White House, Big Oil, Industry... the Real Enemy is Uncertainty

In my many years of experience in the financial markets, both as a trader and a broker, there has always been one thing that consistently punished value in the marketplace - uncertainty. Most people think that bad news is the worst thing for a stocks value, but as the current sub prime meltdown has shown is that its the uncertainty of where it all will end that is causing the most damage. Some stocks rallied earlier this quarter when the announced multi billion dollar losses because it was viewed as the potential end of the uncertainty of how bad the damage will be. But now that the uncertainty as to when the write downs of all this bad debt will end has returned, the financial stocks continue to falter.



Likewise in the world of Renewable Energy. Uncertainty continues to rear its ugly head and prevents any significant long term vision necessary for consistent growth. The Energy Bill signed into law this week is a prime example of this uncertainty that is continuing to stymie the renewable energy industry. As late as September of this year, at Solar 2007, not only was the extension of the Federal tax credit for renewable energy thought to be a no-brainer but there was also talk of removing the $2000 tax credit limit for residential installations. But lo and behold, 10 weeks later, the Energy Bill is stripped of both the formation of a National RPS and the renewal of the tax credit as well. Now we are 12 months away from the end of these tax credits, with the promise of the House and Senate to address this in the New Year. Is the renewal of these tax credits probable? Yes...but not certain. Hence the problem. How long will they be renewed for? what will be the limits? how will it be financed? All these issues will be revisited by Congress when they bring it up in the New Year and all will be debated. Thus we have uncertainty.



What does this mean for the growth of the renewable energy industry? Well the answer is, it doesn't help much. As it stands now, it looks like medium to large scale wind and solar projects will not be started after June 2008. This is to avoid the risk of not being operational in 2008 to qualify for the tax credit. Also, until the tax credit is renewed, it will be virtually impossible to plan and finance a project for 2009 and beyond. The tax credits are the big carrot that attracts all sorts of companies and banks to provide the financing for large scale commercial renewable power projects. They finance the project to collect a meager % return on their capital plus the tax credits and depreciation of the equipment. They can use the tax credits to write off taxable income generated by their other businesses. Once the maximum tax benefit has been realized, the renewable power facility is sold back to the operator at the depreciated price. Additionally, these tax credits are also what makes small to medium size installations affordable to the companies that install them for their own use. Uncertainty in the future of these tax credits will put a virtual freeze on new financing for these projects while at the same time it puts existing deals under the gun to be completed in 2008. It also double the time to reach break even for the companies that install them for their own use.



Whose to blame? The simple answer is politics. The highly contentious political process that is now the norm in Washington makes compromise a painful process. The Democrats were facing a presidential veto and were forced to cut items to get the bill signed this year. Hopefully, when Congress addresses the tax credits in 2008, they will come up with something that will be in place for a long time to come. This will erase the uncertainty and allow long term planning to become more commonplace.