Obama’s investment horizon for clean energy
Like a Byzantine emperor, a U.S. president’s every public move is scripted to send signals about his priorities to Congress, the electorate, business, and the vast federal bureaucracy that will actually be responsible for formulating and implementing decisions in his name.
Presidential politics is a theatrical performance in which the president takes a small number of important decisions personally, but is responsible for setting the tone and direction for many smaller ones that will never reach his desk. If he can reach out to voters and businesses he can also reshape national priorities.
So President Barack Obama’s high-profile speech on energy independence this week, and public signing ceremony for presidential directives on fuel economy and climate issues, was meant to provide a strong signal of his commitment to an ambitious and costly energy agenda, despite the mounting economic crisis and other pressures on both the motor manufacturing industry and the federal budget.
The speech was intended to reassure progressive supporters that crisis management will not distract the administration from pursuing longer-term transformational changes in energy policy. It was probably also designed to provide an early payoff to liberal voters, even as the president seems set to disappoint them in other areas.
But the president’s most important audience was the business community. By emphasizing the eventual goal of energy independence, however vague some of the specifics, Obama’s speech was meant to create a “planning horizon” for corporations and investors.
The intention is to guide investment spending towards fuel-efficient technologies and renewable sources of energy, sustaining expenditure on research, development and commercialization despite the slump in oil prices and global slowdown.
In effect, the administration is trying to delink spending on alternative energy and fuel-efficient technologies from the business cycle and changes in oil prices.
By convincing investors it is serious about shifting the pattern of energy production and consumption, and guaranteeing a market for these technologies in the longer term, the administration wants to persuade investors and firms to “look through” short-term cyclical weakness in oil prices.
CRISIS IMPACT ON ENERGY POLICY
The interaction between the financial crisis and climate and energy policies is complex. On the positive side, prolonged worldwide recession is cutting total energy consumption for the first time since the 1970s and reducing associated emissions of greenhouse gases (GHGs). The global slump will almost certainly reduce emissions in both 2009 and 2010 relative to 2007.
More important is the longer term impact. If the crisis, and the unsustainable accumulation of debt and inflationary pressure which preceded it, convince policymakers recent growth rates were unsustainable, and force them to revise down future global growth estimates, the result would be a permanent shift to a lower trajectory for both growth and emissions.
By mid-century, the world economy would be smaller than in previous projections, and fewer people would have been lifted out of poverty, but GHG emissions would also be lower.
So one effect of the crisis is that it may have bought policymakers an extra five or even ten years to roll out new technologies and programs to limit emissions and stabilize atmospheric concentrations of GHGs.
On the negative side, the cyclical drop in oil prices is blunting commercial incentives to develop alternative energy sources and efficient technologies, and risks delaying their adoption.
First-generation biofuels such as corn-starch ethanol need oil prices of $70 to be commercially competitive; more advanced biofuels such as cellulosic ethanol need even higher ones. In fact, all forms of alternative energy cost more than fossil sources when oil prices are at low to moderate levels ($30-60 per barrel).
Similarly, fuel-efficient technologies remain more expensive than conventional alternatives, especially in terms of upfront costs, and are unlikely to be adopted unless and until oil prices rise again. The decline in oil prices is stalling the switchover.
At the same time, the collapse in energy prices has undermined investors’ enthusiasm for start-up companies and experimental projects that aim to bring new sources and efficient technologies to market. Most of these technologies remain unproven and the risk of failure is high, so they depend heavily on venture capital funding and high-risk project financing from the banks.
Both markets are now closed. With oil prices likely to remain depressed for some time, the risk of technological failure is now compounded by an unfavorable commercial environment.
Venture interest is falling. Several conventional oil companies that were sponsoring alternative projects such as wind farms and advanced ethanol plants have scaled back their involvement.
Independent venture funds remain wary since the market for initial public offerings (IPOs), which they rely on to exit investments in alternative energy companies and elsewhere, remains closed; it is not clear when it will re-open and on what terms.
Even for promising technologies where the risk of technical failure is relatively small, the crisis has dried up sources of project finance. Bluefire Ethanol Inc warned investors last month it had been forced to postpone construction of a cellulosic ethanol plant because of problems with costs, permits and financing. Suncor has delayed expansion of a conventional corn-starch plant by more than a year to save costs.
GUARANTEEING MARKETS AND PRICES
The Obama administration’s task is to convince investors energy will be much more expensive in future (making alternative sources and efficient technologies competitive) and that for any level of energy prices it is prepared to prioritize non-fossil sources (using taxes, fees and subsidies if necessary).
In that sense, decisions announced earlier this week were minor. The president showcased loan guarantees for new power transmission lines; directed the National Highway Transportation Safety Administration to publish fuel economy standards for the 2011 model year; and instructed the Environmental Protection Agency to review its earlier decision to oppose attempts by the state of California to regulate carbon dioxide emissions.
The president did not make a final decision about fuel economy, or whether California and other states will be allowed to pre-empt federal regulation of greenhouse gases by introducing their own rules. He also shied away from controversial topics such as raising gasoline taxes or introducing a cap-and-trade program to curb carbon emissions and support other technologies.
The administration clearly intends to keep its options open and avoid opening up a controversial debate before it is ready and when the president is heavily engaged in other areas.
In the long term, however, the administration will have to contemplate all these things if it wants to raise fossil energy prices, boost alternative sources of supply and encourage conservation.
The importance of this week’s announcements therefore lay in their symbolism.
By reaffirming the president’s commitment to a transformative agenda, even in broad terms, they give greater certainty to senior executives at the automakers that will need to approve costly investments in fuel efficient vehicles that the federal government will guarantee them a market.
By indicating the administration is serious about pursuing transformative change, they also give investors greater confidence about backing long-term alternative fuel projects with highly speculative payoffs.
Lastly, by offering federal loan guarantees and concessional finance for upgrading the power grid, Obama indicated the federal government may have a role to play in helping bridge the financing gap between promising early stage technologies and full commercial adoption, by shouldering some of the development risk.
If the president’s public actions are important mainly for their choreography, Obama has sought to give clear commercial incentives for investors to start allocating capital to alternative energy and efficient technologies again.