Next week I am on a panel talking about alternative energy. These guys have already told me they don't want to re-fight the global warming science battle at this venue, and my guess is that there will be a lot of pragmatist corporate types who won't really care about individual liberty or role-of-government issues -- they will only care if there is money to be made, even if it is by rent-seeking. My best bet, I think, will be to discuss why alternative energy is a bad investment. My sense is that it is a bubble investment, like goofy Internet stocks in the 1990's or housing in the 2000's. Already, I think we see the crash in the corn ethanol business.
My two assumptions are
- I can't think of any industries that were initially heavily subsidized that eventually found their way to competing successfully and growing without subsidies.
- With the exception of agriculture, the public's tolerance for growing subsidies to a single industry eventually wanes.
I would love for commenters or emailers to send me contra-examples if they have them to either of these assumptions. In particular, can you think of an industry that could not have grown initially without subsidies eventually prospering without subsidies.
To the second point, I looked at the numbers two ways.
- In Germany, which is often held up as the model, feed-in tariff subsidies are between $0.06 (wind) and $0.50 (solar) a Kwh. If the US reached a goal of 20% of its production in wind and solar (total production today is about 4000 billion KWh) then the subsidy would be between $50 billion and $400 billion a year. It is hard to imagine these remaining popular for any period of time. (lots of German numbers here and in the linked PDF)
- Venture capitalists and investors are expecting the growth stocks they invest in to grow at, say, 30% a year. Let's assume alternative energy companies grow at 30% a year and the number of companies, attracted to the growth and subsidies, doubles every two years. In this scenario, assuming unrealistically that the supply curve for alternative energy is flat rather than upward sloping, the amount of subsidies to support this growth would have to nearly double every year. They would increase 21-fold in five years and 440-fold in 10 years. In fact, given the shape of real supply curves, new more expensive capacity at the margin is replacing cheaper and cheaper alternatives, resulting in the need to grow subsidies even faster to keep up. Never has happened, never will. Once the industry outgrows the government's willingness to grow subsidies, the whole thing crashes.
(PS - the subsidy could also be in the form of taxes that increase the cost of alternatives, or production and/or import restrictions on the alternatives).
Any help along these lines in the comments is appreciated.
Update: This seems relevant:
First Solar shares skidded 8% Friday to close at $116 after the company issued a murky business outlook beyond June. Until then, however, "orders look very strong," First Solar CEO Robert Gillette said in a post-earnings conference call.
This commentary, along with price pressure and expected subsidy cuts solar panel makers get from the German government is making investors a bit more wary of First Solar, whose shares have been on a bumpy ride the past 18 months....
First Solar, helped by government tax credits extended to businesses for using solar power, has rewarded its investors since going public in November 2006 at $20 a share. The stock peaked at $317 in May 2008. But the shares have been skittish ever since.
Germany, the world's biggest solar market, is weighing a 15% cut on so-called solar feed-in-tariffs. This could make solar installations less attractive.
First Solar projects 60% of its 2010 sales from German-related contracts, according to Wedbush Securities analyst Christine Hersey.
Remember from above, the German feed-in tariff for solar is around $0.58 per KwH, or fully $0.50 above the price paid for the fossil fuel base load. At this subsidy level, the US would be paying $400 billion a year in subsidies and/or higher prices.
First Solar has grown at over 150% per year for the last 3 years so the 30% assumption above is conservative, as is the assumption about the number of competitors doubling every two years.
Another interesting note - First Solar makes a pre-tax margin around 33% of sales, which is over 6x larger than health insurance companies make (and are excoriated for). Is it any wonder Germany no longer wants to keep subsidizing First Solar's bottom line to levels far above most equipment manufacturing companies.