Green Power Forecast: Partly Cloudy - For the Short Term

The sagging economy continues taking its toll on renewable energy spending, with solar and wind projects across the country shutting down or getting delayed as financiers reassess the benefits of investing in new energy technology as their bottom lines shrink. The lower price of oil isn't helping.

When oil prices spiked last summer, investment in any renewable energy project seemed like a prudent, and even necessary decision. Within months, however, the cost of oil dropped, the economy tanked, and priorities shifted.

"Any time conventional energy prices drop, it impacts renewable energy spending," notes Ying Wu, senior analyst for Lux Research, a New York-based emerging technologies research firm. "Solar is more expensive now that fossil fuel prices have gone back down."

That spells doom for business owners and investors looking for short-term returns on their investments, but those taking a long view are more likely to see renewable energy as a worthwhile, especially with the American Recovery and Reinvestment Act of 2009 stimulus package offering billions in green power incentives which, in some cases, may offset up to 50 percent of some renewable energy installations.

Tight credit, however, remains an obstacle.

"For companies that have already made an investment in solar projects, such as Yahoo and Wal-Mart, they will probably continue to make solar part of their energy mix," says Wu. "But companies that were just beginning to look at investing in renewable energy are slowing down, and financing for unfunded projects is getting delayed."

Though several solar companies have announced major layoffs because of collapsed financing, Monique Hanis, spokesperson for the Washington, D.C.-based Solar Energy Industry Association, believes the stimulus package, signed by President Barack Obama three weeks ago, will help turn things around. The measure includes $16.8 billion for the Department of Energy Office of Energy Efficiency and Renewable Energy (EERE), a nearly tenfold increase.

"We expect provisions in the bill to stimulate demand, open up financing and create jobs," she says. "We are hopeful that the renewable energy grants, removing a penalty for subsidized financing, and loan guarantees will help free up the credit and investment markets and that the manufacturing tax credit will scale up U.S. manufacturing, which will keep prices coming down."

Lux analyst Johanna Schmidtke agrees. "The final stimulus bill offered a range of incentives for renewable energy," she says, pointing out the $6 billion earmarked to support loan guarantees for renewable energy and electric transmission technologies. The funds are expected to guarantee more than $60 billion in loans.

"That should encourage greater investment from private sector companies who can benefit from these grants," she says. "It should generate a big uptick in renewable energy generation."

Even before the stimulus bill was signed, certain regions still showed enthusiasm for solar energy, Hanis said. In California, for example, the number of grant applications for business and residential solar projects hit record highs in the last five months of 2008. And while she expects that interest to wane in '09, she thinks it will be temporary and localized.

"You'll still see activity where there are federal and state incentives for solar," she says. Along with California, she expects progress to continue in Pennsylvania, Ohio and New Jersey, where government programs to support solar investment remain strong.

"I got a call from a manufacturing company in Pennsylvania just yesterday that is still moving forward with a solar water heating project," she says. " And they are very excited about it."

She notes that several major businesses are also showing strong public commitment to solar, despite the economy. For example:

-- Global retailer Wal-Mart announced in January that its Mexican unit installed 1,056 photovoltaic panels on the roof of the Bodega Aurrera Aguascalientes retail center in the city of Aguascalientes in central Mexico.

-- Kohl's, the specialty clothing retailer based in Menomonee Falls, Wis., is currently converting four of its nine stores in Oregon to solar power, and also has solar projects underway in California, Connecticut, Maryland, New Jersey and Wisconsin.

-- As part of achieving its pre-certified LEED Gold status for all new store construction, Office Depot will install photovoltaic solar arrays to offset 11 percent of the building's total annual energy costs, and will include active solar tracking skylights that provide light to than 75 percent of the store. These plans will be implemented on every new store construction project going forward.

-- In the next redesign of its hybrid Prius automobile, automotive manufacturer Toyota plans to install solar panels on the vehicle's roof. The panels will power the air conditioning system and fuel its operation even when the main engine is turned off.

"There are definitely pockets of activity," she says of these and other initiatives. "But the larger projects will need additional funding to survive."

A Little Help from Uncle Sam

The new administration, along with the benefits included in the stimulus package, should boost all renewables industries, suggests Karlynn Cory, senior renewable energy analyst for the National Renewable Energy Laboratory (NREL), a renewable energy research and development lab in Golden, Colo.

"It was definitely a step in the right direction, and a lot of issues around liquidity and the tax market got addressed," she says.

One of the most promising additions was the extension of production tax credit (PTC) to 2012 for wind, and to 2013 for all other renewables. The PTC provides a 1.9-cent per kilowatt-hour (kWh) benefit for the first 10 years of a renewable energy facility's operation.

The extension also allows utilities and businesses already paying the alternative minimum tax (AMT) to take advantage of that credit, which creates greater incentives to invest in renewable energy. In the past, those companies that took advantage of the AMT were not eligible.

"Most companies pay the AMT, so this creates opportunities for a whole new set of investors," she says. "These companies can now own solar operations and take a tax deduction for it. For businesses that have a tax appetite this is very appealing."
These combined tax incentives mean investors benefit from the long-term 10-year credit, as well as a short-term, upfront 30 percent tax benefit that can be realized in the first year of commercial operation, Cory explains. She estimates the combined tax incentives could offset half the costs of a solar installation. "It's a sizable incentive that impacts the economics of investing in renewable energy substantially."

The elimination of tax laws preventing companies from taking advantage of the investment tax credit if they were subsidized by state or federal programs will further drive incentives to invest in renewables, Cory predicts.

"The stimulus bill will accelerate things beyond what could have otherwise been accomplished," she says. "It's like pushing a fast forward button on project development. Hopefully it will get us back to 2008 levels by early 2010. "

She has spoken with major retailers and hotel chains that have already shown interest in investing in solar projects as a direct result of this change in the tax system.

Smaller companies are also looking at ways to partner with utilities to take advantage of similar incentives without making the capital investment themselves. These partnerships allow the utilities to build and operate plants on the business owner's site, in exchange for a fixed energy price, explains Dave Scanzoni, spokesperson for Duke Energy in Charlotte, North Carolina.

"They are like mini-power plants owned and operated by the utility but located on private property," he says. Duke currently has a pilot program in North Carolina to develop this distributed generation system with businesses and residential customers.

"We've seen a lot of interest in this program," he says, noting that more than 500 customers contacted the utility about participating. "It's just a pilot program now, but it's a concept that in the long-term could address our clean energy needs."

The combination of innovative investment opportunities and the lowering price of solar makes these projects attractive, Cory says. "This appears to be a good time to invest, even in today's market," she says. "Solar is a great way to hedge yourself against the current electric and fossil fuel markets, and the tax credit is a great sweetener."

Blowing Against the Wind

Wind farms are not in as strong a position to benefit from all of these lucrative incentives. While wind project investors can currently take advantage of the production tax credit, a separate credit for wind is set to expire in December. That leaves owners of projects already underway scrambling to get them finished before the clock runs out, while investors with projects in the planning stages are slowing progress as they wait to see what happens next.

Most notably, T. Boone Pickens, the billionaire Texas oil tycoon who's been a champion of wind power for years, had to delay construction of his 4,000 megawatt $6 billion Texas wind project. He attributes the delay to the credit crunch and the falling price of natural gas. Construction was originally slated to begin in 2010, but it's now on hold until at least 2011.

Wu predicts that such slowdowns will likely occur across the wind power industry in response to the economy but doesn't believe it will peter out. " Wi nd is closer to conventional energy costs than solar, it's close to the grid for coal," she points out. "Because of that wind will continue to grow, but at a slower pace."

In fact, she sees the intermittent nature of wind power, rather than the economy, as the primary obstacle to widespread adoption.

To counter that issue, many utility companies, including Pacific Gas and Electric Co., Southern California Edison, and Duke Energy, are currently developing storage technologies that can capture wind energy at its peak and distribute it during lulls.

"Our CEO is a big proponent of renewable energy for the future, and we are in a good capital position to invest in it," says Scanzoni. Along with two solar initiatives, Duke recently acquired two wind companies in an effort to grow that side of the business. By the end of 2008 the company generated 500 megawatts of wind power, including two new wind farms in operation. It has another 5,000 megawatts under development.

He also notes that Duke Energy is very supportive of the stimulus bill and any related tax incentives that will come from it. "It's not going to impact any of the projects we are working on today," he says, "but there will likely be benefits in the future that will enable us to implement technology faster and cheaper, and we will be able to pass those benefits on to our customers."

Duke entered an agreement in December with Wal-Mart to provide up to 15 percent of the electricity used in its 360 stores in Texas from Duke's Notrees Windpower Project.

"Wal-Mart has shown a commitment to a green future on a number of fronts," Scanzoni says. "For Duke, it's exciting when a major partner can commit to these kinds of projects on a large scale because it makes renewable energy that much more cost-effective."

He believes that as the cost of fossil fuels continues to fluctuate and stricter climate change legislation moves forward, other companies, large and small, will follow suit.

"There is one certainty in the electricity market, and that is that costs will go up, and while renewable energy is still expensive, it pays off tremendously," he says. "Global warming is a reality and if we want to keep our businesses and our planet going, these are the choices we need to make."

This article first appeared at Greenbiz.com