Within the past decade renewable energy has experienced enormous growth on the US market. An illustration of this is the fact that the capacity of wind energy has grown 32 percent annually for the past five years. This growth is partially a consequence of increasingly high oil prices reaching a maximum of 147 dollars per barrel in July 2008. This gave rise to a larger willingness to invest in renewable energy and it lead to an abundance of new projects within wind, biomass, solar energy, geothermal energy and hydropower. Even though oil prices have fallen again, the average American has become much more aware of the impacts of the country’s dependency on fossil fuels.
A lack of Investment
In 2008 the American market was hit by the financial crisis and the industry for renewable energy was affected, just like most other industries. The renewable energy industry is greatly dependent on financial investors as it is a very capital-intensive industry. Financial investors were lined up to invest in renewable energy during the period where the price of oil steadily rose, because it made renewable energy cost competitive to oil and natural gas. Financial institutions such as Lehman Brothers and AIG were among the biggest investors, but with the collapse of the financial sector, capital is now the scarce resource. The willingness to invest in renewable energy has been driven by a number of tax credits; the Investment Tax Credit, a tax credit for investors and developers depending on the size of the investment and the Production Tax Credit, a tax credit for investors and developers depending on the amount of energy produced. However as the financial sector is having difficulties generating profits, these tax credits become less attractive. At the same time the price of oil has decreased considerably, and as a result renewable energy is no longer a cost competitive alternative. Consequently the industry for renewable energy is experiencing a lack of investment and a large number of projects have either been postponed or cancelled.
Political Support
The US government approved “The American Recovery and Reinvestment Act” in January 2009. The act provides 787 billion dollars for a stimulus package in an attempt to recover the economy. A large part of the 787 billion dollars is allocated the development of renewable energy in the US. The act does not only include a number of incentives that makes it attractive to invest in renewable energy, it also contains a loan guarantee program ensuring loans for renewable energy projects. Besides this, a number of environmental regulations have been tightened; most significant is the ambition to ensure that 10 percent of electricity comes from renewable sources by 2012 and 25 percent by 2025. The toughened regulations and the availability of loans will inevitably increase the demand and context for renewable energy. An immediate conclusion of this is that the renewable energy industry in the US will experience growth once again in the not so distant future.
The Future of Renewable Energy
However it is hard to predict when the curve will start going upwards again. At the end of May this year a group of renewable energy industry associations sent a letter to Obama. The inquiry was sent, as there was still no access to the loan guarantee program allocated for renewable energy investments. In the letter they write: “With access to these loan guarantees… our member companies will be able to start construction of planned projects that would otherwise need to be delayed or canceled due to the current capital market conditions”. As long as there is no access to this program and there are no changes within the financial sector there will be very few investments in renewable energy. As a result the investors will demand a higher return on investment and significantly fewer projects will be considered worth the investment. The small players in the industry will have a hard time surviving during this period and a likely consequence of this will be a consolidation of the industry. An example of this is the Spanish company, Iberdola Renovables SA, the world’s largest developer of wind farms that just bought a number of small wind energy companies in the US.
It is impossible to say when the different incentives will start to have an effect. However, even though the decline in the industry may not be complete yet, and a number of small companies will be acquired or forced out of business, there is hardly any doubt that the future for renewable energy in the US is bright. As a result the renewable energy in the US poses huge opportunities for the Danish companies within this industry that are willing to make the necessary investments to position themselves on the US market.
16 June 2009