TODAY’S STUDY: THE BACKING NEW ENERGY IS GETTING AND THE BACKING IT NEEDS

Beyond Boom & Bust; Putting Clean Tech on a Path to Subsidy Independence

April 2012 (Breakthrough Institute, Brookings Institution and World Resources Institute)

Executive Summary

In the absence of significant and timely energy policy reform, the recent boom in US clean tech sectors could falter.

Driven by private innovation and entrepreneurship as well as critical public sector support in the form of tax credits, grants, and loan guarantees, several clean energy technology (or “clean tech”) segments have grown robustly in recent years while making progress on cost and performance.

Renewable electricity generation doubled from 2006 to 2011, construction is under way on the nation's first new nuclear power plants in decades, and American manufacturers have regained market share in advanced batteries and vehicles. Prices for solar, wind, and other clean energy technologies fell, while employment in clean tech sectors expanded by almost 12 percent from 2007 to 2010, adding more than 70,000 jobs even during the height of the recession.

Despite this recent success, however, nearly all clean tech segments in the United States remain reliant on production and deployment subsidies or other supportive policies to gain an expanding foothold in today’s energy markets. Now, many of these subsidies and policies are poised to expire—with substantial implications for the clean tech industry.

This report aims to take stock of the coming changes to federal clean tech subsidies and programs (Part 1); examine their likely impact on key clean tech market segments (Part 2); and chart a course of policy reform that can advance the US clean tech industry beyond today’s policy-induced cycle of boom and bust (Part 3).

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Along the way, this report provides a comprehensive analysis of the spending trajectory of 92 distinct federal policies and programs supporting clean tech sectors over the 2009 to 2014 period. As this analysis illustrates, an era of heightened clean energy spending supported by the American Recovery and Reinvestment Act of 2009 (ARRA) is now coming to an end, coinciding with the expiration of several additional time-delimited tax credits and programs. As a result, key portions of the clean tech industry can now anticipate substantially reduced federal support (see Figure ES1).

At the same time, market subsidies are being cut in several European markets, reducing export opportunities for US clean tech manufacturers and leading to oversupply and declining margins, even as pressure mounts from both low-cost natural gas at home and foreign clean tech manufacturers abroad.

US clean tech sectors therefore face a combination of new challenges, despite the growth and progress achieved in recent years. The specific market impacts will vary by sector (see Part 2). But without timely and targeted policy reform, several sectors are likely to experience more bankruptcies, consolidations, and market contraction ahead.

And yet the demise of the current clean tech subsidy system need not be disastrous. In fact, it may provide an opportunity for needed reform and further industry growth, albeit one that must be carefully approached by both policy makers and business leaders.

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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, or in need of thorough revision thanks to either recent progress in the price and performance of subsidized technologies or the mounting fiscal burden imposed by some programs.

The end of the present policy regime therefore offers the opportunity to implement smart reforms that not only avoid a potential “clean tech crash” but also accelerate technological progress and more effectively utilize taxpayer resources. Well-designed policies that successfully drive innovation and industry maturation could provide US clean energy sectors a more stable framework within which to advance towards both subsidy independence and long-term international competitiveness.

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Along these lines, this report finds that:

g The US federal government will spend just over $150 billion on clean tech over the 2009-2014 period, a more than three-fold increase from the 2002-2008 period.6 We estimate that these investments will leverage an overall cumulative public and private sector investment of $327 billion to $622 billion in US clean tech segments during the 2009 to 2014 period.

g Federal clean tech funding is now at a key inflection point however: absent Congressional action, annual clean tech support will be cut nearly in half from 2011 to 2012.

g A portion of this scheduled drawdown in federal clean tech spending can be explained by the planned expiration of ARRA-funded programs: roughly a third of total spending over the 2009 to 2014 time period originates from one-time federal stimulus programs.

g Including ARRA-funded programs, annual federal clean tech spending is poised to decline to $11 billion by 2014, a 75 percent decline relative to the high of $44.3 billion reached in 2009. Furthermore, by the end of 2014, 70 percent of all federal clean energy policies in place in 2009 will have expired.

g Even excluding ARRA funds, a sharp decline in federal support for clean tech sectors is evident, with normal, non-ARRA annual clean tech funding scheduled to decline by more than half, from a peak of $24.3 billion in 2010 to $10.9 billion by 2014.

g Nearly three-quarters of all clean energy spending over the 2009-2014 period is directed to subsidize clean technology deployment and adoption, yet this funding is poised to fall sharply. Absent policy action, annual funding for these deployment policies will drop nearly 80 percent from 2009 to 2014, wiping away the large bulk of today’s current clean energy deployment regime.

g Clean tech manufacturing receives just 8 percent of federal clean tech spending during the 2009-2014 period. Nearly all of this funding is due to temporary stimulus-supported programs that have already expired, leaving little remaining direct support for US clean tech manufacturing.

g US investment in clean energy research, development, and demonstration (RD&D) constitutes roughly 18 percent of federal clean tech spending over 2009-2014. While energy RD&D funding is relatively stable over this period, it averages just $4.7 billion per year, roughly one-half to one-third the optimal funding levels recommended by numerous business leaders, researchers, and national science advisors7 and far lower than annual investments in other key national innovation priorities, such as space research and exploration ($19 billion), health research ($34 billion), and defense related research ($81 billion).

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In light of these budgetary findings, this report concludes that policy makers and business leaders need to unite behind timely energy policy reform that supports US innovation, rewards continual improvements in clean tech price and performance, and secures subsidy independence for clean tech markets as rapidly as possible. The key implications of this report’s analysis are:

g The maintenance of perpetual subsidies is not a sustainable solution to the new challenges facing the US clean tech industry. Clean tech markets in America have lurched from boom to bust for decades, and the root cause remains the same: the higher costs and risks of emerging US clean tech products relative to either incumbent fossil energy technologies or lower-cost international competitors, which make US clean tech sectors dependent on subsidy and policy support.

g Cost competitiveness is achievable, but until technological innovation and cost declines can secure independence from ongoing subsidy, clean tech segments will remain continually imperiled by the threat of policy expiration and political uncertainty. Continual improvement in price and performance is thus the only real pathway beyond the cycle of clean tech boom and bust.

g Maintaining a viable US clean tech industry will require policy makers to reform the nation’s myriad energy subsidies, which should be optimized to drive improvements in technology price and performance and ensure clean tech segments achieve subsidy independence as rapidly as possible.

g Federal clean energy policies should reward firms for continually improving the performance and reducing the cost of their technologies, or for inventing and commercializing next-generation, advanced energy technologies, not simply for deploying current-generation technologies without advancing them towards subsidy independence.

g Energy subsidies should be temporary and targeted to drive the maturation and improvement of emerging technologies. Just as subsidies for clean tech sectors should phase out as these sectors mature, it is long-past time to end subsidies for well-established fossil energy production methods and technologies as well.

g The United States can leverage its strengths as an innovation leader and accelerate the pathway to clean tech subsidy independence by increasing funding for energy RD&D, accelerating advanced energy technology commercialization, and harnessing the advanced manufacturing capabilities , regional industry clusters, and high-skilled energy workforce that are crucial to a robust innovation system.

g Establishing subsidy independent, highly innovative US clean tech markets will also position US firms to compete effectively in growing international markets for clean energy products. With the right reforms, the United States has the opportunity to be a leader in the invention and production of next-generation technologies for sale to an energy-hungry global market.

Key Recommendations For A New Era Of Clean Energy Policy

As to how, specifically, the nation might move toward a new era of clean energy policy, this report concludes that the United States should now build on its historic strengths as a leader in innovation, entrepreneurship, and advanced manufacturing by accelerating the development, adoption, and improvement of cost-effective clean energy technologies. Therefore, policy makers and business leaders alike should pursue reform on two fronts that will put clean tech on a path to subsidy independence and secure US leadership in clean energy markets:

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1. Reform Energy Deployment Subsidies and Policies to Reward Technology Improvement and Cost Declines

Expiring policies and programs are poised to wipe away the large bulk of today’s clean energy deployment regime. This creates a clear need for urgent policy reform to sustain market opportunities for advanced energy technologies, more effectively deploy limited public resources, and support innovative entrepreneurs and firms. Whatever form they take, a new suite of clean tech deployment policies must simultaneously drive market demand and continual innovation. In particular, clean tech deployment policies should:

g ESTABLISH A COMPETITIVE MARKET.

Deployment policies should create market opportunities for advanced clean energy technologies while fostering competition between technology firms.

g DRIVE COST REDUCTIONS AND PERFORMANCE IMPROVEMENTS.

Deployment policies should create market incentives and structures that demand and reward continual improvement in technology performance and cost.

g PROVIDE TARGETED AND TEMPORARY SUPPORT FOR MATURING TECHNOLOGIES.

Deployment policies must not operate in perpetuity, but rather should be terminated if technology segments either fail to improve in price and performance or become competitive without subsidy.

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g REDUCE SUBSIDY LEVELS IN RESPONSE TO CHANGING TECHNOLOGY COSTS.

Deployment incentives should decline as technologies improve in price and performance to both conserve limited taxpayer and consumer resources and provide clear incentives for continued technology improvement.

g AVOID TECHNOLOGY LOCK-OUT AND PROMOTE A DIVERSE ENERGY PORTFOLIO.

Deployment incentives should be structured to create market opportunities for energy technologies at different levels of maturity, including new market entrants, to ensure that each has a chance to mature while allowing technologies of similar maturity levels to compete amongst themselves.

g PROVIDE SUFFICIENT BUSINESS CERTAINTY.

While deployment incentives should be temporary, they must still provide sufficient certainty to support key business decisions by private firms and investors.

g MAXIMIZE THE IMPACT OF TAXPAYER RESOURCES AND PROVIDE READY ACCESS TO AFFORDABLE PRIVATE CAPITAL.

Deployment incentives should be designed to avoid creating unnecessarily high transaction costs while opening up clean tech investment to broader private capital markets.

Many of today’s clean tech deployment subsidies and policies should be reformed with these criteria in mind. Examples of possible policies that could meet these criteria include competitive deployment incentives, steadily-improving performance-based standards, “top-runner” standards or incentives, demanding government procurement opportunities, and reverse auction programs. If structured to adhere to these criteria, a new era of clean tech deployment policies will neither select “winners and losers” a priori, nor create permanently subsidized industries. Rather, these policies will provide opportunity for all emerging clean energy technologies to demonstrate progress in price and performance, foster competitive markets within a diverse energy portfolio, and put clean tech segments on track to full subsidy independence.

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2. Strengthen the US Energy Innovation System to Make Clean Energy Cheap

A new energy policy consensus to secure an internationally competitive, subsidy-independent clean tech sector must also harness America’s strengths as an innovator. The United States is home to world-class universities, generations of trained scientists and engineers, potent centers of entrepreneurship, finance, and advanced manufacturing, and a creative culture capable of attracting talent from around the world. Yet when it comes to energy, America’s innovation system falls short. Policy makers must strengthen the US energy innovation system to catalyze clean energy breakthroughs and support continual technology improvement. Along these lines, the nation should:

g STEADILY INCREASE INVESTMENT IN RD&D WHILE REFORMING AND STRENGTHENING THE US ENERGY INNOVATION SYSTEM.

Policy makers should steadily scale-up investment in energy RD&D to triple today’s levels to match the scale of other national innovation priorities. America’s energy innovation system must also be modernized to leverage regional innovation opportunities and strengthen new institutional models at the federal level, including the Energy Frontier Research Centers (EFRCs), the Advanced Research Projects Agency-Energy (ARPA-E), and the Energy Innovation Hubs. Efforts to build public-private partnerships responsive to both industry needs and regional strengths should continue to be encouraged across the Department of Energy (DOE) and particularly in the National Labs in order to ensure a maximum return on the federal investment in RD&D.

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g UNLOCK CLEAN ENERGY ENTREPRENEURSHIP BY IMPLEMENTING EFFECTIVE POLICIES TO ACCELERATE COMMERCIALIZATION OF ADVANCED ENERGY TECHNOLOGIES.

The DOE’s Loan Programs Office, which funded Solyndra, should be replaced by a more flexible, independent, and sophisticated suite of financial tools and other mechanisms designed to draw private capital into cleantech projects through a variety of investment, credit, securitization, insurance, and standardization activities. Whether delivered through a Clean Energy Deployment Administration (CEDA) or other entities or programs, the clear mission of these activities would be to accelerate the commercialization and deployment of critical advanced energy technologies.

A National Clean Energy Testbeds program (N-CET) should be established to take advantage of public lands to accelerate technology demonstration and commercialization. This new program would provide access to pre-approved, monitored, and grid-connected public lands and waters ideal for demonstration of innovative energy technologies, thereby reducing the cost, time, and permitting challenges associated with technology commercialization.

The power of military procurement should also be leveraged to drive demanding early markets for advanced energy technologies that meet tactical and strategic military needs and may have later commercial applications. Energy technologies with dual-use military and commercial potential include advanced vehicle technologies, aviation biofuels, advanced solar power, improved batteries, and small modular nuclear reactors.

Similarly, federal agencies should work both independently and with the states to address infrastructure and regulatory challenges that may prevent the commercialization of new energy technologies .

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g HARNESS ADVANCED MANUFACTURING, REGIONAL INDUSTRY CLUSTERS, AND A WORLD CLASS ENERGY WORKFORCE TO ENHANCE AMERICA’S INNOVATIVE EDGE.

Advanced manufacturing is an integral part of the innovation system and a key area for cost reductions and performance improvements in emerging technologies. Innovation thus suffers when divorced from manufacturing activities.19 US advanced manufacturing must play a key role in accelerating advanced energy innovation. Technical support programs, public-private research consortia, and other strategic policies can help domestic manufacturers of advanced energy technologies remain at the cutting edge.

Likewise, the nation needs to develop more potent, catalytic ways to leverage and enhance regional clean tech industry clusters. Such industry clustering has been shown to accelerate growth by promoting innovation, entrepreneurship, and job creation. Policy makers should increase investment in competitive grants to support smart regional cluster initiatives, designed not in Washington but on the ground close to the “bottom up” innovation that has broken out in numerous states and metropolitan areas.

Finally, American clean tech leadership will require a highly educated, globally competitive advanced energy workforce. The nation must make new investments in energy science, technology, engineering, and mathematics education23 and make smart reforms to immigration policies to ensure America remains the destination of choice for the world’s best entrepreneurs and innovators.

Clean energy policy in America is at a crossroads. Federal support for clean tech is now poised to decline precipitously —unless policy makers and industry work together to enact smart reforms that can ultimately free clean energy from subsidy dependence and put clean tech sectors on a path to sustainable, long-term growth.

A business-as-usual strategy of perpetual policy expiration and renewal is no longer sustainable. Yet neither is the immediate cessation of clean tech subsidies in the national interest. Supporting the development of a new portfolio of cost-competitive, scalable clean energy technologies offers substantial opportunities for enhanced American energy security, new technology exports, and improved public health.

The time has come 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 clean tech industries. This report lays out the challenges facing policy makers and business leaders with the aim of sparking a national conversation on the route forward.