Renewable Energy and Domestic Content

The current scuffle between the US Congress and the wind industry began last fall with reports of a large wind farm in Texas involving both Chinese investors and Chinese wind turbines. It ratcheted up last week, with four key Senators proposing to close the "loophole" that enables renewable energy projects built with imported hardware to receive stimulus funds. The American Wind Energy Association (AWEA) promptly retorted that the problem wasn't the wind projects and their suppliers, but a lack of consistent renewable energy policies coming out of the Congress. The more I've thought about this situation, the more I am convinced that both parties to this tiff are missing the bigger picture.

Let's start with the response by AWEA, which used the occasion to reiterate their consistent support for a national renewable electricity standard they contend would provide a clear policy signal for anyone contemplating investing in the facilities and workforce needed to manufacture wind turbines, solar arrays and other renewable energy gear here in the US. That sounds good, but it's equally clear from the record rate of wind installations last year that demand wasn't the problem, nor was it lack of government incentives to stimulate that demand. The Production Tax Credit for wind power has already been extended through 2012 and seems unlikely to be allowed to expire again, and the Investment Tax Credit for solar was extended through 2016. For that matter, 29 states plus the District of Columbia already have Renewable Portfolio Standards of the type AWEA is advocating for the country as a whole, and many of the states without one lack good wind resources in any case. The main aspect that has been in contention is whether the option to convert these tax credits to up-front cash grants--the benefit at the heart of the controversy over foreign-sourced wind turbines--should be extended beyond the end of this year. On the whole, then, the uncertainties faced by wind manufacturers don't look any worse than those confronting other manufacturers, and they might not even be as bad.

Next consider the complaint of the four Senators that such renewable energy grants ought to be reserved for projects that create green jobs here in the US, rather than overseas. This concern was prompted by a study suggesting that the lion's share of such grants to date has gone to non-US firms. While that negates most of the Keynesian stimulus benefits of the policy, it's also a nearly-inevitable result of the way that global manufacturing is now structured. Expecting all wind turbines funded by stimulus grants to be stamped "Made in USA" is no more realistic than expecting every car, computer, and paperclip paid for by stimulus money to have been made by American workers in an American factory. For good or ill, we don't live in that world anymore, and that's one reason that the entire federal stimulus has been less effective than hoped in promoting domestic employment: a large fraction of what we consume is either made elsewhere or includes many non-US components. Although wind turbine manufacturing started as a small, localized undertaking in the US and a few European countries, it has grown with extraordinary speed during precisely the same period that the supply chains of numerous industries became thoroughly globalized.

While these trends of manufacturing globalization and blanket support for renewable energy set the stage for it, the current collision over domestic content in the wind industry is the direct consequence of the pervasive green jobs theme that both politicians and advocacy groups like AWEA adopted for similar reasons of expediency last year: how else do you justify spending billions in tax dollars on this sort of thing during a recession, if it doesn't stimulate the US economy and create lots of jobs?

The solution to this conundrum is tricky. Since it's unlikely that either side can now admit that green jobs have been oversold as a justification for renewable energy policies, both sides ought to focus their efforts on manufacturing, and by that I don't mean just throwing up a few final-assembly plants where imported turbine parts can be bolted together, but rather addressing the factors that have affected US competitiveness across a wide range of industries. That includes high corporate tax rates, weak tax incentives for manufacturing investment, and the stifling overlap in federal, state and local regulations. More urgently, it should be clear that the solution does not involve erecting trade barriers in the form of domestic-content rules that would provoke retaliatory measures that would harm successful US export sectors. Nor does it include obscuring the magnitude of renewable energy subsidies by moving them out of the federal budget--where they are at least visible--and into the cost base of utilities by converting them into renewable energy mandates. While it might be appropriate to shift the burden from taxpayers to ratepayers, the industry needs smart incentives, not a perpetual subsidy along the lines of corn ethanol (three decades and counting.)

I used to think that all of these arcane and inefficient incentives could be swept aside by putting a price on greenhouse gas emissions, via either cap & trade or a carbon tax. I'm now skeptical about that, because of the way that Congress has insisted on combining cap & trade with a renewable electricity standard plus direct, technology-specific subsidies in the Waxman-Markey bill and its siblings. The spectacle of the US Treasury writing checks for hundreds of millions of dollars to Spanish and Chinese wind turbine companies is the inevitable result of this kind of convoluted thinking.