in their own hometowns.The American public increasingly recognizes that climate change isreal and favors taking action. This support is critical since public demandsfor action will put pressure on politicians to take action on climate change,thus supporting the clean energy industry. A New York Times/ CBS Newspoll found that 84 percent of Americans now believe that human activity is at least contributing to global warming.17 The poll also found that92 percent of Americans would be willing to make sacrifices to reduceglobal warming and that 87 percent favor using renewable energy sourcessuch as solar and wind power and fueling vehicles with ethanol.Scientists studying climate change now generally agree that globalwarming is real and that human-generated greenhouse gases are the reason behind global warming. Figure 2.6 illustrates the rise in global temperatures that has occurred in the past several decades. There are a dwindlingnumber of people who deny that global warming is occurring. Most globalwarming skeptics have given up refuting the data on global warming andhave instead started to argue that human-generated greenhouse gases arenot the cause of global warming or that the problem is not serious enoughto justify government regulation or funding to address the problem.There is a wealth of information that supports the view that greenhouse gas emissions are the cause of global warming. Some of the mostcomprehensive information comes from the Intergovernmental Panel onClimate Change, which is a 20-year-old group organized by the United
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FIGURE 2.6 Global Temperature Variation from Average (Degrees Centigrade) –1880–2005Source: NASA Goddard Insttitute for Space Studies, September 10, 2007, http://data.giss.nasa.gov/gistemp/graphs/.
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Nations Environment Programme (UNEP) and the World MeteorologicalOrganization (WMO). The group’s latest report, which was prepared byhundreds of climate scientists and economists, presents the closest thingto a global consensus on the issue.18 The Climate Panel concluded in itsFebruary 2007 report that human activity is the cause of global warmingwith near certainty and the group called for action to limit greenhouse gasemissions to avoid substantial risks associated with global warming. TheIPCC Web site (www.ipcc.ch) contains a wealth of useful information related to global warming including scientific and technical papers.Another key report on global warming, the “Stern Report,” a comprehensive 700-page analysis of the economics of climate change as opposedto the science of climate change, was produced by a U.K. governmentgroup headed by Sir Nicholas Stern, the Head of the Government EconomicService and a former World Bank Chief Economist and released in October2006.19 The essential economic message of the Stern Report can be boileddown to a single quote: “The costs of stabilizing the climate are significantbut manageable; delay would be dangerous and much more costly.”20The Summary of Conclusions of the Stern Report contains the following notable statements:
r The scientific evidence is now overwhelming: climate change is a serious global threat, and it demands an urgent global response. (p. vi)
r Climate change will affect the basic elements of life for people aroundthe world—access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms. (p. vi)r If we don’t act, the overall costs and risks of climate change will beequivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, theestimates of damage could rise to 20% of GDP or more. (p. vi)r In contrast, the costs of action—reducing greenhouse gas emissions toavoid the worst impacts of climate change—can be limited to about 1percent of global GDP each year. (p. vi)r Our actions now and over the coming decades could create risks ofmajor disruption to economic and social activity, on a scale similar tothose associated with the great wars and the economic depression ofthe first half of the 20th century. And it will be difficult or impossibleto reverse these changes. (p. vi)r Action on climate change will also create significant business opportunities, as new markets are created in low-carbon energy technologiesand other low-carbon goods and services. These markets could growto be worth hundreds of billions of dollars each year, and employmentin these sectors will expand accordingly. (p. viii)
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r The world does not need to choose between averting climate changeand promoting growth and development. Changes in energy technologies and in the structure of economies have created opportunities todecouple growth from greenhouse gas emissions. (p. viii)r Climate change is the greatest market failure the world has ever seen,and it interacts with other market imperfections. Three elements ofpolicy are required for an effective global response. The first is thepricing of carbon, implemented by tax, trading or regulation. The second is policy to support innovation and the deployment of low-carbontechnologies. And the third is action to remove barriers to energy efficiency, and to inform, educate and persuade individuals about whatthey can do to respond to climate change.21 (p. viii)One can debate details about climate change, but the observable fact isthat most governments in the world have now adopted the view that globalwarming is real and that government measures are necessary to addressthe problem. The investment conclusion for our purposes is that the government push to curb global warming is likely to grow in coming years,which will provide a very strong tailwind for the clean energy industry.
CLEAN ENERGY TECHNOLOGYIMPROVEMENTSIn the early 1970s, after the Arab Oil Embargo caused oil prices to soar andcaused a painful U.S. recession, there was a rush to encourage energy efficiency and to develop solar power and other forms of alternative energy.The effort largely fizzled, however, because oil prices fell back, and alsobecause technology at the time was not sophisticated enough to truly replace oil and coal.Since the 1970s, scientists have made enormous strides in semiconductor technology, biotechnology, materials science, nanotechnology, information technology, communications, and other fields. These scientificadvances can now be brought to bear on commercializing existing cleanenergy technologies and inventing new ones. Nanosolar was not even aconcept back in the 1970s, and now there is a company called Nanosolar,Inc., which has $148 million in venture capital funding and is in the processof building its first factory to produce thin film solar panels using manufacturing techniques based on nanotechnology (see www.nanosolar.com).DuPont has over 100 scientists and engineers working on producing advanced biofuels using biotechnology and other scientific disciplines.22Technology and technological innovation are in fact the backbone ofthe clean energy industry today. Generating energy is no longer about
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searching for fuel in the earth’s crust, as it was in the days of fossil fuels. Rather, generating energy today is about using advanced scientific disciplines to produce the technological tools and equipment that convertsenergy from renewable sources such as solar, wind, geothermal, and agricultural crops.Where do clean energy companies fit into the old Standard IndustrialClassification (SIC) scheme of classifying companies into certain industries? Do they fit into industrial, agriculture, electrical equipment, or energyclassifications? The answer is that they really fit into energy technology,a new classification that involves using technology solutions to producelow-carbon electricity or transportation fuel from renewable sources.Technological innovation is the key driver that will make clean energy technologies less expensive and increasingly competitive with fossil fuels incoming years. The ability to develop and harness new technologies is alsowhat will distinguish the most successful clean energy companies.
DEMAND FOR DISTRIBUTED POWERSOLUTIONS DUE TO GRID UNRELIABILITYThe blackouts in North America in recent years—not to mention the sporadic availability of electric power in developing countries—has driven thedemand for distributed, onsite power generation resources that homeowners and businesses can install at their own locations. These distributedpower solutions include solar and wind power systems, fuel cells, natural gas or diesel-powered generators, and various types of battery backupsystems. Businesses and homeowners can install these systems at theirbuilding locations and ensure some degree of protection from the vagariesof the utility power grid. In some areas, any excess power that a homeowner or business generates can be fed back into the grid and the homeowner or business can receive a credit for that power.Contributors to Wikipedia, the online free encyclopedia, have compiled a long list of serious global power failures that have occurred inthe past decade that highlights the poor record of grid electricity.23 In theUnited States, the largest blackout in history was the “Northeast Blackoutof 2003,” which involved 40 million people in eight U.S. states and 10 million people in the Canadian province of Ontario.24 The blackout caused anestimated $6 billion in losses.25 A study group eventually concluded thatthe cause of the blackout was high-voltage power lines that came in contact with overgrown trees in Ohio. Then, because of inadequate transmission system protection measures, the disruption cascaded through muchof the regional transmission area and caused the shutdown of more than
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100 power plants.26 The fact that some overgrown trees in Ohio ultimatelycaused $6 billion in losses is a little difficult to explain to power customerswho could only become more doubtful about the reliability of their localpower utilities and the entire North American transmission system. Powerconsumers in developing countries, who may receive power only duringcertain hours of the day, have even more cause to take matters into theirown hands and buy distributed power generation and backup systems.The cost of power blackouts and brownouts can be enormous for manybusinesses, with costs including damaged equipment, lost employee time,plant shutdowns, lost inventory, lost sales, and damage to a company’s reputation when that company cannot respond to its customers. These highcosts make it imperative for many businesses to have some type of selfgenerated power or at least backup power systems that can hold themover until the grid comes back to life. The unreliability of the grid is a keydriver for the industries that sell distributed power generating solutionsand power backup solutions.
RISING ELECTRICITY PRICESElectricity prices in the United States are rising. The higher cost of running a power plant is the main reason for rising electricity prices, both interms of higher labor costs, higher fuel input prices, and higher administrative expenses in general. In addition, utilities are playing catch-up afteryears in which regulators blocked electricity price hikes. In fact, the average retail price of electricity on an inflation-adjusted basis (in 2000 dollars) in the United States peaked at 9.24 cents/kilowatt-hour in 1985 andthen fell sharply by an overall 27 percent to a trough of 6.78 cents/kilowatthour in 1999.27 The inflation-adjusted retail price of electricity since thetrough of 6.78 cents in 1999 moved just mildly higher to 7.63 cents by 2006.That means that electricity in the United States today is about 17 percentcheaper on an inflation-adjusted basis than it was at its peak in 1985. Thatis a good deal for consumers but a bad deal for utilities that want to raiseprices to make up for lost profitability.United States electricity prices on a nominal basis have in fact risensharply since 2000 and are presently at record highs, as seen in Figure 2.7.The U.S. Energy Information Administration reports that average U.S. electricity prices were at record highs in 2006 of 10.4 cents/kilowatt-hour forresidential customers, 9.4 cents per kilowatt-hour for commercial customers, and 6.09 cents per kilowatt-hour for industrial customers. The average retail electricity price for all U.S. customers in 2006 rose to 8.85cents from 6.81 cents in 2000, which translates into +4.5 percent annual
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compounded price rise and an overall increase of 30 percent over the2000–2006 period. That rise in electricity prices significantly exceeds theaverage U.S. GDP growth rate and U.S. inflation rate.Rising electricity prices are a driver for clean energy technologies sinceU.S. electricity consumers are looking for efficiency solutions to reducetheir electricity usage and curb the rise in their monthly electricity bill.Rising electricity prices also provide a boost for the solar industry. As solarpower becomes more competitively priced, U.S. business and residentialelectricity users will increasingly consider installing solar power systems attheir locations, thus locking in an electricity price for the 25-year life of theequipment and protecting themselves from steadily rising retail electricityprices from the local utility.
COULD THE CLEAN ENERGY MOVEMENTFIZZLE IF OIL PRICES PLUNGE?While oil prices over the long-term are likely to trend upward due to the increasing costs of extraction, oil prices on a shorter time frame could easilysee weakness and perhaps even a sharp decline. For example, in late 2006and early 2007, oil prices fell sharply to $50 per barrel due to the excessive
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global inventories that developed after there were no major hurricanes inthe United States during the 2006 hurricane season. OPEC responded bypushing oil prices back up to the $60 per barrel area by cutting its production by 5 percent from late 2006 through early 2007. Nevertheless, the dropin oil prices to $50 per barrel in early 2007 showed that oil prices can stillfall sharply, particularly if OPEC loses its discipline.Investors in the clean energy sector must consider whether a sharpdrop in oil prices could kill the clean energy movement, which in fact happened in the 1970s and 1980s after the 1973 Arab Oil embargo. There wasan initial push for alternative energy and efficiency when oil prices spikedhigher on the Arab Oil Embargo, but the push for alternative energy fizzledwhen oil prices fell back.In analyzing this issue, it is critical to recognize that the clean energy sector must be divided into two very different segments: transportation fuel companies (ethanol producers), and companies tied to electrical power (solar, wind, power efficiency). A plunge in crude oil pricesand gasoline prices would clearly be very bearish for ethanol stocks sinceethanol prices closely track gasoline prices. As gasoline prices fall, ethanolprices typically fall as well, thereby undercutting ethanol company revenues and profits.However, falling crude oil prices should have only a minor negative effect on stocks tied to electrical power such as the solar, wind and powerefficiency stocks. Falling crude oil prices do have some minor negative consequences for solar, wind and power efficiency stocks because falling oilprices may reduce the urgency for new government regulations and incentives in favor of solar and wind power. However, clean energy stocks aredriven by two other major factors that are not tied to petroleum prices,namely, climate change and energy security. Lower oil prices would donothing to reduce the amount of pollution and greenhouse gases given offby fossil fuels and would do nothing to insulate western nations from future oil supply shocks or going to war over threats to critical oil supplies.In other words, solar and wind power and power efficiency stocks can stillperform very well even if oil prices were to drop sharply.In the United States, as in most other parts of the world, crude oilprices have very little effect on the generation cost of electricity or byextension the retail price of electricity. In the United States, electricalpower in 2006 was consumed from the following sources: 52 percent fromcoal, 21 percent from nuclear, 16 percent from natural gas, 8 percent fromhydroelectric, 1.6 percent from petroleum, and the rest from hydro andother renewable sources.28 In other words, the generation costs and retailprices for electricity have virtually nothing to do with fluctuations in crudeoil prices since petroleum is used for only 1.6 percent of U.S. electricityconsumption.
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FIGURE 2.8 Melvin Clean Energy IndexTM vs. Crude Oil Prices
Falling crude oil prices will not reduce electric power generation costsor retail electricity costs and will therefore not make solar and wind powerany less competitive against traditional forms of electricity generation.Fluctuations in crude oil prices should have little direct impact on stockprices for solar, wind and power efficiency stocks. In fact, this thesis issupported by the statistical data.Figure 2.8 illustrates how clean energy stocks since 2003 have generally risen along with crude oil prices as high crude oil prices have helpedspark more global regulation in favor of clean energy and have supportedethanol stocks. The rolling one-year correlation (shown in the bottom line)has fluctuated widely over the past five years, rising to 0.90 through 2005but recently falling to the current level of 0.51.The correlation of the Melvin Clean Energy IndexTM with crude oilprices is mainly caused by the inclusion of ethanol stocks in the clean energy index. The correlation between the Melvin Ethanol IndexTM and crudeoil prices is relatively high at 0.86 in the five years through January 2007 and0.64 in the year through January 2007 as seen in Figure 2.9.The correlation between crude oil and stocks tied to electricity is muchlower, thus supporting our thesis. In fact, in the year through January2007, the correlation between crude oil prices and the Melvin Solar PowerIndexTM was only 0.24, as seen in Figure 2.10. The correlation betweencrude oil prices and the Melvin Power Efficiency IndexTM was similarlylow at 0.25, as seen in Figure 2.11The conclusion is that sharply lower crude oil prices would indeedbe bearish for ethanol stocks and would perhaps slow the R&D push for
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FIGURE 2.9 Melvin Ethanol IndexTM vs. Crude Oil Prices
advanced biofuels, but should have little sustained negative impact onstocks tied to electricity such as solar, wind, and power efficiency. A sharpdrop in crude oil prices would not have a sustained negative impact on thesolar, wind, and power efficiency subsectors because lower oil priceswould not make electricity any cheaper and would not halt the other strongcatalysts for renewable and efficient power stemming from the need tocurb greenhouse gas emissions and improve energy security.
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FIGURE 2.11 Melvin Power Eﬃciency IndexTM vs. Crude Oil Prices
CLEAN ENERGY CATALYSTS:INVESTMENT CONCLUSIONThe clean energy sector enjoys strong drivers and catalysts that will provide a strong tailwind for the industry for decades to come. These driversinclude fossil fuel negatives, energy security, growing global energy demand, climate change, clean energy technology improvements, grid unreliability, and rising electricity prices. The clean energy industry, by providingsolutions to these problems, has the drivers that are necessary to createdouble-digit growth for decades to come.
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CHAPTER 3
The GovernmentPushStrong Enough to Get CleanEnergy to Fossil Fuel Parity?
keptics about investing in clean energy are concerned that the industry is generally not cost-competitive with fossil fuels and that the industry is being propped up only by government incentives, subsidies,regulations, and mandates. The fear is that governments, fickle as they are,may eventually lose interest in supporting clean energy, or the price maybecome too high for taxpayers to pay, and government support could fizzle,leaving the clean energy industry stranded as an overpriced white elephant.Government mandates and incentives have undeniably provided aboon for the clean energy industry. Further government mandates and incentives would, of course, be helpful. However, the success of the cleanenergy industry is no longer fully dependent on government support. Rapidtechnological progress is being made in the clean energy industry, and hugeamounts of private capital are flowing into it. Those efforts should be ableto get the clean energy industry to fossil fuel parity even if governmentsupport for clean energy peters out in coming years.There is talk that the U.S. government should support a “ManhattanProject” to promote clean energy or a “Green New Deal” in the words ofNew York Times columnist Thomas Friedman.1 However, the reality isthat the private sector has already started its own Manhattan Project tofind cost-effective clean energy solutions since enormous wealth will accrue to those companies and individuals that are successful. That wealthhas already started to flow to successful entrepreneurs in the clean energy space. For example, Dr. Zhengrong Shi, founder, chairman and CEOof China-based solar company Suntech Power Holdings (NYSE: STP) has
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become the wealthiest man living in China, by some estimates, with a fortune near $1.7 billion based on his holdings of Suntech stock.2The entire Manhattan Project, which focused on building a nuclearbomb during World War II, cost $2 billion dollars, which translates into$23 billion in 2007 dollars.3 By comparison, private sector investment inclean energy technology has already dwarfed the Manhattan Project. TheUN Environment Programme says that $71 billion in new investment capital flowed into the renewable energy and energy efficiency industry in thesingle year of 2006, adding to $50 billion of capital in 2005 and $28 billionof capital in 2004.4 The group is forecasting $85 billion of new capital in2007. That totals to $234 billion in just the four years of 2004 to 2007. Private investors and industry are providing a huge complementary effort tothe government’s push for clean energy.Nevertheless, there is every indication that the clean energy industrycan count on increasing government support in coming years rather thandeclining support. The United States, for example, is only getting startedon serious efforts to support clean energy. Congress may approve a renewable energy bill by late 2007 and the chances are good for a U.S. cap-andtrade CO2 emissions system by 2009 or 2010 (after the 2008 presidentialelection). In the meantime, clean energy support efforts are moving fullspeed ahead at the state level, as states tire of waiting for the U.S. federalgovernment to act. Meanwhile, many governments in Europe and Asia aremoving faster than the United States to support clean energy and a newKyoto global treaty is likely to replace the current treaty, which expires in2012.This book cannot describe every government support program onearth for clean energy. There are simply too many of them to catalog ina single chapter or perhaps even in a single book. In addition, governmentsupport measures worldwide for clean energy are expanding and changingrapidly and any list will quickly fall out of date. This chapter sticks insteadto the big picture with a view toward illustrating the strength of worldwide government support for clean energy. Government support for cleanenergy is something that has become ingrained in both government andpublic consciousness, and it is not likely to simply fizzle in a few years.
TYPES OF GOVERNMENT CLEAN ENERGYINCENTIVES AND MANDATESThere are a variety of tools that governments around the world are usingto support the clean energy industry, aside from direct funding of scientificresearch. A more thorough discussion of these policy instruments can be
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found in a paper on “National Policy Instruments” written by WorldwatchInstitute officials.5 Here is a quick summary of the main government policyinstruments to promote efficiency and renewable energy:
r Greenhouse gas emission curbs through a carbon tax or a cap-andtrade system. These measures make CO2 emissions more expensiveand raise the cost of using fossil fuels, thus making it easier for renewable energy solutions to become cost-competitive with fossil fuels. Thecap-and-trade system also provides economic incentives to companiesthat reduce their emissions, thus making emission reduction programsmore attractive.r Environmental regulation. Greenhouse gas emissions can also be regulated and curbed by direct government order as well. For example,the U.S. Supreme Court in 2007 ruled that the U.S. Environmental Protection Agency must take the regulation of greenhouse gases under itsjurisdiction.r Renewable Portfolio Standards (RPS) for power utilities. These measures force a utility to derive a certain percentage of its power fromrenewable electricity sources.r Feed-in tariffs for renewable energy producers. Feed-in tariffs providepower producers that construct wind or solar farms, for example, witha government-set price at which they can sell their power to the grid,thus effectively providing essentially a guaranteed investment returnon the renewable energy investment and making it easier for renewable energy projects to obtain bank financing for the capital costs ofthe project.r Net metering. Net metering laws and regulations require a utility toprovide consumer electricity users with a credit for any excess electricity that the consumer generates with an onsite power generationsystem (e.g., solar equipment) and feeds into the grid. This makes onsite renewable electricity generation systems more economical andprevents a utility from trying to block consumers from generating theirown electricity. Net metering is sometimes referred to as allowing theelectric meter to “spin backwards.”r Subsidies and tax breaks for renewable energy. A wide variety of incentives and tax breaks exist for businesses and consumers that invest in clean energy solutions (wind, solar, geothermal, hybrid vehicles, biofuels, etc.) or that invest in power efficiency projects. Thesemeasures include capital grants, investment tax credits, property taxexemptions, production tax credits, sales tax rebates, excise tax exemptions, and others.6r Low-interest loans and loan guarantees. Governments can providelow-interest loans and loan guarantees in order to ease financing of
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clean energy projects, thus eliminating the upfront capital cost barrierto projects and making the projects more economical and affordable.r Renewable energy credits. A framework of renewable energy creditsallows private investors to invest in projects to reduce greenhouse gasemissions and then sell those credits to buyers who wish to pay tooffset their greenhouse gas emissions.r Biofuel mandates for fuel blenders and retailers (“Renewable FuelStandards”). The U.S. government and other governments around theworld have set mandates that require transportation fuel blenders touse a certain percentage of biofuels in the fuel they provide to consumers.r Building codes and permits. Federal, state, and local governmentsuse building code regulations and building permits in order to requirebuilders and building owners to implement building techniques thatresult in improved building energy efficiency.r Lighting and appliance efficiency. Governments implement variouslaws requiring higher efficiency in lights and appliances, and even go sofar as to ban inefficient electrical devices such as incandescent bulbs.r Education and information dissemination. Governments implementvarious education and information programs to ensure that businessesand consumers are aware of energy issues and are aware of variousgovernment support programs.
RENEWABLE ENERGY TARGETS WORLDWIDETable 3.1 provides a summary of the long list of countries that have adoptedrenewable energy targets, which require that a certain amount of