By Tony DanovaIndustry Analyst
By Lindsay HollowayResearch Editor
IBISWorldSanta Monica, CA
For quite some time, alternative-energy technology has been the leading topic of conversation. As the planet grows increasingly warmer, discussions and implementation of alternative energies also heat up. Major concerns over climate change and energy security have effectively thrust renewable energy into the limelight politically and socially. These concerns also created several government-assistance programs to promote the use of renewable energy. Considering the United States is the second-largest consumer of energy in the world (behind China), the Obama administration has made it a top priority to push renewable-energy generation activity as well as reduce the country’s dependence on oil, especially that from foreign countries.
In a joint address to Congress in February 2009, President Obama announced a goal to double energy generation from renewables by 2012. Although it’s not likely that the US will meet that goal by year-end, increased awareness, government support and promotion have helped renewable-energy generation surge. According to data from the US Energy Information Administration (EIA), roughly 12.7% of all electricity generated in 2011 was derived from renewable sources, up from about 8.5% in 2007.
In response to the financial turmoil of the recession, the government and the Internal Revenue Service disclosed several energy incentives as part of the American Recovery and Reinvestment Act of 2009. In addition to various tax breaks for individuals and households, companies producing wind, biomass, geothermal or hydroelectric power would receive a production tax credit (PTC) based on the amount of electricity generated from a specific source.
And in March 2011, the president released a plan to lead the US toward safer, cleaner and more secure energy supplies. The plan states that by 2035 the nation will generate nearly 80% of electricity from a diverse range of renewable-energy sources. To reach this goal, Clean Energy Standards will encourage investment into the clean-energy industry. Additionally, many states have implemented renewable portfolio standards (RPSs) that require a utility’s total energy portfolio to include a certain percentage of renewable energy. This percentage gradually increases annually under an RPS, and although it varies by state, most participating states hover at about 20%—Hawaii is the highest, at 40%. Currently, 36 states carry RPSs, up from 29 last year.
Although more states are expected to set RPS goals in the coming years, supporting the move toward renewable energies, an extension to the PTC—already in its fourth extension—was recently voted down. Consequently, the tax credit will expire at the end of this year, threatening a large number of renewable-energy production sources.
Aside from the looming tax credit expiration, renewable energies will continue to face other hurdles and barriers in the near and long-term future. Though renewables like hydroelectric, wind and solar power have experienced significant support and growth over recent years, such hurdles have inhibited the potential for faster growth. Manufacturers’ inability to compete on a global scale, environmental concerns regarding plant expansion and a slight resurgence in fossil fuel production—particularly natural gas—are just a few factors that have affected and will continue to affect renewables like hydroelectric, wind and solar power production.
Hydroelectric power is by far the largest renewable-energy resource used to generate electricity currently. In fact, in 2011, hydroelectric power accounted for roughly 62.5% of all electricity generated from renewable resources. And of the total US electricity generation portfolio, the EIA estimates that hydroelectric power has grown from representing 6% in 2007 to 7.9% in 2011.
In line with growth in energy production, hydroelectric power companies have experienced steady revenue growth, particularly since 2010. Like the overall renewables industry, however, several factors have kept that revenue growth low and even caused steady decline in other years. Aside from severe droughts that plagued the southeastern and western parts of the US in the two years to 2009 and then the recessed economy that followed, a number of externalities have hurt revenue and hampered the industry from growing at a faster rate—even with federal and state tax incentives at play. The favorable legislation directed toward renewable energy actually failed to create a construction boom for hydroelectric power facilities and, instead, has boosted adoption of other types of renewable energy.
Though hydroelectricity is considered a clean, renewable resource, it has been increasingly scrutinized for its true environmental impact. Hydroelectric turbines are mostly emission free, but their operation isn’t without impact on surrounding wildlife and river water. Damming a river affects the habitats of local wildlife by changing the flow of the river. Aside from disturbing habitats during installation and operation, much aquatic life becomes injured or dies because of passage through hydroelectric turbines. And often, operations contaminate downstream water.
An additional issue is finding a suitable location for hydroelectric power plants in the first place. Because an ideal location requires a steep incline and high water level, the areas where a river can be dammed and plants can be built are very limited. This fact is restricting the number of plants up and running. In fact, according to IBISWorld estimates, the numbers of companies and their respective plants have both been falling—4% and 2.1% per year on average, respectively. Many companies face aging facilities that need to be upgraded or replaced. Even though the cost of producing power in this industry is low (after accounting for facility-construction costs), industry maintenance costs typically stay elevated because of the aging and idle facilities. As a result, the cost of upkeep ate up a higher percentage of revenue over the past five years, which also caused profit to fall. Upgrading or replacing existing assets will require further capital investment if industry players want to continue creating electricity from the same facilities, but doing so wasn’t an option during the recession as financing became hard to come by. Due in part to the aging structures, the numbers of companies and dams are forecast to continue declining in the next five years.
These environmental and financial hurdles are expected to persist in the coming years, continuing to inhibit strong company and industry growth. In the five years to 2017, IBISWorld projects hydroelectric power industry revenue to grow at a mild average annual rate of 1.9%.
Although wind’s share of renewable energy production is much lower than hydroelectric, it is the power source that has experienced the most rapid growth over the past five years. According to the EIA, electricity generated from wind power has more than tripled from 2007 to 2011, growing from 0.8 to 2.9%, respectively. This growth pales in comparison to wind power industry revenue growth, though: In the five years to 2012, IBISWorld estimates revenue increased 19.3% per year on average to $4.3 billion.The main driver behind this substantial growth has been the PTC, which provides operators an income tax credit of 2.2 cents per kilowatt-hour of electricity produced from wind turbines. Deemed a highly capital-intensive industry by IBISWorld standards, the PTC made construction of expensive wind farms increasingly attractive and lowered the overall cost of wind power generation. With private companies reluctant to make such large investments during and after the recession, the government’s incentives helped push financing for wind power companies that would not have otherwise attained the investment required. Companies threw wind farms up at breakneck speeds to take advantage of the credit, pushing the number of industry companies up 5.5% per year on average over the past five years.
Despite the astronomical revenue growth, the wind power industry has seen its share of hurdles. Aside from requiring significant capital investment, a wind farm also needs a sizable plot of land. And like hydroelectric plants, the wind farms need to locate in an area with specific characteristics. The region needs to be in an area with high wind, yet close enough to its end-user market to keep distribution costs from getting too high. The majority of energy from wind farms is generated in the Great Plains, particularly Kansas and Illinois, whereas the majority of demand for energy is on the coasts.
Additionally, there has been considerable consumer opposition to wind farms for their unpleasant look and noise. People living near wind farms have complained of headaches, vertigo, insomnia, anxiety and more as a result of the nearby turbines. And in many cases, home and property values drop when a wind farm is installed nearby. Lawsuits regarding noise pollution and resident outcry stretch from Oregon to New York, Texas to Wisconsin. The issues aren’t only stateside either, with Taiwan, Australia and Canada among the countries with reported complaints. A poll done by ICM Research for UK magazine The Guardian found that opposition to onshore wind farms has actually tripled since 2010. Consumer opposition, combined with the limited land resources, has kept wind power from growing at a faster rate than it has, and these factors are expected to continue affecting the industry in the future.
Expected to inhibit the industry even further in the immediate term is the looming expiration of the PTC. Despite the wind power industry’s lobbying efforts on Congress, another extension of the multiyear tax credit was voted down. So wind farms that are erected before the end of this year will receive the tax credits—meaning this year could be one of remarkable growth for the US industry—but after 2012, new turbine construction and operation will become drastically more expensive and will force firms to reorganize. Wind turbine projects slated for years ahead will have to be delayed and restructured to run without the tax credit.
Although the end of the PTC will pose a severe threat to production of many renewable energy sources, it is especially detrimental to that of wind power because of such high start-up and operational costs. As a result, IBISWorld projects industry revenue growth to slow substantially over the next five years to an annualized rate of 8.4%.
Like wind power, the US solar power industry has experienced intense annual growth over the past five years. Although the EIA estimates that solar power only generated about 0.35% of energy derived from renewable sources in 2011—and only 0.04% of total energy—industry revenue soared at an annualized rate of 28.5% from 2007 to 2012. Despite its small share of power output in the bigger picture, solar power presents a prime opportunity for growth. The sun is by far the most abundant renewable resource, and many companies have been capitalizing on the wealth of resources it offers. The number of solar power generators has been growing about 6% per year on average since 2007, but even more telling is the 48% annual growth in the number of US solar panel manufacturers.
In 2011, three companies declared bankruptcy within three weeks of each other: California-based Solyndra, Massachusetts-based Evergreen Solar Inc. and New York-based SpectraWatt. A key contributor to the downfall of these companies was their highly niche panels, which did not offer the same application as traditional panels. These unique panels eventually became noncompetitive in the marketplace. Additional contributors to the challenges facing solar have been the simultaneous rising costs of silicon and falling prices of solar panels. Because silicon is a major ingredient of solar panels, price increases over the past five years have squeezed profitability. At the same time, manufacturers stepped up production in the years prior to the recession to tap the booming solar industry, expanding supply and effectively pushing down prices of solar panels as manufacturers sought to unload inventory.
China’s growing role in the global solar power energy market has also kept the domestic industry from growing at full potential. Chinese solar panel manufacturers have thrived in China’s low-cost, government-backed marketplace. Chinese manufacturers leverage government incentives and access to capital and low-cost labor, giving the country considerable competitive advantage over US solar panel manufacturers. As China becomes a greater force, domestic solar power industry revenue growth is forecast to slow to 7% per year on average to about $210.4 billion in the five years to 2017.
As solar power generator growth slows, so too will growth of the solar panel manufacturing industry. IBISWorld estimates US industry revenue to grow 8.2% per year on average through 2017, compared to the immense 32% annual growth in the five years to 2012.
Although these renewable-energy sectors have been expanding and are poised for continued growth in the coming years, they’ve all been restricted to some extent by hurdles within each industry. And internal structural issues aside, the entire renewable-energy community has been facing increasing external pressure from the very real shale-gas boom that is occurring. From its more environmentally friendly characteristics (compared to oil and coal) and consistently low prices to its more flexible operations and vast domestic supply, natural gas has become a strong growth industry. Recent discoveries of untouched reserves in the Marcellus Shale region of the Appalachian Basin have only added fuel to the fire. The influx of cheap natural gas has supplanted the growth of other fossil fuels, such as coal and petroleum (both of which have declined over the past five years), and is increasingly threatening renewable energies.
Going forward, the move from dependence on foreign oil to domestic energy resources will be pursued at higher rates, making natural gas an even hotter commodity. According to EIA data, natural gas generated 24.8% of total electricity in 2011, up from 21.6% in 2007. Energy growth throughout the US is expected in the short and long term, with 222 GW of new generation capacity to be added by 2035, according to the EIA; nearly 58% of that newly consumed energy will be fueled by natural gas.
Like the renewable energies, however, the natural-gas industry’s growth path is not without bumps and detours. While domestic resources are abundant, the prevailing form of natural-gas extraction is hydraulic fracturing, or "fracking," a method that has been highly scrutinized for its potential harm to surrounding ground water and the people exposed to that water. Activist site DangersofFracking.com claims that there have been more than 1000 documented cases of water contamination near areas of gas drilling as well as cases of sensory, respiratory and neurological damage due to ingestion of contaminated water. Environmental, safety and health issues will continue to restrain natural-gas production from reaching its full potential as government oversight of the industry increases. This drag on growth could mean greater influence and market share for renewable energies in the future.
Even if a bit chaotic, the future of renewables looks promising. Overall, awareness, exploration and consumption of renewables have expanded over the past five years. Though the surge of natural gas consumption poses the largest external threat and each individual industry has experienced its own restrains on stronger growth, the total renewable-energy market still has a lot going for it at various levels. As discussed, the long-term performance of hydroelectric, wind, solar and other alternative energies largely rests on the willingness of companies to fight for extended government incentives; to expand production without incurring severe political, social, environmental and health problems; and to compete on a global scale amidst increased foreign production.
This article was first published in the 2012 edition of the Energy Manufacturing Yearbook.