How Secure Are Green Jobs?

It's been an article of faith among advocates of "green jobs" from expanding renewable energy deployment that wind and solar installation jobs are secure because they can't be sent offshore, even as the manufacturing of wind turbines and solar equipment increasingly shifts to Asia.  A story in MIT's Technology Review casts doubts on that assumption, for reasons that have much to do with recent reductions in the cost of solar photovoltaic (PV) cells, modules and panels.  Green jobs, which in any case shouldn't be viewed as the main selling point of renewable energy, turn out to be much like other jobs in facing competition from automation, as well as from globalization.

Why would it suddenly make sense to consider installing utility-scale solar panels using the robots highlighted in the article?  PV module costs have declined dramatically in the last two years.  As I've noted in other postings, this trend reflects the expected experience curve effects--such goods become cheaper as you produce more of them--but also the fierce competition resulting from enormous over-building of global PV manufacturing capacity as countries competed with each other to offer generous subsidies for this industry.  One consequence of these PV hardware price declines is to increase the share of "non-module" costs in the total installed cost of solar panels. Because the power produced by PV is still more expensive than conventional energy in most markets, that tends to shift the focus of innovation toward ways to reduce the costs of the mounting hardware, inverters, and labor used to put these arrays in place.

The article makes it clear that only certain parts of the solar installation trade are currently threatened by robotic installation.  Robots apparently aren't suited to rooftop and small ground installations, yet.  However, with politicians busily blurring the distinctions between outsourcing and offshoring, while neglecting the ongoing transformation of work by automation, computing and telecommunications, it's worth recalling that energy remains a capital-intensive commodity business.  Keeping costs down is crucial for both energy providers and their customers, and thus for the entire economy they energize.  When labor is involved in producing energy, its productivity must be very high, or it naturally becomes a target of innovation and process reengineering.  That needn't mean low wages, but it does imply fewer workers working smarter, with more automation.

The energy industry offers excellent opportunities in many sectors, especially those that are growing rapidly because of new technology or the removal of artificial constraints.  Yet we shouldn't fool ourselves that these jobs are any more protected or permanent than any others, especially in segments that aren't yet cost-competitive.

The Market for US Cleantech Is Out There

One of many press releases I received this week highlighted the new Clean Energy Export Principles developed by a "multi-industry coalition, which was coordinated by the National Foreign Trade Council, and U.S. government representatives." They recommend a significantly expanded and technology-neutral effort by the US government to promote exports of clean energy gear, including equipment for the smart grid, energy efficiency and energy storage. They also suggest the need to reduce trade barriers affecting such exports globally, not just to help US industry but to increase the effectiveness of efforts to mitigate climate change. I can only hope that the administration embraces these recommendations as enthusiastically as it has other aspects of its green agenda, because these principles are aimed squarely at the biggest opportunities for clean energy technology and emissions reduction, outside our borders.

It doesn't really matter whether these principles reflect the sensible recognition of trends in the global energy marketplace, or merely make a virtue of necessity at a time when government support for domestic clean energy deployment is approaching its statutory and practical limits. However the current debt ceiling crisis is resolved, the capacity for the federal government to continue providing generous incentives for cleantech deployment, either through the Treasury renewable energy cash grants that have totaled nearly $8 billion to date, or the Department of Energy Loan Guarantee program that has backed or directly funded more than $40 billion in loans for clean energy projects is likely to be far more constrained in the future.

Nor is this simply a question of money. The whole notion that we are in some kind of renewable energy deployment race with China or any other country ignores the big differences in our respective levels of economic development. If there were such a race we would be bound to lose, and not because we don't have the right policies or strict enough regulations, but because US electricity demand is growing slowly and is backed by both ample generating capacity and ample supplies of relatively cheap and low-emitting fuel. Meanwhile both electricity demand and capacity in the developing world are growing rapidly, and the indigenous generation fuel in good supply is mainly coal. That, together with the disparities in economic growth coming out of the global recession, is the underlying reason why investment in renewable energy in the developing world apparently surged past that in the developed world last year.

With cleantech supply chains already substantially globalized, the leaders in this industry must be global in scope and focus. US manufacturers of cleantech equipment shouldn't ignore the US market, but they must be realistic about it. Even with growing opportunities in the smart grid and solar power, the US will account for only a small fraction of the global market for such goods and services, as growth shifts away from the mature markets of Europe and North America. The market share that counts, for competitive strength and economies of scale, is global market share. And global sales will provide the volumes needed to drive down costs for both exports and domestic installations. There's a huge, growing market for cleantech, and it is mainly out there.

Green Energy Competitiveness

As I was catching up on recent op-eds in the New York Times, I was intrigued by one with the snappy title, "Red China, Green China." As the author, an "executive in residence at Columbia Business School," built his case for why the US is falling behind China in clean energy technology, I was hopeful that he'd offer some sensible recommendations for resolving the problems that have made it harder for the US to compete across a whole range of industries, not just cleantech. Unfortunately, two of his three suggestions were focused on measures to ensure a market for clean technology, and the third on R&D for carbon capture and storage. These are worthy goals, but there wasn't a word about making our manufacturing sector more competitive. That blind spot seems to be shared by the Department of Energy, which according to an article in MIT's Technology Review ran out of money for clean energy manufacturing tax credits, but spent more than $3 billion funding renewable energy projects, many of which are being built with imported hardware. If we're serious about competing in a global clean technology race, we've got our priorities backwards.

I must admit that I'm generally skeptical of anything that smacks of industrial policy. Industry has a mixed record at picking technologies in which to invest to create the industries of the future, but government is often worse. For example, does it really make sense to spend taxpayer money helping companies build factories to make batteries for electric vehicles that consumers haven't yet embraced, and that may only capture a small share of the total car market, similar to today's hybrids? However, this might still prove wiser than shoveling money at the deployment of green energy technologies that either don't need much assistance, or that haven't developed sufficiently to meet the needs of the economy.

It might also help to think about our competitiveness in cleantech from the perspective of the entire economy, rather than the usual practice of looking at it in isolation. From that vantage point, the main thing the economy needs from the energy sector is cheap and reliable supplies of the kinds of energy that we use: liquid fuels for transportation, gas for heat, and electricity for nearly everything else. Reliability was licked a long time ago--except for the occasional blackout--and renewables don't bring much to the table in this regard. For several of the most popular forms, such as wind and solar power, it's their weakest suit. As for cost, the price tag on wind capacity has come down significantly over the last couple of decades, and off-peak wind power is sometimes the cheapest supply available. That's still not true for solar, however, though solar thermal and some novel forms of photovoltaic cells have the potential to get there.

It's also important to recall that while we can employ subsidies or mandates to make renewables appear more competitive locally or to require their use, whether competitive or not, that doesn't alter their impact on the global competitiveness of the US economy. If we are embedding expensive energy at the heart of our manufacturing, services, transportation and distribution networks, then that must make us less competitive--unless everyone else is doing the same thing.

We should also be asking to what extent taxpayers (or ratepayers--often the same people) should subsidize the creation of a market for renewables. After all, the market already exists, and most of it is outside the US. The world apparently added 38,343 MW of new wind generating capacity last year, and only 26% of that was installed in the US. Instead of concluding that we should pay or require companies to install more wind turbines in the US, as Mr. Usher suggests in his op-ed, wouldn't it make more sense to help US wind turbine manufacturers become more competitive in the larger global market? That seems like an obvious conclusion, especially when we consider that US manufacturers accounted for less than half of the wind turbine capacity installed here last year, according to data from the American Wind Energy Association, and that the bulk of the Treasury grants issued under the stimulus have gone to non-US firms to develop wind farms equipped mainly with non-US turbines.

Nor would shifting our focus to supporting the production, rather than installation of cleantech hardware lessen the impact of US policy on reducing global greenhouse gas emissions. A wind turbine or solar panel generates emissions-free energy in any country in which it is sited, and it might even reduce more emissions if it were installed in a location where the generation source it backs out is an inefficient coal-fired power plant with minimal pollution controls, rather than an efficient gas turbine, as is often the case here.

Effective policy requires clear thinking. If we want to promote clean energy technology for reasons of job creation and global competitiveness, then shouldn't we focus our efforts where they can have the greatest positive impact on those priorities? Manufacturing is a strong candidate for that point of maximum leverage, while deployment suffers from many drawbacks, including "leakage" and higher costs that get passed on to other sectors of the economy. Whether our best approach to bolstering cleantech manufacturing is to single it out for special treatment or to focus on corporate tax reform and other measures that would help all manufacturing is a subject for another day.

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.