Green Rent Seeking Update

More here on the failure of European green energy subsidies.

At a speech a while ago, I told this to an investing group a while back:  Do the math.  You can't build a growth company on public subsidies.  It may be possible to grow at first when the subsidized activity (e.g. solar) is a tiny percentage of the market.  But once it starts to grow, the projected subsidies are astronomical.  The German solar subsidy is something like 50 cents per KwH -- to give one a sense of scale, the typical electricity price from fossil fuels there or here is something like 8-10 cents per KwH.  Subsidizing just 20% of US electricity production at this kind of rate would cost $50 billion a year.  Subsidizing all production would cost a quarter of a trillion dollars a year.

Take a company dependent on subsidies, figure out what their implied size is in 10 years based on current stock multiples, and then calculate what the public subsidy at current rates would have to be to support that size and a reasonable market share (because competitors are following the same model).  Investors who do this will quickly figure out that the subsidies needed to support their favored company are unsustainable.  Phoenix-based FirstSolar, a sometimes-darling of Wall Street, has had  a rocky year.  Its stock price has had several steep falls, each one just after rumors that Germany would cut its solar subsidy rate (actually its feed-in tariff, but the same idea).

My advice to the group was that if you were investing in green energy, either your company had a three year plan to reduce costs to be able to compete profitably in a subsidy-free environment, or else you are investing in pets.com.

Update: If you have Nancy Pelosi's husband on your board, you can probably extend your window to five years.

  • Sean

    You might find an article in the NY Times entertaining. Apparently, the climate bill is net positive on job creation. DoE even has an economic model and their own modeling tool to prove it. Here is the link to the NY times article. Just wonder what you think.

    http://green.blogs.nytimes.com/2010/05/21/the-climate-bill-and-the-employment-picture/?ref=energy-environment

  • DrTorch

    A quick search says the US uses 3.8T kWH in electricity per year.

    If I'm understanding your math, subsidizing all of that at $.50/kWH means $1.9T.

    That's a fair bit (4x) worse than your number.

  • mysterian

    I hope Sean is either sarcastic or naive enough to make a lamb look wise....

  • ADiff

    They don't call it The Department of Inner-Gee for nothing! I consider them the 3rd most counter-productive Federal department, after No. 1, the BIA, and No. 2, Agriculture.

    As if anything they have could possibly be anything other than complete and utter ca-ca!

  • Mark

    A direct subisdy for output is very bad because it builds in long term structural losses.

    I can see however a start up subsidy in the form of business loans to help get a company off the ground. Hopefully the product will be cost effective or be usable in a niche.

    For instance Solar and wind power are great for very remote regions where it would cost millions to get in power lines and where it would be difficult to deliver fuel.

  • markm

    Subsidize an energy company per KWH delivered, and you build in a cost structure which cannot be sustained without subsidies, so the company can grow only as much as the subsidies can grow.

    Subsidize it for putting in wind turbines, and you'll get wind farms with half the turbines shut down. They already got the subsidy, so why should they spend more on maintenance? If the original subsidy is in the form of a loan for the physical plant, they can take their profits out as soon as possible, then default on the loan.

    For remote areas that aren't connected to the grid, subsidies aren't needed. Although they're quite welcome - it helps pay for the backup diesel generator!

  • Doug

    Madison, WI is trying to get people on solar by using subsidies. One interviewee gushed about how the meter went backwards and that they were owed money. Buried in the article was the $8500 cost for the array. How long will that take to pay off? What about those days in which its largely overcast? Winter time? They also groused about the trees blocking the sunlight. But, as was pointed out, they keep houses cool. And the penultimate statement, we have to subsidize these arrays.