Alternative Energy's Momentum Won't Flag

Despite tumbling energy prices, demand for renewable, solar and other green power sources is here to stay.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

November 26, 2008

Oil prices may keep plunging, but enthusiasm for alternative energy will not. Venture capital plowed into renewable energy plateaued this year at about $4 billion for U.S. projects. But look for a big jump in 2009, with investors pouring about $5.5 billion into solar, wind, geothermal, biofuels and other projects.

Here's why: Investors know the low oil prices won't last. As global economies pick up speed in a year or so, demand for fossil fuels will surge again. While that won't bring back the kind of hyperinflated prices seen earlier this year, it will reestablish prices that represent a fundamentally tight supply/demand balance. The incentives to develop alternative oil sources will get even stronger, such as the Bakken oil shale fields in Montana and nearby states. The sheer size of the reserve, at about 100 billion barrels, and new extraction technologies will see large-scale production within five years. It's profitable as long as oil prices remain above $40 a barrel, a near certainty once financial markets stabilize.

In addition, today's energy and regulatory landscapes are very different than the ones trod during the late 1970s and early 1980s by entrepreneurs, investors and inventors, who pushed the envelop to develop motor fuels from coal and farm wastes. Their projects crashed or went into deep freeze when the Middle East oil cartel was defanged, oil prices plunged and the fledgling Reagan administration zeroed-out federal support for alternative energy development.

Alternative energy policies put in place by Congress since the mid-1990s has put a solid floor under alt-energy. Laws now require refiners to use progressively more ethanol in gasoline, offer tax credits for building out biofuels, wind, solar and geothermal energy systems. Also, Uncle Sam now pours billions of dollars into research and grants. Meanwhile, most states mandate a percentage of electricity sold by utilities be made from renewable resources, or offer their own tax credits to encourage businesses and homeowners to install renewable power for their own use.

The incentives and mandates are set to get even stronger. Congress and President-elect Barack Obama will tackle global climate change, imposing carbon emission curbs on industries and hiking demand for nonoil fuels. And other legislative changes ahead spell tax benefits for renewable fuels well into the next decade, luring investors with the promise of financial security.

The solar industry in particular is on the cusp of a boom. In eight years, solar-powered systems will make about 32 gigawatts of electricity, enough to power 8 million homes -- up from 2 gigawatts now. But solar power's share of total U.S. power capacity will still be small, at just over 3%.

Solar is getting a lift from a 30% tax credit for the purchase of solar power systems. Previously capped at $2000, the credit was extended until Dec. 2016 and the ceiling on it removed as part of this fall's credit rescue plan. "These [initiatives] provide the stability to develop investments and build large manufacturing facilities that take three-to-six years," says Monique Hanis, a spokesperson for the Solar Energy Industries Association. The tax credit extension should vastly expand solar power installations, too, by making it more affordable for businesses and homeowners to install solar arrays -- some large enough that they'll have little if any need to rely on the power grid, says Hanis.

The electric utility industry will be one of prime movers expanding solar power installations -- and it will be for bottom line reasons. The sector will be under the gun to cut carbon emissions and is likely to see progressively larger mandates to sell green power. The credit rescue plan gave utilities the reason to embrace sun power by permitting them to take the solar energy tax credit--for the first time. Michael Eckhart, president of the American Council on Renewable Energy, says, "I anticipate that the electric utilities will step up to fill the gap left by Lehman Brothers, AIG and others that are no longer are in a position to invest" in renewables, which they did for years to corral tax credits.

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