Green Energy: A Tale of Ups & Downs & Ups & Downs

Here is an interesting article in The Atlantic. It explains the semi-derelict wind power farms that I saw in California as I drove I-10 between the LA basin and the Mojave desert during the past quarter century. This half-abandoned technology puzzled me. People had gone to great trouble to build machines to harness wind power, but the huge gadgets mostly didn't work. It was such a waste. Finally, with this article by Joshua Green I now understand the story behind this sad scene:

When the Arab oil embargo touched off concerns about energy security, two major impediments hindered the development of a domestic clean-energy industry. The first was that electric utilities controlled transmission lines and wanted no competition. The second was the prohibitive cost of developing and deploying the technologies. Carter addressed both problems in 1978 with an energy plan he characterized as “the moral equivalent of war.” He compelled public utilities to accept power from independent companies, such as those that might draw on wind or solar; and he made available, for the first time, subsidies for renewable energy in the form of an investment tax credit. Congress increased the subsidies two years later, after the second oil shock.

To these federal incentives, states added their own. None surpassed California’s combination of additional tax credits and regulatory arm-twisting—the law not only forced big utilities to buy power from renewable providers but made sure they did so at favorable rates. If you lived in California in the early 1980s, government would cover half the cost of a windmill and guarantee generous recompense for the power you produced. Soon enough, wind took off.

The first wind farms went up in the San Gorgonio Pass in 1981. Others soon followed. Turbines dotted the country, but in particular California. The demand led to a manufacturing boom, and new companies sprang up to meet it. “It was like the car industry in 1912,” Ed Zaelke, a project-finance partner specializing in renewable energy at the law firm of Chadbourne & Parke in Los Angeles, told me. “Everybody had a new invention.” Sales of wind power leapt from $21 million in 1981 to $748 million in 1985.

But the industry encountered serious quality-control issues, and one reason was the nature of the government’s support. A tax credit on investment created an incentive to put up turbines quickly and plentifully and collect a check. But the tax code had nothing to say about how those turbines performed. And many of them did not. “If you look at Palm Springs,” Zaelke said, “the turbines are set one alongside the other in corn rows because you got paid by how many you installed, not by how well they produced. Well, the ones in back don’t spin, because the ones in front absorb all of the wind and disperse it. That’s why today we space them and put them on ridgelines.”

These, at least, were good-faith efforts. Across California, wind became a popular tax shelter. Doctors, lawyers, and dentists began throwing up turbines or buying shares in hastily erected wind farms to take easy advantage of the benefits. “People were sawing surfboards in half and sticking them on a rotor to claim the tax credit,” Zaelke said.

That ended abruptly in 1985. Ronald Reagan, well on his way to slashing his predecessor’s largesse toward clean energy, killed the investment tax credit. Evidently, Reagan despised wind power. Having previously instructed the IRS to challenge the credit, he singled out California’s turbines as evidence of the need for reform when he sent Congress the 1986 Tax Reform Act. With oil flowing cheaply again, the industry swiftly collapsed.

Solar power benefited from the same credits and, beginning in 1980, had the additional sweetener of a California property-tax exemption to defray the cost of acres of mirrors. Motivated by these incentives and the emergence of “peak oil” theory, companies like Shell, Exxon, and Amoco became some of the largest investors in solar technology.

The great pioneer in the field was Arnold Goldman, an engineer lured to California from Israel by the promising economic climate. Goldman was an inventor, but a practical one. Rather than tinker in the lab, he studied Department of Energy research reports (a product of Jimmy Carter’s initial investment) to find the technology with the most potential. Goldman founded Luz International and got Southern California Edison to agree to buy power. With financing from Phillips Petroleum and Bank of America, he built the first utility-scale solar farm in the United States in 1984, a $62 million facility that could generate 14 megawatts.

Part of the adventure for entrepreneurs like Goldman lay in continually refining the technology to drive down cost. Luz was strikingly successful, and Goldman managed to keep building larger facilities even as the state and federal tax credits disappeared and the oil companies lost interest. “We were improving at a fast enough pace that each time one of the credits went away, we made up for it with cost savings from the new technology,” he told me.

By 1991, Luz was operating nine facilities and had begun construction on a tenth when the California property-tax exemption—the one subsidy the company could not do without—came up for renewal. At the time, Luz’s 354 megawatts of capacity represented 90 percent of the world’s solar energy. Luz was literally peerless. But from a political standpoint, this created a problem: the solar property-tax exemption appeared to benefit a single company. “It was absolutely crazy,” Goldman said. When the Republican governor vetoed the renewal, Luz went bankrupt. Its nine plants, now owned by Florida Power & Light, still run today. Goldman is now a principal behind BrightSource.

For the dwindling few companies that struggled on, the trouble didn’t let up, arriving not only from the political right but also from the left. Kenetech Windpower, for instance, struggled with what the industry delicately refers to as “avian mortality.” Remote, windy places like California’s Altamont Pass are home to rare birds like the golden eagle, which nature did not equip to survive an encounter with a Kenetech turbine. In contrast to sensible Europeans, whose blades churned slowly, Americans, with our predilection for speed and power, produced windmills of such fearsome torque that they became, as one outraged Sierra Club lobbyist put it, “Cuisinarts of the air.” To the horror of avian-minded environmentalists, eagle carcasses began piling up in the Altamont Pass. To those whose sympathies lay with wind, liability was the concern: mutilating golden eagles violated the Migratory Bird Treaty Act. Kenetech first negotiated “killing permits” from the U.S. Fish and Wildlife Service, then settled on the more permanent solution of going bankrupt.

Wind and solar didn’t die when the tax credits dried up. They moved overseas. Denmark offered robust government support, and came to dominate the wind industry. Germany and Spain found success with solar energy by requiring utilities to pay hefty “feed-in tariffs”—above-market rates—to anyone who sent electricity to the grid. Japan also built a vibrant solar market.

Though its manufacturing base was devastated, the U.S. remained one of the world’s largest markets for wind power. In 1992, Congress moved to rebuild the industry, this time basing the tax credit on production rather than investment. Again, the market took off—and collapsed, when the credits were allowed to expire. This boom-and-bust cycle repeated itself three more times over the next decade, and very nearly a fourth. Last fall, after 18 attempts to extend the production tax credit, Congress, in one of its final acts before adjourning, allowed a one-year extension to squeeze through.

Plotted on a graph, the history of clean-energy production in the United States resembles the blade of a saw, rising and falling each time subsidies came and went. Japan, Germany, Spain, and Denmark show smooth, upward-sloping yield curves, a reflection of consistent government policy.

This is almost a textbook case of how to not do green energy. You keep bankrupting people who are passionate about the needed new technology. Mao used a similar technique with his "Let a Hundred Flowers Bloom" campaign. Those foolish enough to take him up on the offer had their heads cut off. Well, US energy policy seems to be modeled on this. Sure enough, after enough cycles of bankruptcy, the US is no longer a leader in green technology. Sad. Funny. Tragic.

It is funny how Americans view themselves as muscular entrepreneurs with a can-do attitude. But their aspirations and their achievements in green technology don't match up. I now understand how a dysfunctional bureaucracy has set them up to fail. Right now, the intrepid are listening to the siren song of Obama and his green enthusiasts. But what's to prevent the Republicans from seizing power in 3 years and, yet again, undermining whatever investment the foolish few put into green technology?

Joshua Green thinks Silicon Valley has what it takes to break this boom-bust cycle. But I think about his mention of Tesla Motors. Here's a poster child of the new green auto industry. But it nearly went bust and is now living on handouts from Obama's stimulus package. Joshua Green says things are different this time. But I don't see it. There are too many crazies in the Republican party.

Go read the article. It says I'm wrong. Joshua Green makes this point:

But Carter’s efforts can also be viewed as a qualified but important success. Despite its epic travails, the United States in the mid-1980s was the overwhelming leader in clean technology, with more than 80 percent of the world’s wind capacity and 90 percent of solar. The entrepreneurial culture of California in particular drew the best minds from around the world. One of them, Arnold Goldman, was already building toward scale when it all came apart.

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As an indicator of where a solution might emerge instead, venture-capital investments in clean technology last year reached $5.8 billion in the United States, compared with $1.8 billion in all of Europe and Israel. And that was before Obama’s enormous ante.

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The key to our energy future lies in exploiting two often opposing forces without having them trample or undermine each other: Silicon Valley’s free-market culture of innovation and Washington’s power to set the terms by which everyone operates. The challenge will be to establish European-style stability without constraining ourselves to anemic European levels of innovation. And if it turns out that a Nobel-caliber breakthrough is necessary to save the planet, the freewheeling boom-and-bust disruptions of the 1980s might come to be regarded in a much better light—because, really, who else has produced such rapid change? It may seem strange to think so, but the last, best hope for heading off climate change is probably the same country that botched the job so badly once before.