Wind in Wall Street's Sails: Investment Rushes Into Wind, But Can We Make It Last?

By Yael Borofsky and Jesse Jenkins, originally posted at the Breakthrough Institute

"The money is coming back,"

That's what Ethan Zindler, head of New Energy Finance Ltd, proclaimed to the Wall Street Journal in response to emerging evidence that the government's $3 billion dollar cash grant renewable energy stimulus program is successfully incentivizing private investment in the wind sector.

After falling into the doldrums for the past six-months, the wind industry is roaring back to life thanks to direct public investments enacted in the American Recovery and Reinvestment Act (ARRA), also known as the stimulus bill. A DOE and Treasury-funded cash grant incentive program is helping to grease the pipeline for private investors looking to finance renewable projects, particularly wind farms, slated to begin construction in 2009 or 2010. According to the WSJ, just four weeks into the program $800 million in grants have already been submitted and Wall Street bankers predict that figure to reach $10 billion by the end of 2010.

The cash grant program was created to rescue the clean energy industry, a critical American growth sector, from the malaise of the credit crisis. The tax credits (PTC and ITC) that usually incite clean energy development are worthless in an economic climate where the big financial firms that typically absorb them, on behalf of project developers, are in crisis.

The solution: Congress tucked a two-year cash grant into ARRA worth 30% of qualifying wind, solar, and geothermal project costs, replacing the normal production and investment tax credits. With the money from the program officially flowing since August, the grants are breathing new vigor into clean energy investment, speeding America's economic recovery.

With big players like Morgan Stanley and Citigroup investing $120 million each to finance new wind farms, the wind sector is generating more than clean energy - it's producing clear evidence that public investment really does drive private investment. By covering 30% of a new project's cost, the cash grant program will spur more than two dollars in private investment for every public dollar, successfully leveraging taxpayer money to drive significant private investment in cleaner energy, greater energy security, and accelerated economic recovery.

The projected success of the cash grants, which bankers calculate will lead to 9-15% annual returns per deal, suggests that perhaps, public investment is even more effective at driving private investment than setting an economy-wide carbon price, an oft-suggested strategy to motivate private financing in renewable RD&D.

While this ARRA-funded program has already positively impacted the wind sector (and should have a similar but smaller impact on solar and geothermal), it is important to temper the excitement with prudent acknowledgement that this is a short-term stimulus. A graphic representation of the recent history of wind financing in the U.S. (see below) shows that as successful as the program is shaping up to be, it could prove a fickle friend in the long-term.

Even though the stimulus program appears incredibly effective at coaxing Wall Street to loosen its grip on the capital coffer in the short-term, a long-term deployment strategy, focused on supporting the maturation and development of a suite of clean energy technologies, is essential to sustaining high levels of private investment in the clean energy sector.

In the context of a struggling economy relieved by even the smallest signal that the market is on the upswing, it is difficult to envision the structure of a long-term deployment plan. But it is important to keep in mind three vital factors of any long-term clean energy deployment strategy.

First, the strategy must set forth incentives targeted to individual technologies since all clean energy technologies are not created equal. Incentive levels must buy down the above-market cost of each individual technology so that maximum investment in each technology is possible. Clean energy sources are still more expensive than their entrenched fossil energy competitors - sometimes significantly more so - and private investment in these critical, emerging technologies and industries will always be limited without public investments to help level the playing field.

The objective, however, should not be to create permanently subsidized industries, forever dependent on taxpayer dollars. Instead, clean energy deployment incentives should spur the continual improvement and development of a suite of emerging clean energy sources, driving down cost through economies of scale, learning and experience, and targeted R&D. If a technology fails to come down in price over time - in short, if it will never become cost competitive without permanent subsidy - incentives for that technology should cease.

The goal: clean, cheap energy sources that can competitively and affordably power America's economy - and the world.

Second, a long-term strategy must be consistent. The danger of short-term investments is that their inherent uncertainty has the potential to push renewable energy markets into scarcity mode. Because private investors are motivated to capitalize on what they perceive to be a short-term market, the subsequent rise in commissioned projects leads to high demand for parts. This demand spurt often cannot be met by manufacturers who are not experiencing corresponding capacity expansion. Component scarcity can lead to price increases for key parts, eventually negating the value of both government and private investments by making clean energy more expensive, not cheap, and discouraging additional investment.

Scarcity mode, caused by short-term government investment strategies, has been symptomatic of the wind industry's frustrating boom-and-bust history. This new stimulus program, somewhat like a bad diet, is at risk for perpetuating the cycle because although it drives industry growth initially, it is not designed to make wind energy cheap through the kind of consistent, long-term deployment strategy described above, and thus risks making it more expensive in the short- and long-term.

Finally, any long-term clean energy deployment strategy cannot focus on deployment alone. Unlike short-term stimulus objectives, which tend to revolve around immediate job creation and economic growth, a truly comprehensive strategy should be specifically designed to make a suite of low-carbon technologies cheap and abundant through continued innovation. Investments should be channeled to motivate innovation through sustained, robust R&D, consistently lower prices, and continued improvements in the product.

Additionally, making clean energy cheap, depends upon feeding knowledge and experience gained through deployment, or "learning-by-doing," back into R&D efforts to continually improve the technology and drive down cost. This creates a far more productive cycle than the alternative (boom and bust), enabling further deployment, more learning and experience, and continued innovation. The learning-by-doing cycle is supported by government investments in R&D and targeted, long-term deployment incentives, both necessary catalysts for this process.

The final output of this process: clean, cheap energy.

Denmark's deployment of offshore wind is a perfect example of how learning feedback loops encourage both technology and deployment practice improvements, thus making clean energy cheaper. By capturing the experiential gains of "learning-by-doing" Denmark's coupled deployment and applied research programs are credited with driving significant advancements in wind turbine technology. No amount of time in the lab could replace the knowledge Denmark gained throughout the actual deployment process.

Deployment of clean energy technology is certainly a smart avenue for short-term economic stimulus. But in order to keep high levels of private investment flowing into the wind and other renewable energy sectors, it is more realistic to view deployment as an evolving process instead of as an event. Building viable industries and new technologies capable of export around the world requires a more focused and sustained vision for clean energy technology policy. Long-term deployment policies to drive strong domestic markets, continued innovation, and ever-more-affordable clean energy technologies will be central to the nation's longer-term economic strategy, helping drive a robust clean energy growth sector.

Thus, the current boom in private wind financing will only result in another eventual bust without any consideration for the long-term. While the ARRA cash grant program merits the enthusiastic response it has received from Wall Street and the wind sector, without a subsequent or concurrent long-term deployment strategy, today's gust of growth and profit is fated to turn disappointingly stale.

For more on how to make clean energy cheap, view the Breakthrough Institute's policy recommendations here.