From The Washington Monthly
By Mariah Blake
This winter, as Congress was scrambling to pass the stimulus package, the bottom fell out of the renewable energy sector—the very industry that lawmakers have held out as our best hope of salvaging the economy. Trade groups like the American Wind Energy Association, which as recently as December was forecasting “another record-shattering year of growth,” began predicting that new installations would plunge by 30 to 50 percent. Solar panel manufacturers that had been blazing a trail of growth announced a wave of layoffs. Some have since cut their workforces in half, as stock prices tumble and plans for new green energy projects stall.
But there is one place where capital is still flowing: Gainesville, Florida. Even as solar panels are stacking up in warehouses around the country, this city of 120,000 is gearing up for a solar power boom, fueled by homegrown businesses and scrappy investors who have descended on the community and are hiring local contractors to install photovoltaic panels on rooftops around town.
One of those investors is Tim Morgan, a tall fiftysomething man with slicked-back hair and ostrich-skin boots who owns a chain of electrical contracting companies. His industry has been hit hard by the downturn, but he has a plan to salvage his business, which he explained over a drink at the Ballyhoo Grill, a gritty Gainesville bar with rusty license plates nailed to the wall and Jimmy Buffett blaring on the jukebox. Morgan intends to rent roof space from eighty Gainesville businesses and install twenty-five-kilowatt
solar generating systems on each of them, for a total of two megawatts—a project that would nearly double Florida’s solar-generating capacity. He estimates the venture will cost between $16 million and $20 million and bring in $1.4 million a year. Already, he has lined up financing, found local contractors to do the installation, and staked claims to the rooftops of at least fifty businesses. “And we’re just one tiny player,” he told me. “Look around. You can see how fast this thing is going to move.”
Indeed, around Gainesville similar projects abound. Paradigm Properties, a residential real estate company, plans to install photovoltaic arrays on fifty local apartment buildings and its downtown headquarters. Achira Wood, a custom carpentry outlet, is plastering the roof of its workshop—roughly 50,000 square feet of galvanized steel—with solar panels. Interstate Mini Storage is doing the same with its sprawling flat-roofed compound. Tom Lane, who owns ECS Solar Energy Systems, a local solar contractor, told me he’s planning to expand his staff from eleven to at least fifty. “The activity we’ve seen is just explosive,” he said. “I’ve been in the business thirty years and I’ve never seen anything like it.”
Why is the renewable energy market in Gainesville booming while it’s collapsing elsewhere in the country? The answer boils down to policy. In early February, the city became the first in the nation to adopt a “feed-in tariff”—a clunky and un-descriptive name for a bold incentive to foster renewable energy. Under this system, the local power company is required to buy renewable energy from independent producers, no matter how small, at rates slightly higher than the average cost of production. This means anyone with a cluster of solar cells on their roof can sell the power they produce at a profit. The costs of the program are passed on to ratepayers, who see a small rise in their electric bills (in Gainesville the annual increase is capped at 1 percent). While rate hikes are seldom popular, the community has rallied behind this policy, because unlike big power plant construction—the costs of which are also passed on to the public—everyone has the opportunity to profit, either by investing themselves or by tapping into the groundswell of economic activity the incentive creates.
Though Gainesville is the first to take the leap, other U.S. cities are also moving toward adopting feed-in tariffs. Hawaii plans to enact one this summer, and at least ten other states are considering following suit. Among them is hard-hit Michigan, where Governor Jennifer Granholm has promised that the policy will help salvage the state’s economy and create thousands of jobs by allowing “every homeowner, every business” to become “a renewable energy entrepreneur.” There is also a bill for a federal feed-in tariff before Congress.
Could this approach help revive our renewable energy market, and give a needed jolt to the U.S. economy? There is reason to believe it could. In Germany, which pioneered the modern feed-in tariff, it has given rise to the world’s most vibrant green energy sector. More than forty countries, from Nicaragua to Israel, have followed Germany’s lead, often with dramatic results. Study after study has shown that not only do feed-in tariffs deliver more renewable energy than other market incentives, they do so at a lower cost. “People hesitate to call anything a panacea,” says Toby Couture, an energy and financial markets analyst at the Department of Energy’s National Renewable Energy Laboratory. “But if you’re interested in creating jobs, getting capital flowing, and expanding renewable energy, feed-in tariffs get the job done—often more cost effectively than other policies.”
o understand why feed-in tariffs are potentially revolutionary, you first have to understand how they differ from the system we’ve been using to drive investment in renewable energy so far. For the last fifteen years, the United States has relied on a patchwork of state subsidies and federal tax breaks—mostly production tax credits for wind power, which let investors take write-offs for the energy produced. When Wall Street was riding high on mortgage-backed securities, this made green energy an appealing option for big banks, which funneled billions of dollars into sprawling wind farms as a way of lowering their taxes. But when the market collapsed and corporate profits dried up, so did the incentive to invest. Since last year, the number of tax equity investors—mainly big investment banks—sinking money into wind farms has dwindled from as many as eighteen to four, and the remaining players have scaled back.
This tax-based system has other drawbacks as well. Because Congress has to renew the tax credits—and has often failed to do so—renewable energy is a risky market. Frenzied bursts of investment are followed by near-total collapse, a pattern that has hampered the growth of our domestic green manufacturing sector. Also, tax incentives (and the quota systems in place in about half of U.S. states) end up favoring large-scale projects, mostly monster wind farms concentrated in remote places like the Texas panhandle. This has been lucrative for the companies, like GE and Siemens, that build them, but of limited economic benefit to local communities. What’s more, a lot of energy is wasted transporting power from the sparsely populated areas where it’s produced to the cities and coasts—assuming it can be transported at all. Transmission lines are in such short supply that turbines (and occasionally entire wind farms) sometimes have to be shut down because of bottlenecks in the grid.
Feed-in tariffs promise to solve many of these problems by encouraging small, local production, driven not by Wall Street banks but by ordinary entrepreneurs—a system that boosts efficiency and fortifies local economies.
eed-in tariffs are not a new idea. In fact the United States tried them once before, in the 1970s. At the time the global economy was in shambles, the result of OPEC choking off the world’s oil supply. In a bid to ward off future oil shocks, Congress passed the Public Utility Regulatory Policies Act of 1978 (PURPA), which required power companies to buy electricity from small renewable generators. This spurred a green energy boom, especially in California, which offered producers long-term contracts at rates that were tied to the then-soaring price of natural gas (specifically, they were linked to future-cost projections). Virtually all of the renewable generating power the state has today came online under the policy. More importantly, the technical breakthroughs made in California during this era helped give rise to the modern renewable energy industry.
But this approach also had some glaring flaws, which came into focus in the early 1990s, when the price of natural gas tumbled. Rates for renewable energy sank so low that there was no incentive to invest, and the industry collapsed. Power companies were also stuck with high-priced contracts, which stirred a well of public resentment. Several key states, including California, rolled back the contract requirements, essentially taking the teeth out of PURPA.
But not every nation had the luxury of cheap, abundant fossil fuels. Even in the 1980s and ’90s, when the United States was flush with energy, Germany was struggling to meet its demand—a by-product of its scant oil and gas reserves and the groundswell of opposition to nuclear power after the Chernobyl meltdown. One of the solutions the country settled on was dusting off the feed-in tariff model. The original German bill, passed in 1991, only created an incentive for wind and hydropower. Still, it doubled the share of renewable electricity the country produced, from 3 to 6 percent, over the next nine years. In 2000, the incentive was extended to all renewable energy sources. The pricing structure was also overhauled so rates were tied to the cost of production and varied by energy source—a key point of distinction from PURPA. The aim of the policy was to cultivate a broad enough portfolio of renewable options that Germany could one day replace fossil fuels entirely, and do so outside conventional energy markets. “Big power companies have too many vested interests against renewable energy,” explains Hermann Scheer, a member of the German parliament, who championed the policy. “They will never be the driving forces behind its development.”
The policy has allowed Germany not only to meet but to exceed its renewable energy goals. Initially, the aim was to get 12 percent of its electricity from renewable sources by 2010. But it passed that milestone three years early, and has since reached the 15 percent mark—the most rapid growth seen in any country. By mid-century, Germany aims to increase that share to 50 percent. Already, the nation, which is about as sunny as Juneau, Alaska, is home to almost half the world’s solar generating capacity, and churns out more solar power than any country except Japan. Although it is half the size of Texas, and far less windy, it is also vying with the United States for the number one spot when it comes to generating capacity for wind power.
The driving forces behind this boom are local communities and small entrepreneurs. If you travel the country top to bottom, you’ll see the signs of this everywhere, from the drizzly port of Hamburg, where wind turbines are tucked between stacks of rusty shipping containers, to villages in the Black Forest, where farmers are ripping out ancient waterwheels and replacing them with modern turbines. In Freiburg, a walled medieval city full of cobbled streets and Gothic spires, there are roof-mounted photovoltaic panels everywhere, from churches and schools to train stations and factories, even the local soccer stadium. Some residents have also found more creative ways to harvest energy. Among them is local architect Rolf Disch: his home, which looks like a squat upside-down rocket, has a billboard-sized solar array on the roof and wrap-around balconies with liquid-filled railings that double as solar heat collectors. It also rotates to follow the sun. All told, the building generates five times more electricity than it uses. Disch has also designed solar gas stations and a suburban housing development, where the homes act like mini power stations. But he is careful to note that his clients are not hippies or eco-rebels. “These are doctors, teachers, engineers,” he told me when I visited Freiburg last June. “In other words, ordinary people.”
What inspires ordinary Germans to invest in renewable energy? Part of the answer is that it’s about as safe as government bonds—and brings a better return. Under the German system, renewable energy producers are given long-term, fixed-rate contracts, designed to deliver a profit of 7 to 9 percent. This makes green energy a secure bet for both investors and banks.
he German system contains another ingenious feature: every year, the rate paid for new contracts falls, so a company that installs a large rooftop solar array this year will lock in a rate that is nearly 20 percent higher than one that waits until 2011. This has two salutary effects. First, it creates an incentive for would-be entrepreneurs to get in the game as soon as possible, thereby spurring a rush of investment (which helps explain why Germany was able to meet its renewable energy targets three years early). Second, it forces the green energy sector to innovate. If they want to stay in business and hold on to their margins, manufacturers have no choice but to continually seek out new efficiencies.
This combination of a fast-growing market and rapid innovation has turned the country into a green industry powerhouse. Germany is the leading destination for green capital, with $14 billion invested in 2007 alone. It is also a front-runner in green job creation. Some 300,000 people work in the nation’s renewable energy sector today. By 2020 green technology is expected pass the auto and electrical engineering industries to become the nation’s top employer, with more than 700,000 workers. One of the forces driving this growth is exports. In fact, many of the windmills and solar panels that are cropping up from New York to the Texas panhandle are made in Germany.
The economic benefits of this green tech boom have reached into the poorest corners of the country, including ragged patches of former East Germany. The region between Frankfurt-Oder and Dresden was once as grim as the drabbest outpost in the American Rust Belt. But in recent years, a vibrant green energy corridor, known as “solar valley,” has sprung up amid the abandoned coal mines and shuttered factories. Thousands of workers from the defunct East German semiconductor industry (some of whom had languished for years on unemployment rolls) are now gainfully employed in solar panel factories.
Most importantly, although Germany’s economy has been devastated by the downturn, its green energy sector continues to thrive. In fact, Ernst & Young recently ranked the nation number one on its index of most attractive markets for renewable energy investment. “Just as cash is king,” the report found, “feed-in tariffs are favored by investors,” especially in uncertain financial times.
ou might expect that a system like this—one that allows countless independent producers to sell electricity at premium rates—would come with a hefty price tag. But that is not the case. Studies have shown that even though German-style feed-in tariffs encourage the use of relatively expensive forms of renewable energy, such as solar power, they produce power more cheaply on a watt-for-watt basis than other renewable energy policies. This is because there is less investment risk, and less risk means investors can get lower-interest loans for generating equipment. This is one reason installing a solar panel in Freiburg costs less than it does in San Francisco. Renewable energy producers are also willing to accept lower profit margins because the returns are all but guaranteed. In contrast, under other systems utilities are forced to pay hefty risk premiums. This is particularly true of the quota systems (known as renewable portfolio standards) that are in use in about half of U.S. states and some European countries.
These findings are not lost on Germany’s neighbors. To date, at least eighteen of the European Union’s twenty-seven member states—along with some twenty-five countries, cities, and provinces elsewhere in the world—have adopted feed-in tariffs. Mario Ragwitz, who is spearheading a long-term EU study comparing renewable energy incentives, says three-quarters of the renewable electricity that the bloc produces each year is a direct result of this trend. “Almost everything Europe has when it comes to clean energy stems from the feed-in tariff policy,” he says. “No other system compares.”
In some nations where feed-in tariffs have reached critical mass, there is evidence that they have actually driven down the overall price of electricity. This may seem counterintuitive—after all, renewable energy is more expensive on average than, say, coal power. But the price of electricity is often driven by natural gas, a costly and volatile fuel that is frequently used to meet peak power needs. If you have a large volume of renewable energy (particularly less-expensive wind power) you can cut your use of natural gas, bringing prices down across the board.
n the United States, tax credits and quotas are still the policies of choice. But this may be changing. While the stimulus package expands existing incentives, it also has some novel twists. Namely, in lieu of tax write-offs, companies that break ground on renewable energy projects (such as solar, wind, and geothermal plants) in the next two years can recover 30 percent of their project costs from the Treasury in the form of direct grants. This opens the renewable market to a wide range of players, rather than just big companies with outsized tax bills.
Investors and industry analysts have hailed this as an enormous step forward—one that, in concept, could unclog the pipelines of capital and breathe life back into the renewable sector. “Theoretically, this approach could really supercharge the industry,” says Cai Steger of the Natural Resource Defense Council’s Center for Market Innovation. But they are divided over just how much investment it will attract. This is because, while the policy broadens the pool of potential investors, it doesn’t thaw the frozen credit markets, which have made it difficult to get financing for renewable projects (except in places where the return is guaranteed). Also, although the green energy measures in the stimulus package are longer term than past incentives (the production tax credits were extended for three years instead of one, as has often been the case in the past) they don’t entirely fix the quandary of market instability. Will the industry collapse again when the Treasury grants expire in 2010? Nobody really knows. Moreover, analysts expect the system will continue to favor large-scale projects. This means it is unlikely to spur the kind of small, local production, widespread economic development, and rapid job growth seen in places like Germany.
n this front, some lawmakers would like to see America give Europe a run for its money. “Why should Germany be dominating all this job creation?” Rep. Jay Inslee of Washington told me when I visited him on Capitol Hill in January. “It’s time for us to get in the game.” Last June, the Democratic congressman, who has long been pushing green energy as an engine of economic growth, introduced a bill for a federal feed-in tariff —part of a surge of interest in the policy reaching from California to Maine. In recent months, there has been a flurry of white papers, reports, and conferences on the topic. Interest is also growing in research circles. Toby Couture of the National Renewable Energy Laboratory says that six to eight months ago many of his colleagues didn’t even know the policy existed. Now, he adds, “Everyone on my team is asking, ‘Why aren’t we doing this?’”
Congress, meanwhile, is clearing away some of the logistical stumbling blocks, like our nation’s aging, patchwork electric grid, which could make the intermittency of renewable energy difficult to manage, especially if large quantities come online at once. The stimulus package helps solve this problem by providing $11 billion to modernize our energy infrastructure and develop a “smart grid,” with advanced sensors and distributed computing capabilities, so it can instantly reroute power to meet demand or avoid system overloads. This should pave the way for a better integration of renewable electricity—and, perhaps, open the door to strong, consistent policy that channels America’s entrepreneurial drive into renewable energy.
The drive is there waiting to be unlocked. Just ask Tim Morgan. As the sun dipped behind the live oaks outside Ballyhoo, and “Margaritaville” blared over the speakers, he let me in on the grander scheme behind his Gainesville venture. As he trolls the city for rooftops where he can install photovoltaic arrays, he’s purposely gravitated toward chain stores. That way as other cities and states adopt feed-in tariffs, he’ll have ready-made inroads. “I wanted the system to be scalable, so I can expand,” he explained. “If the incentives are right, there’s no reason there couldn’t be solar panels on every Walgreens and Sam’s Club across the country.”
Will Tim Morgan turn out to be the Sam Walton of solar power? Who knows. But hearing his plan, I definitely had the sense he was a man on the ground floor of something big.
