Clean Energy: It's Getting Affordable

The argument that we can't afford renewable sources of energy falls flat when considering the growth in solar, wind, biofuels, and fuel cells

Clean-energy critics are fixated on cost. To them, the use and deployment of renewable sources of energy simply doesn't make financial sense. That's why we've got to continue doing things the old-fashioned way, by employing coal, oil, and natural gas. Those excuses are wearing thin.

To see why, one need look no further than the growth in the markets for solar, wind, biofuels, and fuel cells, and how the cost of such renewable energy sources is approaching parity with carbon-emitting energy sources. For the past decade, solar and wind have been averaging annual growth rates in excess of 30%. Most industries would be envious of that kind of compounded annual growth. It's comparable to the expansion of the PC industry at the height of its growth.

Despite record-high oil prices, rising home foreclosures, and consumer uncertainty, revenue generated by four clean-energy markets—solar, wind, biofuels, and fuel cells—grew by 40% to $77.3 billion in 2007, from $55 billion in 2006.

Favoring Renewables

The cost for solar and wind have both dropped significantly over the past 30 years, bringing the cost of both sources within striking distance of, and in some cases lower than that of conventional energy sources. Consider the costs of geothermal, wind, and solar power compared with nuclear power, often lauded as one of the cheapest sources of energy.

The average up-front capital cost for a new 1-gigawatt nuclear plant, sufficient power for about 1 million U.S. homes, is $2 billion to $6 billion. The cost of 1 gigawatt of geothermal and wind power is less than $2 billion; the same amount of solar power cost $5 billion to $10 billion. Never mind it can take years to bring a new nuclear power plant online; the U.S. hasn't had a new nuke plant in more than two decades.

Admittedly, these aren't apples-to-apples comparisons. Whereas coal, nuclear, natural gas, and geothermal plants are able to provide base-load power—that is, nearly continuous power—solar and wind are intermittent resources. To compete with conventional sources, solar and wind have to be paired with base-load power sources, or require the implementation of energy storage and so-called smart-grid capabilities such as devices that help users and utilities better conserve energy and reduce consumption during peak demand.

But clearly, the pendulum is shifting in favor of a range of renewables, and the smart money is taking notice. New global investment in energy technologies from such sources as venture capital, project finance, public markets, and research and development ballooned 60% to $148.4 billion in 2007, from $92.6 billion in 2006, according to research firm New Energy Finance.

A Windfall

And you can't talk about investment in clean energy without mentioning high-tech giant Google (GOOG) and its push to make renewable energy cheaper than coal power. Google has the cash to back high-risk, high-return, clean-energy investments, and the company has hired dozens of engineers to push the clean-energy envelope. Among the areas Google has targeted is wind power, an industry dominated by European companies, many of which are making significant investments in the U.S. Utility companies in Portugal and Spain spent billions buying wind-energy companies with U.S. operations in 2007.

With U.S. wind installations growing 45% last year, the U.S. is on pace to surpass Germany as the world's largest wind market by the end of next year. Meanwhile, foreign-based wind turbine manufacturers are jockeying to set up production facilities, potentially creating hundreds of jobs for states including Iowa, Pennsylvania, Colorado, and Minnesota. And General Electric (GE), the largest U.S.-based wind turbine manufacturer, generated $4.5 billion in sales in its wind division last year.

The wind opportunity hasn't escaped the attention of legendary oil and gas investor and prospector T. Boone Pickens. He recently announced plans to build the world's largest wind farm, at 4,000 megawatts, enough to power more than 3 million homes, with an estimated development price tag of around $10 billion.

Exploiting a Clean Future

But the wind-boom promise comes with a caveat. Without an extension of the production tax credit for renewables, which is set to expire at the end of the year, it's likely that many of these investments will be blown away.

The tax credit now applies to a range of renewable energy projects and affords a 1.9¢ per kilowatt-hour benefit for the first 10 years of operation for a renewable-energy facility. Of course, critics of clean energy will point out that without such subsidies and other regulation, renewable sources would never get a foothold in the market. But that argument misses a critical point: There's no such thing as subsidy- and regulatory-free energy, and there never has been.

Coal, oil, natural gas, nuclear power, and other sources have been supported with the direct and indirect financial support of governments that want to encourage them. Clean-energy sources shouldn't be expected to operate without similar regulatory supports and incentives.

Simply put, the future doesn't belong to the incumbents. It belongs to a range of emerging efficiency and renewable energy technologies that are reshaping the global economic and environmental landscape. And as that future unfolds over the next two decades, the transition will offer untold opportunities to the companies, individuals, and governments that exploit it.

Before it's here, it's on the Bloomberg Terminal.