It’s almost axiomatic to say that we all care about the effects of global warming (hi Mr. Gore!). Nobody wants to swim down 5th avenue. But it really wasn’t until last year’s phenomenal oil spike that people started talking about alternative energy with any kind of practical fervor – and that brought investment dollars.
Oh, how times have changed
NYMEX Crude oil closed at $37.51 on Friday. Inventories at the Cushing, OK deliver point were pushed almost to the limits. Gasoline nation-wide averaged $1.94 (though I paid $2.09 a gallon locally) and while not great, it’s better than the nation-wide average of $2.96 this time last year, and a lot better than the crazy $4 gas we bought at the peak in June.
The bonus of those high gas prices last spring and summer was that the pain was so great that drivers actually drove a little less. Consumption actually declined, and some of that behavior shift has extended into last fall and this winter. The global economy hasn’t helped fuel any fuel consumption either.
But that could be changing. The latest Energy Department’s Weekly Petroleum report showed gasoline demand for the four weeks ending Feb. 6 was up 0.1% from the previous year. OK, it’s not much, but it’s a little. But for alternative energy, it’s probably too little, because gasoline demand impacts directly on ethanol demand.
Agriculture Secretary Tom Vilsack said last Tuesday that the EPA “should raise the amount of ethanol it requires to be blended with gasoline in order to help the U.S. ethanol industry.” Currently, the government only allows a 10% ethanol-gasoline blend. More ethanol has become an economic argument, not an environmental one, because the ethanol industry is in need of help of some serious help.
Ethanol giant VeraSun Energy Corp filed for bankruptcy back in October, and it has been shopping around for buyers for essentially all of its plants. Other companies are feeling the pain as well. Corn prices are still relatively high, and gasoline demand has stayed low (along with prices) – which means for ethanol, margins are squeezing ethanol companies right out of business. No margin. No ethanol supply.
Currently, the federal government’s renewable fuels standard requires 11.1 billion gallons of renewable fuels to be used in 2009, with 10.5 billion gallons of that coming from corn ethanol. That target climbs to 36 billion gallons of renewable fuels by 2022 (15 billion gallons of corn-based ethanol & 21 billion gallons from advanced biofuels). The chances that those targets will be met are in serious doubt. ADM recently estimated that 21% of U.S. ethanol capacity has shut down due to low margins and weak demand.
But there is more to alternative energy than ethanol, it just happens to be the one you can most directly trade as a commodity investor.
Alternative Alternative Energy
I’d love to say it’s different elsewhere on the green planet, but even T. Boone Pickens’ favorite alternative energy option – wind power – is in dire straits. Like most other projects that are looking for financing right now, wind and solar projects are finding it tough to get cash. Back in December, Mr. Pickens admitted to being “a little anxious” about where the money for his big Mesa Power project was going to come from, and he has said in the past that in order for wind to be competitive, natural gas needs to be around $9/mm Btu, a long, long way from the $4.68 the EIA reported in last week’s natural gas update. The EIA Short Term Energy Outlook from last week forecasts total natural gas consumption to decrease 1.3% in 2009, with the loss stemming from a 5.1% drop on industrial gas consumption due to the economic downturn.
Not exactly great news if you’re a fan of the Pickens Plan. Not great news if you’re interested in alternatives at all. Companies in both solar and wind industries are laying off workers and seeing demand for their products go down, as consumers and businesses tighten their belts.
Not only are alternatives competing with cheaper fossil fuel energy (and coal, as well) the industry itself has become a victim of the economic downturn – both in terms of tighter credit markets and falling sales.
Stimulus Package to the Rescue?
With the U.S. Economic Stimulus package soon to be signed by President Obama, let's take a look at some of the line-items designed to help the alternative energy industry.
As far as direct investment goes, I count roughly $38.7 billion dollars going toward energy related items – from the largest piece of the pie ($11 billion) earmarked for the updating of the U.S. electricity grid to $2.5 billion dollars going to energy efficiency and renewable energy research. But this isn’t all about alternatives – that fancy new electrical grid, while obviously green, just moves generic energy demand (cars, heating) from other sources to coal, the source of most of this nation’s electricity.
And fossil fuels aren’t left out of the plan anyway – there is a provision for $3.4 billion for research and development of fossil energy. There is some good news though for wind and solar projects. The plan sets aside $6 billion for loan guarantees for renewable energy projects, such as wind or solar – guarantees that might make it easier for projects such as Mr. Pickens' Mesa development to receive financing from the private sector. The rest of the energy allocations go primarily towards conservation efforts.
Beyond direct investment, there are important tax breaks directed at alternative energy. The plan extends existing tax breaks for wind and other renewable energy facilities, along with providing new tax incentives for those facilities. There is authorization for $1.6 billion of new clean renewable energy bonds and $2.4 billion for energy conservation bonds for state and local government projects aimed at reducing greenhouse gas emissions.
Consumers can get in on the tax breaks too, with tax credits for energy-efficient improvements on existing homes being extended. And, for those early adopters – tax credits of at least $2,500 when you purchase a “plug-in” electric car.
Honestly, it’s doubtful any of these stimulus line-items really do much to make the life of an ethanol plant owner any easier, and the plan doesn’t change the game. And the name of the game is still fossil fuels. Basic economics always wins, and if Oil or Natural Gas remain just plain cheaper than the alternatives – after any and all incentives, investments, or incantations – well, they’re just not much of an alternative.
