, now that clean energy is more mature and global, might find that the money only sucks in imports and perhaps some final assembly from firms headquartered elsewhere.

by David L. Levy

Last week a student at our university sheepishly poked his head into my office and asked if I knew where the Center for Sustainable Enterprise and Regional Competitiveness (SERC) was located, as he was interested in the new University of Massachusetts clean energy programs he had heard about. Perhaps he  expected to find the SERC Global Headquarters in a shiny new steel and glass building, but for now my rather grungy office serves the purpose. The student, an African-American business major who grew up in the Roxbury area of Boston, is already interning at an energy efficiency organization serving the inner city. His enthusiasm for our plans for Clean Energy Workforce Training programs was palpable and infectious – he wanted to sign up right away. He didn’t just want a credential – he really understood how clean energy programs, by imparting relevant expertise and skills and connecting with regional businesses, will contribute to employment, economic development, and improved housing. We have the chance to create communities that are sustainable environmentally, economically, and socially. (For Earthday 2010, David was interviewed about green jobs and business opportunities on New England Cable News.)

I’ve spent months of reading about green jobs, building the new center, coordinating meetings, and writing grant proposals, but this was the moment that made it real. I had my first tangible sense of the people we could serve and the potential for our vision to connect with the needs of the community. Later the same day, I was at an event organized by the Energy Interest group of the MIT Enterprise Forum. Aside from the usual ensemble of clean energy businesspeople, venture capitalists, academics, graduate students, and assorted groupies, I was struck by how many people I met who were looking for a career transition into clean energy – accountants, salespeople,  engineers, product managers, lawyers, and others. Some had been laid off during the recession, but some were attracted by the prospect of greener pastures, greater professional opportunities, and aligning their personal values with their work in a fast growing sector. This helped to confirm the market logic behind our plans to offer shorter certificate programs for professionals.

Evidence for the boom in clean tech employment is more than anecdotal. This month Clean Edge launched a new report that provides detailed analysis of employment trends in the sector. They define clean-tech jobs as “those that are a direct result of the development, production, and/or deployment of technologies that harness renewable materials and energy sources; reduce the use of natural resources by using them more efficiently and productively; and cut or eliminate pollution and toxic wastes.” The CleanEdge report notes that the 770,000 clean tech jobs in the US in 2007 (per the June 2009 Pew report) is comparable with more mature US industries such as biotech at 200,000, telecommunications at 989,000, and traditional energy including utilities, coal mining and oil and gas extraction 1.3 million. The Pew report also found that clean-energy jobs are growing fast, increasing by 9.1% annually from 1998 to 2007 compared to 3.7% for all U.S. jobs over the same period.

Neglected in this and other “green jobs” reports is the rapid growth in the clean-tech related service sector. While the numbers are hard to estimate, I keep running into evidence of expansion in several areas. This year has seen an explosion of interest in carbon accounting and management software, with a number of independent firms being bought out by larger integrated corporate software providers such as CA and SAP. Many financial, legal, accounting, and consulting firms are building their capacity in the environmental area. One local consultancy, The Brattle Group, now lists 14 staff with expertise related to policy, economics, regulation, and planning.   

Source: Clean Edge: Clean Tech Job Trends © 2009

The Clean Edge report lists energy, transportation, materials, and water as the four major sectors, but the most activity, in terms of jobs and investment, is in the energy sector: solar, biofuels, efficiency, smart grid, and wind. Efficiency-related employment in utilities represents the largest single employment sector. Perhaps most useful, the last section of the report provides a reasonably comprehensive guide to clean tech employment resources.

A salary survey demonstrates the wide variety of jobs being created by clean tech, from renewable energy project developers with graduate degrees earning more than $100,000 to insulation installers earning $36,000. Technicians, welders, and sheet metal workers without university education are earning around $50,000, while engineers, accountants and business analysts with degrees are earning from $60,000 to $80,000.

The report provides information on the regional distribution of jobs, and points to several large clusters. The largest is in California, followed by the East Coast Washington DC to Boston corridor. But the report stresses that “No one place or region will control any one clean-tech sector. Clusters of clean-tech activity, supported by local technology development, capital flows, and supportive public policies, are springing up across the U.S. and around the world.”

Source: Clean Edge: Clean Tech Job Trends © 2009

One surprise is the table of the global top 10 publicly traded pure-play clean tech companies, which together employ about 100,000 people. Three of the companies are Chinese, and the sectors include energy storage, smart grid, and electric motors. The report also notes that large, diversified multinational companies are also major employers. “Siemens currently has 5,500 employees working for its wind business, BP has more than 2,200 solar employees, and GE Energy, with a diverse portfolio of both conventional and rapidly expanding clean-energy activities, employs 40,000. Other multinationals with significant clean-tech workforces… include Sharp, Toyota, and ABB.”

Source: Clean Edge: Clean Tech Job Trends © 2009

A section titled US Manufacturing Jobs in Transition tries to put a positive spin on the replacement of traditional industrial jobs with clean tech employment. The numbers, however, don’t paint an optimistic picture. Maytag, for example, closed down a home appliance manufacturing facility in Newton, Iowa, in 2007, laying off 1800 people, while TPI Composites, a wind turbine blade manufacturer, has now opened a plant employing 325 people. The truth is that aside from turbine blades, which are hard to ship over large distances, clean energy manufacturing is quickly shifting to low cost countries. It used to be the case that emerging industries enjoyed premium pricing for a number of years before the products became low-cost commodities, and intense competition would drive production offshore. Recently I’ve been hearing that manufacturing of solar, advanced batteries, and other clean energy components is shifting offshore almost as soon as it’s out of the lab and into commercial production. I’ve written academic articles about the offshoring phenomenon (download pdf) and understand how communication technologies and management techniques facilitate the process, but it’s still a shock to see how quickly this is happening in a sector held out to be the great new hope for regions ravaged by de-industrialization. Look out for a future posting on this question of competitiveness and the likely regional distribution of clean tech value added.

The urgency of Daniel Goldman’s proposal to create a The Clean Energy Accelerator Corp. (see previous post) is reinforced by an article in the Financial Times today,  Cash Crunch Could Stain Clean Technology. Richard Waters writes that:

The lack of capital, however, is preventing many companies in the alternative energy world from reaching the scale at which they claim they can start to drive down unit costs of production to a level that could eventually make them competitive with traditional sources of energy.

Even companies that have been able to find a market – often due to government subsidies or other mandates that guarantee them a market, in spite of a lack of direct cost competitiveness – are struggling because of the lack of capital.

Though venture capital investments in clean tech have been picking up recently, “traditional project finance markets are still largely closed, and the public equity markets….remain closed to companies that have yet to prove long-term viability.”

Government fiscal stimulus funds have significant sums for environmental goals, but the problem is that current government funding mechanisms are inadequate, temporary, and somewhat arbitrary. The investments required for a transition to a low-carbon economy amount to several hundred billion dollars a year over a more than a decade – far beyond the timescale and scope of current government projects. The proposed energy legislation in the US envisages a revolving clean energy loan fund of just $30 million, and that is being fought bitterly.

The FT article points to one company left on the sidelines:

Quallion, a private maker of cells for advanced batteries, was one of those passed over this month as the US government announced plans for $2.4bn in support for battery makers – one of the first signs that green stimulus money is finally starting to flow.

Quallion had sought $220m to build a factory for truck and car batteries, but must now contend instead with better-financed rivals that have been given a leg-up by the taxpayer.

“When someone comes along and slaps down $300m for a new factory for my competitor, that changes the dynamics of the market,” says Paul Beach, Quallion’s general counsel and head of business development.

The structure of the proposed The Clean Energy Accelerator Corp. would help leverage private capital to generate a larger investment pool and ensure its independence from political pressures, allowing it to focus on more commercial and scientific project criteria.