Beyond Boom and Bust: Getting Clean Energy Policy Right

Once again, the “clean tech” world is roiled by politics in Washington.

After a decade of fast growth and strong progress on technology and flattening price curves, clean tech players are wondering what’s next.

Most notably, questions swirl about whether Congress will renew the production tax credit (PTC) for wind energy. The credit has been a vital driver of wind power development in the last decade, including more than doubling installed capacity between 2008 and 2010 and dramatically increasing U.S.-based manufacturing capacity. However, the PTC expires at the end of the year and faces tough sailing for renewal in Congress—a victim of budget deficit politics and energy-policy backlash.

And yet, the much-publicized debate over the wind credit is emblematic for clean tech broadly, as documented in a new study we are releasing today. The study reviews the status of existing programs and offers a new approach to federal support for a robust U.S. clean tech industry that can deliver on its environmental and economic potential. In our view, a more stable framework that moves towards both subsidy independence and international competitiveness could provide key support for both innovation and industry maturation.

By our count, 63 of 92 federal clean energy finance policies in place in 2009 will have expired by the end of 2014 absent congressional action. Annual financial support for clean energy sectors is poised to decline by 75 percent from its 2009 high of $44.3 billion to $11 billion. This year, 2012 itself represents an inflection point, as overall support for advanced energy and low-carbon solutions broadly defined will plunge by half from 2011 levels by year’s end.

With key renewable energy industries reliant on an array of “start-and-stop” subsidies, the next few years could bring bankruptcies and retrenchment as these industries compete with mature, but still subsidized, fossil fuel producers.

Taking a longer view, the debate around the current clean energy subsidy system provides an opportunity for needed reform that can foster further industry growth, albeit one that must be approached carefully by both industry leaders and policymakers and that must also be handled urgently.

Far from walking away from clean energy and ceding this major 21st century industry to competitors in Asia and Europe, America needs to innovate now by designing new forms of support for clean tech that chart a path toward subsidy independence and a strong, internationally competitive industry.

Many of today’s existing subsidies and clean energy programs, after all, are poorly optimized, characterized by a boom and bust cycle of aid and withdrawal. Additionally, many are in need of revision thanks to either recent progress in the price and performance of subsidized technologies or the mounting fiscal burden imposed by some programs.

There is an opportunity to implement smart reforms that not only avoid a potential “clean tech crash” but also accelerate technological progress and more effectively use taxpayer resources.
To that end, we think policymakers and business leaders should adopt an “extend but reform” stance that sustains investment in emerging clean tech sectors but also modernizes federal supports on two fronts.

To begin with, the nation should update its advanced energy subsidy system, moving beyond the current start-and-stop, static-while-they-are-in-place supports toward a system of incentives designed to support innovative U.S. firms and constantly prod them to compete on price with both fossil fuels and international competitors.

Given tight budgets, each dollar of federal support today should be optimized to advance clean tech sectors towards subsidy independence as soon as possible. Deployment incentives should harness competitive market forces, avoid locking-out emerging technologies, and drive continuous cost reductions and performance improvements. Subsidy levels should fall as technologies mature to both conserve taxpayer resources and provide clear incentives for continued technology improvement. And while such incentives will be dynamic over time, they must also provide sufficient business certainty to facilitate investment decisions while leveraging access to affordable private capital.

In practical terms, the new breed of industry support would transition industries toward subsidy-free price competitiveness through the use of steadily declining subsidies; gradual phase-outs; and progressively tightening performance standards like the CAFE standards for cars. In short, static, on-or-off supports and renewal dramas should be replaced by a set of technology specific, predictable down-ramps that simultaneously drive continual cost-improvement and increased market demand.

Yet subsidy reform by itself will not be sufficient to drive the needed development and diffusion of clean, low-cost energy technologies. Also essential will be a steady, balanced set of investments in the nation’s innovation, finance, market, and regional assets aimed at making clean energy cheap.

The nation must continue to invest heavily in energy-related R&D and deployment, as well as continue to experiment with new institutional models that link research efforts to the needs of the market. Likewise, the nation needs a flexible, independent, and more effective new public finance entity and related practices for drawing private finance into clean tech projects through a variety of investment, credit, securitization, and standardization activities to support clean energy entrepreneurs and accelerate the commercialization of new advanced energy technologies.

And finally, the nation needs to develop more potent, catalytic ways to foster regional market development and enhance regional advanced manufacturing and clean tech industry clusters. Regional markets and clusters—structured by what one analyst calls a “coalition of the willing among states and regions”—are going to be critical in fostering continued progress. Federal efforts should therefore work now to aid and abet sub-national efforts to structure dynamic energy markets and deploy clean technology.

Fossil fuels, too, are in desperate need of subsidy reform. Fossil fuels have had a century to drive down costs and reach scale. It is a mature market that benefits from an energy system built to its specifications. Reforming and reducing subsidies in the fossil fuel sector is a necessary step to build a low-carbon future and reduce greenhouse gas pollution that drives climate change and harms the planet.

In the end, then, clean energy policy in America stands at a crossroads. A business-as-usual strategy of perpetual start-and-stop policy expiration and renewal is no longer sustainable. And yet, the immediate wholesale cessation of clean energy policy support envisioned by some would be disastrous, amounting to the sacrifice of nascent markets that could mature into multi-trillion dollar economic opportunities.

A strategic middle way is therefore necessary because clean energy sectors are still emerging and maturing and must compete against well-entrenched fossil energy sources with over a century of incremental improvements, federal subsidization, and established infrastructure and regulatory environments behind them.

The time has come then to craft a new energy policy framework specifically designed to accelerate technology improvements and cost reductions in clean tech sectors; ensure scarce public resources are used wisely to drive technologies towards subsidy independence as soon as possible; and continue the growth and maturation of America’s most competitive clean tech industries.