Beyond Boom and Bust: Report Overview

Despite robust growth and recent improvements in price and performance, a boom in US clean energy technology ("clean tech") sectors could now falter as federal clean energy spending declines sharply, according to a new report published today by some of the country's top energy analysts.

To both sustain clean energy growth and put the United States' clean tech sectors on an accelerated path to subsidy independence and global competitiveness, analysts at the Breakthrough Institute, Brookings Institution, and World Resources Institute counsel a thorough revamping of American clean energy policies to prioritize innovation and cost declines.

Clean energy sectors have surged in recent years, driven by both private sector innovation and entrepreneurship and a historic expansion of federal support for clean tech sectors. Renewable electricity production has expanded; prices have fallen for wind, solar, advanced batteries, and other clean tech products; and construction has begun on the first US nuclear reactors in decades. Clean tech firms were among the few to add jobs during the depths of the great recession, with employment in the sector expanding 12 percent from 2007 to 2010.

Yet clean tech owes much of this growth to historic federal policy support, which the new report estimates will total $150 billion from 2009 to 2014 - a three-fold expansion from cumulative 2002-2008 totals.

Now, much of that support is set to decline, as stimulus funds dry up and a number of tax credits and other programs reach their sunset dates or volumetric limits. Without Congressional action, federal clean tech support is slated to plunge 75 percent from 2009 to 2014, the report estimates.

America is now at a key inflection point, with federal clean tech funding this year set to decline 50 percent from 2011 levels.

Clean tech segments examined in the report include renewable power, nuclear, carbon capture, energy efficiency, high-speed rail, smart-grid, biofuels, electric and plug-in vehicles, and advanced batteries. While the specific impacts of declining federal support on these clean tech segments differently, several sectors are likely to experience new headwinds.

Despite a 27 percent improvement in wind turbine prices from 2008 to 2011, the boom in cheap shale gas has moved the goal posts for wind power, which is now cost competitive without subsidy only at the best wind sites near existing transmission lines. Solar prices have plummeted in the last few years and are now within reach of "grid parity" with retail electricity prices in several sunny states with high-electricity costs. Yet rooftop installations are only fully subsidy independent in Hawaii, with its extremely high electricity costs, and without subsidy, central station solar PV and thermal plants cannot yet compete in wholesale markets against low-cost gas plants. An American renaissance for nuclear power will also be severely limited unless capital costs for new reactors fall significantly.

See Breakthrough Institute fact sheet, "Gas Boom Poses New Challenges for Renewables and Nuclear."

Costs pose barriers to electric and plug-in hybrid vehicles and advanced biofuels as well. And smart grid, high-speed rail, and many energy efficiency technologies require policy support to overcome infrastructure, finance, and other barriers to adoption.

Yet this is exactly the wrong time for America to walk away from these clean energy technologies.

What's needed is renewed support for clean tech sectors that charts a new path toward subsidy independence. Policy makers should reform clean energy subsidies to reward innovation and help to develop a robust industry that can thrive without public subsidies.

The headwinds facing clean energy technologies are more the result of growth and success than a sign of mounting failure. Like any fast-growing sector, the boom in clean tech markets has attracted numerous new competitors. And as clean energy industries grow to become more substantial contributors to America's energy mix, the costs of the subsidies once necessary to jumpstart industry growth are mounting. A renewed focus on innovation and technology improvement is the key to overcoming both challenges.

What should a smarter deployment policy designed to spur both market demand and continual innovation look like?

The authors recommend policies that provide sufficient certainty for investment decisions, but also set expectations that subsidy levels will decline over time. They would promote a diverse energy portfolio and maximize the impact of taxpayer resources by limiting transaction costs and ensuring clean tech can efficiently access affordable private capital. And they would reward innovators who deliver better prices or performance.

Whether through tax credits or payments for clean power producers, consumer rebates for electric vehicle purchase, or performance standards for new vehicles, fuels, or power plants, a new suite of clean tech deployment policies must simultaneously drive both market demand and continual innovation.

But subsidy reform alone will not be enough. The United States must also leverage its strengths as an innovation leader and increase funding for energy research and development. It must support a robust innovation system that harnesses advanced manufacturing capabilities, regional industry clusters, and a high-skilled energy workforce.

In exchange for sustained support, policy makers should demand that industry focus laser-like on reducing costs through innovation. Cost-competitiveness with fossil fuels is achievable. But until that point, clean tech companies will remain under threat of subsidy-expiration and political uncertainty. Innovation is the only route beyond the policy-driven boom and bust cycles that imperil the industry.

The time has come for a new clean-energy framework, one that accelerates technology innovation and reduces costs, guarantees that scarce public resources will be used wisely, and continues the maturation of the nation's most competitive clean tech industries.

If industry leaders and policy makers alike make innovation their guiding principle, clean energy can both power America and fuel exports to energy-hungry global markets.

Click here to download the full report.

Read on for the Executive Summary of the report.

"Beyond Boom and Bust" - 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).
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.

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.

Along these lines, this report finds that:

• • 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.

• • 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

• • 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.

• • 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.

• • 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.

• • 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.

• • 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.
  • 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 advisors 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).

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:

• • 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.

• • 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.

• • 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.

• • 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.

• • 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.

• • 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.
  • 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.