The Danger of Painting Green Things Black with the Solyndra Brush

Posted on October 12th, 2011 by
   

The blowback from Solyndra’s bankruptcy has been severe and highly politicized.  Solyndra execs – Brian Harrison (CEO) and Bill Stover (CFO) – plead the Fifth before the House Oversight and Investigations Subcommittee of the House Energy and Commerce Committee.  As the two were raked over the coals by committee members, more than one commentator drew the comparison between this hearing and the atmosphere surrounding the Un-American Activities Committee hearings of the McCarthy era.  Televised “talking heads” and political pundits have also been making hay with Solyndra.  As the bankruptcy and intrigue have opened yet another wound in Obama’s Presidency, the rush to capitalize on it by decrying Obama’s “green jobs” initiative has been spectacular.  It is not our goal to opine on whether this outcry is justified or unfair.  However, we are concerned that the political and public backlash surrounding Solyndra risks discrediting  promising and economically justifiable demand-side initiatives simply because they fall under the banners of “green” and “clean.”

It is always useful to re-visit the facts when situations get heated.  Let’s look at energy efficiency.  There are a number of credible studies that examine the U.S. market size and the economic benefits of energy efficiency.   The Urban Land Institute in a 2010 study calculated that over the next 10 years there will be a $190 billion market opportunity in retrofitting existing commercial buildings.  The American Council for an Energy-Efficient Economy (ACEEE) in a 2008 forecast calculated that the annual energy efficiency market across all market sectors will be $700 billion by 2030.  And McKinsey & Company, the management consulting firm, has estimated that energy efficiency retrofits could yield over $1.2 trillion in savings by 2020, far outstripping the $520 billion capital investment required to unlock this hidden value.

The conclusion is clear regardless of which number you embrace:  Energy efficiency presents enormous economic opportunity.  Embedded in this opportunity are a host of follow-on benefits.  For instance, successful energy efficiency projects result in financial savings and free cash flow for companies, thereby improving finances and unlocking capital for investment in other value creating initiatives.  Each project not only deploys American workers but also has the potential to pull in American Made products from manufacturers such as Honeywell, Cooper Industries, Carrier, Lutron and Emerson, thereby creating further economic growth.  Energy efficiency projects also help make our nation’s grid infrastructure more stable and reliable by reducing electrical load and T&D requirements.

Jim Rogers, CEO of Duke Energy, has been vocal over the years in his support of energy efficiency as the Fifth Fuel – an energy resource that stands alongside coal, nuclear generation, natural gas and renewable generation.  Arguably, energy efficiency should be viewed as the First Fuel as it is the lowest cost energy resource available.  The Tennessee Valley Authority (TVA) completed its comprehensive Integrated Resource Plan in March of this year and its data on energy efficiency and demand response (EEDR) is powerful.  In comparing the levelized cost of electricity (LCOE) – a normalization factor that takes into account energy production and lifetime costs – TVA found that EEDR is clearly the lowest cost resource of all the generation strategies available to it.  As highlighted in Table 1, TVA found that EEDR has a LCOE of $19 – $40/MWh compared to nuclear at $71/MWh, coal at $125/MWh and natural gas combustion turbines at $250/MWh.  Interestingly, the LCOE of solar is $295/MWh, highlighting that photovoltaics can’t yet compete against TVA’s other options.  Given the economic merits of EEDR, TVA’s Integrated Resource Plan will expand the contribution of EEDR by 3,600MW to 5,100MW by 2020.

Table 1:

Source of Capacity

Levelized Cost of Electricity ($/MWh)

Solar

$295

Gas CT

$250

Coal

$125

Gas CC

$120

Biomass

$73

Nuclear

$71

Wind

$70

Energy Efficiency & Demand Response

$19 – 40

*Source:  Tennessee Valley Authority, Integrated Resource Plan March 2011

We would be remiss if we failed to highlight the environmental benefits of energy efficiency.  It is well known and logical that the cleanest and most sustainable source of energy is that which you do not use.  Setting aside the arguments of whether human induced climate change is real or not, reducing power generation – particularly coal, which is still this country’s primary generation source – will reduce the release of CO2, NOX, SOX and Mercury into the environment.  McKinsey, in its study, calculates that the elimination of the $1.2 trillion in waste it identified would translate to a reduction of 1.1 gigatons of green house gas (GHG) emissions.  Unfortunately calling these emissions GHG in today’s political climate risks having the data discredited — it may simply be better to call it “bad stuff.”

So what is the best way of keeping the baby from being thrown out with the bathwater?  We believe the answer lies with the White House and Department of Energy (DOE) exiting the business of trying to pick winners.  Any attempt to do so in this climate will only invite politically motivated scrutiny and criticism.  Efforts should be redoubled on creating a policy and tax environment that encourages private sector investment in those technologies and projects the market deems most promising.  Examples of important initiatives that can benefit the energy efficiency market (portions already included in the DOE’s Better Buildings Initiative announced in February) include:

  • Changing the tax treatment for investments in energy efficiency to be on par with the tax treatment for renewables (this is several steps beyond current legislation that proposes changing EPACT tax deductions to tax credits);
  • Implementing a DOE loan guaranty fund to assist private sector commercial and industrial building owners to secure outside capital to help fund energy efficiency improvements; and
  • Supporting states and local governments with technical assistance and investment to update building codes and regulations that govern energy performance standards with the goal of eventually driving towards zero net energy use.

This is a critical time.  The Energy Savings and Industrial Competitiveness Act of 2011 (S. 1000), sponsored by Sen. Rob Portman (R-Ohio) and Sen. Jeanne Shaheen (D-N.H.), is awaiting Senate approval.  This legislation advances many important changes that will foster investment in energy efficiency and broaden its adoption.  All indications are positive that S. 1000 will pass.  Although one Solyndra-like event could jeopardize its chances, the good news is that the merits of energy efficiency are so strong that both sides of the aisle can line-up in support of S. 1000 despite whatever they may believe about “clean” technologies and “green” job creation.

Written by Erik G. Birkerts and Thomas G. Knight, Evergreen Growth Advisors. Erik G. Birkerts and Thomas G. Knight are the Founding Partners of Evergreen Growth Advisors, a boutique growth strategy advisory firm serving clients in the Clean Energy industry.  

 

 

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