Beyond Sunny Hopes and Windy Rhetoric

President Barack Obama hopes that new wind and solar projects will produce many thousands of new jobs. Renewable energy, after all, is manufactured energy. If domestic producers were to provide the thousands of component parts that a major shift to wind and solar energy requires, a side benefit would indeed be a domestic production industry and significant employment. Unfortunately, we do not currently have a domestic renewable industry capable of supplying those components. Neither do we have any real plans to develop one.

Failure to support a world-class domestic renewable industry in the face of greatly expanded demand will have two negative consequences. European Union and Asian countries will continue to capture most of the new jobs. And the increased domestic demand for wind and solar projects could easily outstrip the industrial capacity to supply the components, leading to bottlenecks and price increases. The expectation among renewable-energy advocates is that programs to create market demand will allow the technology to drive down costs, leading to increasing competitiveness and market share. But can this virtuous circle of increased demand leading to lower prices leading to further demand be realized? Only if the market demand is matched by programs to expand industrial capacity to supply the components and finished products demanded.

Even the relatively mild increase in demand for wind and solar over the past three years produced sharp price increases. The installed costs for wind have risen, according to the Department of Energy, from a low of $1,200 per kilowatt in 2003 to an average of $1,710 in 2007.

The costs of solar energy are a bit more difficult to pinpoint because installations vary dramatically from small systems for individual households to grid-sized projects hundreds of times larger. SolarBuzz, an international solar-energy research and consulting company, publishes an average of module costs that shows U.S. costs dropped to $4.35 per watt in 2005 and then climbed to $4.85 in 2008 and have stayed at that level.

Today, there is not a single federal program to support the development of a domestic renewable- manufacturing industry. And nothing in the initial Obama administration recovery plan supports one either. That needs to change if the promise of green energy and jobs is to be realized.

THE GREEN MANUFACTURING POTENTIAL

New wind and solar projects provide jobs for workers installing and maintaining them. And the jobs created by the installation and ongoing maintenance of renewable projects cannot be sent offshore. For example, the 330 megawatts of wind turbines at the Kittitas and Wild Horse wind farms developed outside Ellensburg, Washington, and the 400 acres of mirrors at the Solar One concentrating solar power project outside Boulder City, Nevada, provide visible evidence of renewable energy?s economic footprint.

However, the greater potential for renewable energy to stimulate the U.S. economy requires looking beyond installation and maintenance to the manufacturing industries that provide the wind and solar technologies. At the Kittitas, Wild Horse, and the Solar One projects, all of the major capital equipment was imported. The wind project developers imported towers, blades, and turbines from Europe and Southeast Asia to the wind farms. The Solar One project imported mirrors, vacuum tubes, and the power generator from Europe to Nevada.

Every megawatt of a typical wind turbine installed today is estimated to create 4.85 full-time equivalent jobs to manufacture, install, and maintain the project. About 70 percent of the total labor required for a typical wind turbine is in the manufacturing. For solar, the manufacturing requires about 75 percent of the total labor. As it now stands, any new national clean-energy policy that relies solely on accelerated incentives for installation of wind and solar projects will simply lead to an acceleration of imported equipment.

SUPPLY CHAINS AND STATE STRATEGIES

A modern wind turbine is assembled from a number of component parts, typically produced by different suppliers. One firm will roll large plates of steel into the columns that support the turbine. Another firm will specialize in the development of the turbine blades from carbon fiber materials. Still another will make the electronic controls for the operational control of the turbine. And so on.

At least 26 states have passed legislation to mandate in-state purchase of renewable electricity. To capture the manufacturing and job potential, states should look strategically to promote manufacturing supply chains. States should start with an analysis of their assets and look for ways to help existing industries to retool or add capacity to manufacture renewable components. Typically, development agencies assemble a package of incentives to lure renewable manufacturers to the state. States should go beyond that practice in several respects -- by getting directly involved in the development process.

One good approach is to streamline the permitting process and use it as a planning tool. The development of renewable projects requires obtaining scores of approvals, from environmental permits to local zoning approvals to transmission agreements. Only then does a project get to the stage of negotiating power-purchase agreements and project financing. Typically, a project developer will look for an electric utility to purchase the power generated from the project under a long-term contract. This contract will translate into the annual revenue that can be taken to banks to secure financing of the project.

The early permitting steps can be very expensive and time consuming. Until the permits are obtained, the project cannot go forward, creating a chicken-and-egg problem. However, many of the early permitting steps can be packaged in advance by a public agency. The agency can then offer them to developers in exchange for agreeing to use local manufacturers.

For example, Nevada used this approach in the 1990s when it offered use of a portion of the 1,400 square miles at the Nevada Test Site facility for renewable development. Funds were obtained from the Department of Energy to perform environmental impact assessments for the test site and a few other strategic locations, planning for transmission upgrades were undertaken, and early markets for renewable power were negotiated. In a request for proposals, these various public assets were offered in exchange for developing renewable, particularly solar, projects with an emphasis on projects that also located manufacturing in the state. Low natural-gas prices at the time stopped solar development, but the solar development sites are currently under proposed development.

In Ohio, a broad coalition centered in Cuyahoga County has focused on developing the offshore wind potential of the Great Lakes. According to estimates developed by the National Renewable Energy Lab, up to 250,000 megawatts of wind power can technically be developed on the Great Lakes. The technical potential from the Great Lakes alone is 12 times as much as the total installed wind capacity. If this offshore wind resource can provide competitively priced electricity generation, the investment to develop it would require at least $500 billion and perhaps more than a $1 trillion in new investments. The Cuyahoga Project intends to demonstrate that offshore wind turbines can generate electricity competitively. If initial pilot projects can achieve this breakthrough, it will open the 250,000-megawatt potential for commercial development. Built out over a 10-year period, the offshore wind projects would require between $50 billion and $100 billion of investment per year, which would be financed with long-term contracts to buy the output of the installations; the plan is for regional manufacturers to supply the component parts for the turbines.

The Cuyahoga group hopes to develop the Ohio industries and work force to supply the gearboxes, blades, towers, metal castings, electronic controls, and all the other component parts that will be assembled into the wind turbines. To negotiate for these manufacturing opportunities, the Cuyahoga group undertook early environmental assessments of likely sites. In addition, the group obtained a lease from the state for submerged lands for one or more pilot projects. The group is also planning on funding an underwater transmission line to link pilot projects to onshore transmission. Armed with these valuable assets, the group intends to negotiate with potential developers. The developers would get access to the site and transmission lines and in exchange agree to use qualified local manufacturers.

One option being explored is for a portion of the transmission capacity to be reserved for wind projects that meet in-state manufacturing content standards. Such trade-offs have been negotiated elsewhere. In Minnesota, a transmission line across farmland was required to set aside capacity for 60 megawatts of community-owned wind projects.

Securing access to transmission lines can be one of the most difficult hurdles for renewable projects to overcome. In some states, the existing lines can be close to capacity, which means that any new project has to wait for expansion of the lines before the new renewable-source power can be delivered to the local utility. Often, project developers will file for access to transmission lines only to be placed in a long queue. The greater the difficulties, the greater the value of securing access to transmission lines would have for developers.

However, while states can be innovators, there are problems with relying mainly on state-level initiatives. States acting alone find themselves in a zero-sum game to pursue new industry, often bidding against each other in subsidy wars. It?s not clear that a balkanized wind and solar industry, with each state favoring its own local suppliers, is necessarily the best way to shift to a renewable path. A solid program of federal supports to create a world-class domestic renewable industry will move beyond the zero-sum trap states alone will tend toward.

COMPREHENSIVE FEDERAL POLICIES

Federal energy policy must look beyond providing incentives for new renewable projects and look as well at supporting the growth of a globally competitive domestic renewable industry. Here are the major elements critical to a successful program:

Financing Incentives. On the financing front, the 2005 Energy Policy Act includes a provision authorizing Clean Renewable Energy Bonds. These bonds, known as CREBs, subsidize costs by offering the purchasers of the bonds a tax credit in lieu of an interest payment. Qualified projects apply to the Treasury for an allocation of bonds. If they are selected, they sell the bonds but are only responsible for repaying the principal.

CREBs to this point have only been available for public bodies that sell bonds and use the proceeds to finance renewable-energy projects. Sellers of the bonds in effect get an interest-free loan. The bond program could be expanded to support new or expanded renewable manufacturing.

Research and Development. The federal government can also become much more active in promoting research and development. Competitive advantage is derived from technological breakthroughs in everything from nanosolar advances to solving wind-turbine gear-box problems. Manufacturers of components are intimately aware of critical problems -- such as the need to reduce the weight of the turbine components, make blades lighter, make generator transmissions more durable, and make solar-energy inverters, which convert direct-current solar electricity to alternating-current solar electricity, last longer. The list of problems is endless, and the flip side of that is the potential for improvement is endless. Federal research and development support can link the national research community, in particular the national energy labs, and the manufacturing community. This linked research and development, through to the commercialization phase, will not only assure that the domestic renewable industry is world-class but will also help drive down the cost of renewable energy. This is exactly what has happened in bio-tech, thanks to supportive national policies -- and what has not happened in renewable energy production.

Commercialization. Even when a research and development project is successfully completed from the point of view of the researchers, it may ultimately fail if it never makes it into commercial practice. Commercialization policy supports the translation of research and development programs into commercial applications. There are many ways to do this but they all have elements in common. The effort to be commercialized must be "important" from the public?s point of view. The private owners of the research and development must have "skin in the game," usually accomplished through a requirement that they provide at least 50 percent of the investment for the initial venture. Conversely, the public investor needs both to cost-share and to reap a share of the benefits if the project pays off.

Title XVII of the 2005 Energy Policy Act called for providing loan guarantees for "significant new technologies" that contributed to climate-stabilization goals. In the three years-plus since the passage of the legislation, the Energy Department has not issued a single loan guarantee. The alternative to loan guarantees would be a federal program that offers a grant to provide 30 percent to 50 percent of the initial commercialization cost. Basically, the government needs to become something of a venture capitalist or partner if we are to jump-start green-energy production.

MOVING AHEAD

After decades of neglect, the Obama administration is moving to develop a climate-stabilization policy. Any serious effort here will require a major reworking of the U.S. energy sector. Renewable-energy technologies, which provide needed energy while reducing carbon-dioxide emissions, will play a major role in these efforts. Even the initial efforts here will require thousands of megawatts of renewable projects, projects that will require hundreds of billions of dollars in new investments.

At the same time, and after similar decades of neglect, the Obama administration is tackling the erosion of the economic health of middle-class American families. The vice presidential task force taking on this problem announced that its initial meeting would be on green jobs.

There is great anticipation that the widely shared goal of doubling renewable energy generation over the next three years will provide thousands of green jobs. It can, but we should not celebrate early. The prevailing mind-set at the federal level is to pull renewable projects along by providing incentives for developers. But this leaves 70 percent of the potential jobs on the table. The full potential of a major renewable-energy-development effort to create green jobs will only come if we also support the development of a domestic renewable-energy industry.

The greatest potential and competitive advantage of such an industry is its ability to evolve rapidly and offer technologies that produce electricity at lower and lower prices with no carbon emissions, subsequently decreasing our dependence on foreign fossil fuels. A world-class renewable industry can be created here, but the effort requires financial incentives, targeted research and development, and a serious effort to commercialize important innovations.

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