What's the Cost of Inaction?

With regulatory conditions for renewables worsening in the U.S., power producers must choose to change or suffer the consequences. 

Last November when Donald Trump won the presidency, I said with confidence that there was no way he could stop the renewable energy juggernaut. The ‘economic genie’ created by the success of solar and wind had already come out of its bottle. With its levalized costs now rivalling that of coal, it seemed that renewable energy would continue to thrive even in a world without incentives. Now, I have to eat my words. I didn’t think it was possible until now, but Trump has all the means to dismantle our industry. His decision to go through with the ITC’s recommendation to pose tariffs on imported PV panels would severely damage power producers’ ability to develop projects at the low costs they’ve enjoyed in recent years. Effectively, these tariffs put them in a position worse than a deer in the headlights, where the cost of inaction is death. Not only would the tariffs artificially obstruct the U.S. power market, but they would create a dramatic shift in our domestic economy. We saw the same thing happen not long ago when our European neighbors made this very mistake.

When the Spanish government abolished feed-in tariffs in 2013, which ended funding for new renewable investments, the market collapsed. The incentives had given rise to lucrative solar and wind industries that had created thousands of jobs and affordable electricity. Once FIT rates dropped too steeply, their markets suddenly became unattractive to investors. Italy and Germany also suffered similar fates. European developers then had to make a choice, typically one of the following three paths: Those that stuck their heads in the sand and refused to evolve their business models perished. Those that diversified into new technologies and regions but continued to operate in the same fashion struggled for a while. We saw this happen with even the largest of European utilities. However, the companies that fared best were those that invested heavily in creating a robust IT infrastructure. Doing so allowed them to double down on their operational costs, gain clarity over the risk factors of new investments and maintain the compliance that helped them attain investment capital at a low cost. These are the players that are able to bid the lowest tenders while still profiting today.

History is now faced to repeat itself, with our industry staring down a very real threat. If the Trump administration succeeds at making conditions harder here at home, U.S. companies can expect to face a fate similar to that of the Europeans. Many will find themselves at a crossroads and will be forced to take one of those three paths. Thankfully our European counterparts have shown us the way. It is not enough for power producers to diversify without making significant improvements to their business model. The choice now comes down to either weathering the storm with brute force alone or going about it more strategically. “Strong IT platforms are the key to the distributed future,” predicted David Crane, former CEO of NRG, at the beginning. Having a robust IT infrastructure will crucial in helping companies attain the competitive advantage that they need to survive. Otherwise, history has already shown us what will happen and hopefully, we will not repeat the same mistakes.

For more articles on the subject and more, visit the Mercatus IGNITE Blog.