Final C.R. Could Be an Early Glimpse of a Complicated Clean Energy Landscape

 With the dust settling in the multi-month fiscal 2011 federal budget drama, now may be a good time to take stock of its expected impact on the renewables industry, and what this could mean for the future.  Federal policy remains a prominent driver of growth in the U.S. renewables and energy efficiency sectors, and these past few months may have given us some insight into the future political battles that lie ahead.

To help guide us on this magical fiscal journey, we need to quickly review a few key documents – the compromise FY 11 Continuing Resolution, which provides funding for the remaining five or so months of this fiscal year, and the competing fiscal year 2012 budgets that will set the parameters for negotiations on federal spending next year and in the years to come (the Ryan FY12 Budget and the Obama FY12 Budget, and subsequent speeches).  In doing so, we see that the budget compromise for this year spared most clean energy programs, but that the two sides remain far, far apart when it comes to next year’s funding. 

Final FY11 Continuing Resolution:  Perhaps this is just an unfortunate anchoring effect, but based on the cuts to clean energy and innovation spending originally passed by House Republicans, this wasn’t as bad as feared.  This isn’t an endorsement by any stretch (Office of Energy Efficiency and Renewable Energy still saw a 6% reduction excluding earmarks from last year, and Energy Information Administration and Office of Electricity Delivery and Energy Reliability took it on the chin), but there were some bright spots.  ARPA-E received $180 million, which will allow this new entity to build on its promising start, and the Office of Science wound up with most of its science and research funding restored.  On loan guarantees, it seems a middle ground was reached, where most Sec. 1705 loans (given to innovative clean energy generation and manufacturing projects) will be able to move forward, with some additional subsidy cost funding provided to support a couple billion dollars more in 1705 loan guarantees, but that Sec. 1703 loan guarantee funding was reduced significantly.  (an explanation, from prior to CR passage, of the importance of loan guarantees)

President Obama FY12 Budget: Released in February, the President’s budget recommendations for next year represent a welcome leap forward in funding for clean energy technology and stand in stark contrast to both the budget cuts for the remainder of this year and especially Paul Ryan’s approach outlined below.  More recent remarks, and a new “Blueprint”, provide much more perspective on the Administration’s comprehensive energy strategy.  Yesterday the President added further details to his original budget proposal, addressing health care, social security and defense spending, and highlighting $750 billion in discretionary spending cuts over the next 12 years, but with a  promise to maintain strong investment in clean energy.  In his original budget proposal, the President provided critical support for funding to a host of renewable energy and efficiency programs, on a longer-term trajectory.  Among the highlights:

  • Compared to fiscal 2010 funding, annual funding would increase under this proposal anywhere from 55% - 233% for clean energy technology R&D programs such as solar (103%), biomass/biofuels (55%), wind (59%), geothermal (132%), vehicles (89%), building efficiency (136%) and industrial efficiency (233%)
  • Key innovation investments would similar be boosted.  Under this budget ARPA-E would receive $550 million (compared to the $180 million in the recent FY11 CR), and Office of Science, a cornerstone of our domestic innovation infrastructure, would see a 10% increase.  The budget request also includes new funds for three additional Energy Innovation Hubs (on energy storage, materials and smart grid tech)
  • Fossil energy R&D would be cut by a third and $4 billion in annual fossil fuel subsidies (amounting to over $40 billion in the long-run) would be repealed.

Rep. Paul Ryan FY12 Budget: as far as energy policy, the Ryan budget is like one of those bad reality TV shows where you can’t believe someone thought it a good idea to actually put this thing together (Bridalplasty I’m talking to you). CAP does a great job of parsing Ryan’s past statements, past votes and the budget document itself to provide some analysis.  The challenge is that, since it is a budget outline, there are not a lot of details, and those policies that are detailed are really, really bad.  In addition to endangering the environment and state economies by throwing drilling regulations out the window (“lifting moratoriums and bans on safe, environmentally responsible exploration for domestic energy supplies”), and rollback of EPA regulations that prevent harmful pollution and reduce greenhouse gas emissions (“scales back spending on government bureaucracies seeking to impose a job-destroying national energy tax”), Ryan also would apparently end federal support for a range of renewable technologies (at least this is what I take the following statements in Ryan’s energy section to mean: “The President has also stifled domestic energy production….The stimulus alone allocated $80 billion of taxpayers’ dollars specifically for politically favored renewable-energy interests”;  “paring back spending in areas of duplication or non-core functions, such as applied and commercial research or development projects best left to the private sector”, “roll back federal intervention and expensive corporate-welfare funding directed to the president’s allied industries.”)  These sentiments have also been expressed publicly by Ryan.  Further, as far as actual funding, his budget appears to essentially zero out renewable energy and energy efficiency spending by 2014.  In the actual figures on budget authority and outlays (two ways the government allocates funding), Ryan would reduce all energy spending by the government to $1 billion by 2014, 70% less than in the Obama budget. As fossil energy R&D and nuclear R&D spending alone currently account for well over $1 billion (both are in the 270 budget function), and have been strongly supported by Ryan in the past, energy efficiency and renewable energy would likely receive no funding in this budget, and instead fall into the category of what Ryan terms “welfare for energy companies” (which, somehow, doesn’t include fossil energy subsidies). 

As to what all this means for the future – it’s difficult to say.  The Obama administration continues to advocate strongly for clean technology and innovation funding, and public support for renewables remains in the 70%-80% range.  The optimistic take is that a broad “renewables and innovation coalition” (however loosely defined) was strong enough to beat back a sizable threat to vital federal support for clean energy and science, and demonstrated the political clout necessary to defend itself in future battles.  

There is another perspective that looks at the Ryan budget, and the earlier Republican Study Committee spending cuts, as examples of a government philosophy that assumes no federal role in energy markets, despite the many market inefficiencies, barriers and failures, and the many examples of useful government support in developing new industries.  We may be about to enter into a many-month philosophical battle about the nature and value of government which will have far-reaching effects on clean energy policy (and through extension the U.S. clean energy industry). 

Unfortunately, if the latter prediction is accurate, this could prove highly problematic, given the many critical clean energy policies on the table in the coming 18 months.  The Treasury Cash Grant expires at the end of this year, and the production tax credit expires at the end of next year, both of which have proved incredibly important to the development of the wind and solar industries.  While each of these policies could stand some refinement, the uncertainty leading up to this expiration, and the current lack of viable options will be damaging.   These are tax-based incentives, and therefore not directly connected to the annual budgets described above.  However, extension of these tax incentives will require funding allocations, which will involve many of the same arguments described above. (and on a sidenote, tax credits and deductions of all sorts will feature more prominently in the coming deficit debates)

Additionally, the application period for Sec. 1705 loan guarantees ends this year, and with the removal of funds from 1703 guarantees, it will be important to see if other federal financing mechanisms, such as the Clean Energy Deployment Administration (CEDA), emerge.  Exacerbating everything is that nearly all of the tens of billions of Stimulus Act funding for R&D and deployment of innovative clean technologies) will have been spent by 2012, leaving a hole that private capital may not be ready yet to fill.  Then of course, there’s the faint possibility of a clean energy standard, and a host of issues around transmission, siting and permitting

Bottom line – the outcome of these policy debates, good or bad, will have a massive impact of the growth and sustainability of the U.S. renewable energy industry.  Given its importance economically, environmentally, and on national security, we hope cooler, bi-partisan heads will advance the conversation in a positive fashion and the right policies will prevail.