The political risk of RE

Renewable energy is about delivery of commodity electrons at a price competitive with other sources of electricity. As a replacement for grid power, RE is today is not cost competitive. Instead, it’s completely dependent on subsidies, RE quotas (like California’s Renewable Portfolio Standard), taxes on fossil fuels and other government interventions.

So today, the renewable energy manufacturers and operators toil on in a difficult intersection between businesspeople, social activists, and a special interest lobbying group. Meanwhile, many energy efficiency products offer payback periods as short as two years.

The RE execs face a threefold uncertainty. As executives, they are creating new technologies with considerable technology risk, at the same time that low cost offshore (mainly Chinese) producers seek to commoditize most of the business. As social activists, their cause is currently in ascendancy, but as with any political issue, public opinion can shift. And as lobbyists, asking for government subsidies at a time when the government is going broke (the Feds) or already broke (California) is a tenuous position at best.

The latest threat to public opinion is Climategate, the candid e-mails by British (and US) climate scientists suggesting efforts to exaggerate the global warming data and demonize opponents. Global warming skeptics have seized on these revelations in hopes of turning back efforts at counter-climate change controls.

One such skeptic is author and Daily Telegraph blogger James Delingpole who predicted doom for RE companies:

If you own any shares in alternative energy companies I should start dumping them NOW. The conspiracy behind the Anthropogenic Global Warming myth (aka AGW; aka ManBearPig) has been suddenly, brutally and quite deliciously exposed after a hacker broke into the computers at the University of East Anglia’s Climate Research Unit (aka Hadley CRU) and released 61 megabites of confidential files onto the internet.

Delingpole’s argument (even under the most favorable circumstances) is vastly overstated. Even if the revelations caused a dramatic shift of public opinion against policy intervention — which I think highly unlikely — current policy initiatives would continue on their own inertia for a few years. Subsidies and mandates may not get renewed or expanded, but they aren’t going to be cancelled wholesale.

If solar power reaches grid parity by 2012 (as some claim), it would then be able to stand on its own two feet in various parts of the country with high-irradiation or high grid power costs. This certainly would be enough to keep driving costs down the experience curve, to give solar (or other RE) an eventual cost advantage.

The worst case scenario is that grid parity takes longer — and that in the meantime, bankrupt governments end subsidies in favor of other priorities (food, housing, public safety).

Even if that happens, unelected governments in totalitarian states face far fewer limitations on their power, and could continue subsidizing their domestic manufacturers until they dominate the market via superior costs. This wouldn’t be a very attractive outcome for US entrepreneurs and VCs, but it would prove their thesis that RE will inevitably supplant fossil fuels.