As the Senate tries to find a way to pay to extend renewable energy tax credits that are set to expire at the end of this year, investors and industry leaders are calling for immediate action in order for the business community to be affected as minimally as possible. During today's OnPoint, Michael Eckhart, president of the American Council on Renewable Energy, discusses international trends for renewable energy investment and implementation and explains the effect renewable energy tax credit uncertainty is having on businesses throughout the United States. Eckhart also discusses a conversation he had with President Bush at last week's WIREC conference relating to the extension of renewable energy tax credits and discusses the future of the green-collar job market.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Michael Eckart, president of the American Council on Renewable Energy. Mike, thanks for coming on the show.
Michael Eckhart: Thanks Monica.
Monica Trauzzi: Mike, last week renewable energy investors and government officials all gathered in Washington, D.C. for an international conference on renewable energy called WIREC. Was it a success? And what's the main headline that came out of this conference?
Michael Eckhart: It was a greater success than we expected. We were looking for a big success, it was even more. We were looking for a 5000 people from around the world, there were 8500. We were looking for maybe 50 ministers, there were 87. We were looking for at least 100 countries to assemble, there were 130. We were looking for a good trade show to co-locate with it, it was overwhelming, sold out, a tremendous success. So, in terms of the numbers, the attendance, the participation, the quality of the event, it's just beyond our expectations.
Monica Trauzzi: And as far as the substance of the discussions, what's the main thing that came out of the conference?
Michael Eckhart: A clear agreement that the United States is in a world community on renewable energy. This is not a one country show. Germany is out there. Spain is out there. China is moving fast. India is starting to move. This is a global phenomenon. Japan is the lead in manufacturing PV today. China is coming on strong in wind power. This is a global phenomenon happening. The U.S. is clearly a leader, but not the dominant leader and we've got a role to play, but we're part of a global fabric now and that international global collaboration is key to every country's success.
Monica Trauzzi: Talk a bit more about the U.S.'s role on the international level in terms of implementing renewable energy, where we stand in comparison to other countries, how much more we need to grow to be a leader in this area.
Michael Eckhart: Well, the original technology initiative in renewable energy, starting in the Carter era, in the 1970s, with funding and creating the Department of Energy, funding a multi-hundred million dollar research, development, and demonstration program was a U.S. initiative. So we initially led this whole thing, other countries, Europe, Japan, China, India, they all picked up with R&D programs, but the US program was, by far, the dominant program in the early days. Our policy was that our government funded the development of technologies that then went on the shelf for industry to take off the shelf and implement. What we forgot to look at it is there's industry all around the world and the world industry took our technology off the shelf and implemented it worldwide. Denmark was the first to go on wind power and you see Vestas and other global companies out of Denmark. Then came InterCon and so forth in Germany, and then you had Suzlon in India, for example, and Gamesa in Spain and others in China. And so our U.S. funded technology really became ubiquitous and is implemented now around the world. A little bit we're in the catchup mode and we didn't incentivize our markets as strongly as say Germany and Spain and other countries did. So they're implementing ahead of us and we're not quite in the catchup mode, but our lead has been diminished and we've got a less even market than others around the world.
Monica Trauzzi: And, obviously, one of the major issues playing into this is the extension of renewable energy tax credits, which is currently being debated on the Hill in the Senate. At this point, the Senate is trying to find a way to pay for these tax credits and the White House has said that it won't sign a bill that repeals oil company tax breaks. Where do you see this discussion heading and do you think that these tax credits will be renewed in time?
Michael Eckhart: Well, I compare it to a college giving assistance on scholarships, but not telling the students until the day the school opens whether they have a scholarship. You don't know the rules of the road. And we're talking about a marketplace where $100 billion flowed into this market last year. This is huge capital flows now that all require sophisticated financing and financing structure requires knowing what the tax effects are or the tax inputs are on the structure of that financing. Well, in the U.S. here we have very powerful incentives to accelerate these markets, but we're letting them sunset every two years. So today, as we sit here, the production tax credit for wind and other wholesale power generation and the investment tax credit for solar and fuel cells and other clean tech, these things expire in 10 months. And yet a wind farm can take five years to develop. So why would you be investing in a wind farm development today that's not going to achieve closing until beyond when the tax credits expire? It's like sending a child to college after the scholarships expire. You don't know what the rules of the road are. You don't know what to do. So, what it does is it shuts down the market until they wait for certainty. Business has always said, "Give us certainty and we'll act." And the government, instead, is giving uncertainty.
Monica Trauzzi: So, where do we stand right now in 2008? Is there a shutdown at this point of the market as you were just describing? How uncertain are things for investors at this point?
Michael Eckhart: There's two things happening because the tax credits expire at the end of 2008. One is every project that could conceivably get done by December 31 is being pulled forward. So a lot of business that would be done in 2009 is being pulled up into 2008 creating, by definition, a valley of business in 2009 already. We're going to have a boom-bust market, we know that already. Secondly, any project that can't make that is being put on the shelf. So people are being laid off because they're no longer working on these projects until after they know whether the tax credit is, in fact, going to be there. As friends in finance tell me, look, we serve a global market. Capital flows where the opportunity is greatest and the risk is least. Well, with no knowledge of whether the production tax credit and investment tax credit exists in 2009, that capital is flowing to Spain and China and India because those markets have certainty, as the capital waits to find out what's going to happen here in the U.S.
Monica Trauzzi: And as far as investment in renewables, we have seen the steady upward climb in previous years. There's concern though that this might be a bubble though and that it's not going to continue to go up over the long-term. Is this one of those fad investments or do you see sustainability in this area as well?
Michael Eckhart: Well, I would agree with you that it is a bubble if you believe that oil prices are soon going down and the climate change issue is going away and I don't think anybody believes those two things. So, the fundamentals that are driving the market acceptance of these technologies, which have been in development for 30 years on the promise they'll do good, yes, the fundamentals have now kicked into place. Oil prices are moving, energy prices have all doubled, and the cost of renewables is coming down in the face of conventional energy costs going up. Those are two fundamental things. Climate change is here. It's going to drive us towards a low carbon economy and renewables are low carbon relative to conventional fuel. So, you'd have to believe that oil prices are going down long term and the climate issue is going to go away long term to think this is a bubble. So, therefore, I say it is not a bubble. This is the beginning of a long-term climb.
Monica Trauzzi: I want to go back to the issue of the tax incentives because when the president was at WIREC last week he called for increasing stability in renewable electricity markets through long-term or permanent tax incentives. But on the flipside of that he's also said that he will veto any attempts to pay for these tax incentives by repealing oil company tax breaks. Does that square for you in your mind that it's sort of we want this, but on the other hand it won't happen if we don't meet these certain criteria?
Michael Eckhart: Well, the background on his statement comes from his visit that morning. We were walking around the exhibit floor with him and at one of the stops we got into a discussion about the PTC and ITC. And the president wasn't that keenly aware that these were expiring. This is not at the center of his desk. When it came out in that discussion that they are he was not happy to hear that and he asked his staff, "Are these in the '09 budget?" And was informed that, no, they were not in the '09 budget. In other words, the staff did not expect the PTC and ITC to be extended, which surprised the heck out of me and there was a discussion about that. So, going up in the elevator, the president put into his speech the line you just read, which was about stability in these markets, without getting specific, that these would be signed or approved. But he, as an ex-businessman himself, understands the business and financial community needs stability and certainty to do their business and he's in favor of that. So I think there's a discussion going on about how to bridge this problem politically.
Monica Trauzzi: And so did that discussion with him leave you hopeful that the tax credits will be extended and that this would be included in the '09?
Michael Eckhart: It left me with the belief that President Bush, personally and individually, professionally believes these incentives should be in place and should be long-term, if not permanent. That is my understanding of his position. Now, there's a lot more to the administration, a lot more to the politics of this that has to be worked out, but I left that meeting in the belief that he believes that these are good incentives. Tax credits cause capital to flow. That capital flow creates immediate economic development. That capital gets spent immediately in the marketplace to buy equipment and employ construction jobs and installers and so forth. So, it creates immediate economic development and all that development pays taxes. So, the supply-side economists of the 1980s would argue here, if they were still here, that these tax credits actually pay for themselves. In fact, all of the supply-side analysis proved, in the 80s and 90s, that a tax credit like this causes $4 to $5 of capital flow for every dollar of the tax credit. You have$4 to $5 dollars flowing in, which creates tax revenues back to the government that pays for the tax credit. It pays for itself. And I'd like to see that supply-side argument, even though it's not so popular these days, come forward and justify that these tax credits actually pay for themselves on a current basis. I believe that and I believe that's true.
Monica Trauzzi: And is that something that's being discussed in Congress?
Michael Eckhart: Not enough. There's too much of this PAYGO system this year and, OK, that's the philosophy of the Congress and the Congress is our government. We have to respect that. That's the way they're running it. But what I'm saying is outside of today's philosophy the fundamentals of economics are that tax credits like this create immediate economic impact that, in turn, pays the taxes back on a current basis. That's the fundamental argument behind tax credits fundamentally.
Monica Trauzzi: All right, let's step away from the tax incentive discussion for a moment and talk about the international community and which country you would say stands out as sort of the leader in turns of renewable energy implementation?
Michael Eckhart: Well, you don't like to pick one because there's so many that are working hard on leading this, but I would take Germany. Germany really stands out as having established the technology support programs, the market support initiatives, and support for the manufacturing sector. They have created 230,000 jobs in the last five years in wind power, solar energy, and other renewables, in five years, 230,000 high-paying jobs in five years. This is the number one job creator in Germany. I think it has contributed significantly to the reunification of Germany by providing jobs in East Germany, a lot of manufacturing. They've done very well.
Monica Trauzzi: And that's something that could happen here. There's a lot of talk about the green collar job market as well.
Michael Eckhart: Oh, absolutely! The basic market incentive, which translated from German is feed-in tariff, which sounds odd, but it's just paying a high price for clean energy. That actually comes directly from our law, PURPA, from 1978, the Public Utilities Regulatory Policy Act, I didn't name it, that's what it's called, that created the whole independent power industry. Very successful here in the U.S., adapted for renewable energy in Germany and it boomed in Germany as well. That basic philosophy, where the government rule assures the revenues of the projects and lets the capital markets flow on their own. No involvement of government in the financing, just government mandate that the projects earn revenue and then the financiers take it from there and it works every time.
Monica Trauzzi: All right. I think we're going to end it right there on that note. Thanks for coming on the show again.
Michael Eckhart: Thanks so much Monica.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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