Will Alternative Energy Run Out Of Gas?

By Martin LaMonica

Now some of the pillars underpinning green technologies are wobbling. Oil prices have plummeted more than 50 percent since the summer, making traditional energy sources look a lot more affordable than they did six months ago for businesses and consumers alike. And the global credit crisis that has sucked the wind out of the economy has done damage to the funding of alternative energy projects as well.

The hardest hit by a freeze or reluctant lending are renewable energies which are already commercial, or on the cusp of getting there. These aren't cheap little startups we're talking about: Constructing a biofuels plant costs upwards of a $100 million while connecting a solar power plant, capable of powering tens of thousands of homes, is in the range of $500 million and $800 million, depending on the size. In the current credit market, it's tough to come up with that money.

But don't write off clean tech as another casualty of the souring economy quite yet. Today's clean energy field is a lot more resilient than in the days of the 1970s oil price shock for one simple reason - society's priorities have changed since then. Climate change and energy security are front-page issues that still command the attention of consumers, businesses, and politicians, regardless of the economy.

Industry is also catching up to the demand for greener and energy-efficient goods, everything from non-toxic cleaning products to small wind turbines. The solar industry projects that cost reductions from technology and manufacturing scale will make solar power match the retail cost of electricity in some areas within a few years.

Nonetheless, the ballyhooed clean tech revolution is being slowed. The length of that delay hinges on the economy, of course, and government policy. Federal incentives to stimulate the transition to more diverse energy sources could serve as a backstop to keep the alternative energy movement on track for both economic and environmental reasons, according to Mark Fulton, the global head of climate change investment research at Deutsche Bank. That is, if there aren't other spending priorities, like bailing out Wall Street.

"The current debate in the next year will include arguments around energy security, which will be combined with the climate change issue, in order to get people focused on the fact that it's a necessity and an opportunity," Fulton said.

Business fundamentals

Just a few years ago, hardly anybody heard the terms "clean tech" or "green tech," which describe products that make better use natural resources. Renewable energy and efficiency certainly aren't new. But the clean-tech wave is founded on an important idea: a company can make money with environmentally friendly goods. GE's Ecomagination initiative and Wal-Mart's solar-powered "sustainable" stores are two high-profile corporate examples. But there are hundreds of small firms which have formed over the past five years.

Venture capitalists - the same people who bankrolled the dot-com boom - have lavished money on green-tech firms, making it the fastest growing investment sector. But these start-ups come with a hitch, one that's only getting worse with the credit crisis: Energy technology start-ups typically require far more money than what venture capitalists are equipped to invest to take a product from the lab to the market.

The current fiscal environment makes getting that "late-stage" funding even tougher and, if debt is involved, more expensive. In particular, financiers of energy projects don't like technology risk. Wind turbines are well proven and the returns predictable. But understanding the economics of making ethanol from wood chips at commercial scale is still a black art at this point.

To some, that late-stage funding barrier exposes a structural flaw when it comes to technical innovation in energy, environment, and water. "We need a new financing system," says Matthew Nordan, the president of emerging technology advisory firm Lux Research. "The old one from the 1970s is unlikely to make it happen."

A role for government?

But even amid slumping financial markets and volatile energy prices, there's cautious optimism regarding alternative energies. Why? Politicians - most notably both major presidential candidates - say renewable energy will play a major role in fixing the nation's energy problems.

Government spending is the real wild card. State and federal governments have helped get many fledgling clean-energy companies out of the nest. Michigan and the Department of Energy, for example, funded construction of a plant to make ethanol from wood chips, one of several DOE-backed projects. States tend to be eager to promote clean-energy businesses to help grow their economies and create jobs. But these projects are likely to be squeezed as tax receipts fall and budgets scrutinized.

Renewable energy industries like wind, solar, and geothermal, got an important federal tax credit extended last month. Among other things, consumers can now get a 30 percent tax credit for solar electric panels.

Clean-energy advocates say much more should be done, such as bulking up the power grid and mandating that utilities get a percentage of their electricity from renewable sources.

On climate change, experts believe it's only a matter of time before there are federal laws to restrict greenhouse gas emission from heavy polluters, like utilities; California and the Northeast states have already pushed ahead with their own carbon-emission reduction programs.

More immediately, the world leaders' reaction to the financial crisis could determine whether and how quickly clean energy technologies will make an impact on the energy business.

Governments may treat the economic crisis as a reason to backpedal on emissions reduction targets. Another school of thought is to make energy and environment an important part of government stimulus spending to upgrade infrastructure.

Many technologies - solar, wind, geothermal, cellulosic ethanol - can be scaled up today. Others, such as storing carbon underground at coal plants, need more active government involvement to make economically feasible, said Fulton of Deutsche Bank.

"We do indeed have many technologies that are in commercialization, or close to it, that can have significant impacts on the whole energy and electricity mix," Fulton said. "But there are still some looming that need public and private capital to keep pushing them down the cost curve."
By Martin LaMonica