The Evolving Face Of Renewable Energy

Wednesday, September 19, 2012 - 10:46

Renewable energy is at an important crossroads for several reasons. In particular, the following concerns have been brought to the forefront: the continued availability of subsidies that can impact the economic feasibility of renewable energy projects; the potential market impact of large quantities of inexpensive Marcellus formation natural gas entering the energy marketplace; and the emerging ability to cost-effectively store large quantities of energy generated from renewable sources such as wind and solar.

Today, many renewable energy resources require some level of subsidization in order to be cost-competitive as an energy source while at the same time being profitable for owners and operators.  Subsidies can be direct or indirect and can take the form of production tax credits, grants, loans or above-market power purchase agreements.  The existence, nature and size of these subsidies at the federal level have become front-page matters in this fall’s elections and are among the issues where the parties and their candidates have articulated clear, yet diametrically opposed visions.  From an economic and societal perspective, this year’s elections may signal a fundamental shift in federal renewable energy policy for some time to come.

Several significant federal renewable energy subsidy programs 
are either on the eve of expiring or their future existence is being questioned. In certain instances, the pending sunsets of specific subsidies are already chilling development of projects and leading to job reduction announcements within the renewable energy supply chain.  In several states, including New York, these changes may be leading to more aggressive state-level incentives for renewable energy.  For example, New York recently announced an expanded subsidy for residential and commercial solar projects. There has also been discussion in some states of expanding the state’s role in purchasing energy generated from renewable sources.  Some states are also looking for opportunities to bundle other state-level resources with renewable energy subsidies through, for example, encouraging development of renewable energy projects on brownfield sites.

The significant expansion of natural gas production from Marcellus and other shale formations is also impacting renewable energy.  The near- and long-term expansion of the natural gas supply in the United States is keeping energy prices relatively low and encouraging the owners of coal-fired power plants to repower with natural gas. The ability to displace “dirty” coal with “clean” natural gas tends to dull the value of the key environmental attributes of renewable energy.  In order to respond to these market challenges, the renewable energy industry must effectively adjust to the shale gas phenomenon and show how renewable energy fits into an overall energy supply strategy that makes broader economic and social sense for the United States.

The availability of efficient, cost-effective, large-scale energy storage may be the key to long–term viability and growth of renewable energy in the United States.  Storage can be part of a larger strategy to help the renewable energy industry offset possible reductions in federal subsidies and increased natural gas production. Large-scale energy storage would allow renewable energy to better compete with other “on-demand” energy resources. Selling energy when demand (and prices) are higher, not just when the wind is blowing or the sun is shining, can materially change the economics of a project, allowing energy to be profitably sold at/near market rates. This might justify larger-scale renewable energy projects and change the underlying economics of renewable energy projects with limited subsidization.

The next several years will be critical for the renewable energy industry.  How the industry adapts and responds to these challenges and opportunities may shape the industry for years to come.

 

David P. Flynn is a Partner with Phillips Lytle LLP and is the Team Leader of Phillips Lytle’s Energy Practice. He can be reached at (716) 847-5473.

Please email the author at dflynn@phillipslytle.com with questions about this article.