Deutsche Bank: Absence of US Clean Energy Policy Will Send Global Capital Elsewhere

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Deutsche Bank last week released a research note of curious interest just ahead of this busy week of international climate meetings and upcoming Senate action on federal climate law. Called Creating Jobs and Growth: The German Green Experience, it reviewed the policy architecture responsible for Germany’s rise as a global clean tech leader over the last decade.

The plot line goes like this: Thanks especially to a mechanism called a “feed-in tariff,” Germany has been able to create 300,000 new jobs since 2000 in a booming renewable energy sector, with renewable energy supply more than doubling, jumping from 6.3 percent of total electricity supply in 2000 to 14 percent in 2007. The people of the European nation of 82 million also saw only modest electricity price rises.

Over the same time period in the U.S., the contribution of renewable sources of energy to total supply has contracted, going from 10.1 percent in 2000 to 9.4 percent in 2007, with the sector still struggling today against a right wing campaign that vilifies the very idea of green jobs and a clean energy future as a socialist plot to undermine the U.S. economy.

The brief report from one of the largest investment banks in the world tells a different story, with a clean energy boom being an outcome that any genuine capitalist would be proud to have engineered. But the report also sounds a warning to U.S. lawmakers: Failure to enact climate and energy legislation will keep investors away from U.S. markets.

“Capital is a free-flowing system,” Bruce Kahn a Deutsche Asset Management senior investment analyst and co-author of the report told SolveClimate. “If the U.S. is not an attractive place to invest in renewable energy, capital will flow elsewhere. The German example shows how capital can be attracted when there are a clear set of policies.”

Kahn’s report gives credit to a stable, transparent and long-term regulatory policy in Germany that allowed investors to clearly understand the market risks. The clarity and certainty gave investors comfort and attracted flows of capital that ushered in the boom.

As a percentage of GDP, the clean energy sector in Germany is almost three times greater than in the U.S. Germany has eight times as many jobs in the wind and solar industry than the U.S. on a per capita basis, and it is aiming to reduce greenhouse gas emissions 40 percent below 1990 levels by 2020.

That’s double the EU commitment of 20 percent, and 10 times the meager commitment of 4 percent below 1990 levels that Congress is considering in the American Clean Energy and Security Act (ACES), which passed the House in June.

And here’s the kicker: it’s not particularly sunny or windy in Germany, especially when compared with the deserts of the American Southwest or the windy expanses of the Great Plains.

The key mechanism in Germany’s regulatory toolbox has been the feed-in tariff. Essentially, the government guarantees that producers of renewable energy will get paid a mandatory price for the more expensive power they produce. This subsidy is financed by a modest rate increase spread across the entire population and disappears over 20 years. In addition, local grid operators must provide grid access to plants which exclusively produce renewable energy and must transmit this clean power on a priority basis.

Currently in the U.S., the principle of “economic dispatch” governs power transmission — the cheapest goes first. This means that cheap power from aging coal plants would take priority over more expensive wind power, for example. As a result, clean sources of energy in general can’t compete with dirty energy on both price and market access. The feed-in tariff is a proven mechanism that levels the playing field, giving clean energy a chance to compete.

“A feed-in tariff guarantees what we call ‘production-based cash flow,'” Kahn said. “It says to developers, ‘If you produce renewable energy, we will buy it at a guaranteed price,’ and in Germany, it has catalyzed people to build renewable power.”

Gainesville, Fla., is the only place in the U.S. that has adopted a feed-in tariff to encourage clean energy development. San Antonio, Texas, Los Angeles and Sacramento, Calif., are considering adopting the policy mechanism. Only a few states states — such as Washington and Vermont — have introduced feed-in tariff measures. Kahn points out that many states have adopted Renewable Portfolio Standards to encourage clean energy development, but in some cases there are no consequences for the failure to meet the standards.

Lawmakers in the U.S. House included a national Renewable Portfolio Standard in ACES, but it is a weak provision that policy analysts say will not spur additional growth of the clean energy sector. Far more robust are provisions that would send tens of billions of dollars in bonus payments to utilities for developing “clean” coal technology. It contains no feed-in tariff provision to spur the development of solar and wind energy.

Sen. Barbara Boxer, who is writing the Senate’s version of climate and energy legislation, is widely expected to introduce her plan next week, so the Deutsche Bank report provides a timely reminder of the German success story with solar and wind energy.

“What we’re pointing out is that investors need a stable, transparent and long-term regulatory framework in order to deploy capital,” Kahn said.

What policies are needed? Deutsche Bank is careful to stop short of providing specific policy prescriptions.

“We have substantial experience with the German experience of ‘green’ investments and have a decade of results to analyze,” Kahn and his co-authors write. “We present that experience here in the hope that it can serve as a useful case study in climate policy development.

“Germany is a prime example of how governments can help lead the transition to a cleaner energy supply through a long-term and comprehensive policy framework, including a guaranteed connection to the power grid.”

Seven years and 300,000 new jobs later, the clean energy model Germany has developed might be worth a fresh look, the Deutsche Bank report is saying. Given the timing of its release and the state of play inside the Beltway, it’s hard not to hear it as as a loud political statement coming from one of the world’s pre-eminent capitalist institutions, keen on cashing in on a clean energy boom in the US.


See also:

Without Functioning Ecosystem, There Is No Economic Growth

Why Isn’t the U.S. Embracing Feed-in Tariffs?

Solar Power Makes Cents, Even in Cloudy Germany

(Graph: Deutsche Bank)