GreenStocks101

It’s simplicity at its best, and it has helped spread solar power across Europe. By putting solar panels on your roof, then wiring them to the electrical grid you can recoup your costs and even make a profit through checks from your local power company.

This idea may have worked in Europe, but it’s been slow to start in the United States, perhaps due to countervailing incentives to local power companies or perhaps because the U.S requires a more innovative approach. As it stands now the official barrier is a slew of Federal Regulation on the selling of excess solar power from home owners. Laws aren’t made arbitrarily so it seems like these regulations could be the result of the power industry’s lobby. It seems contradictory that while the Obama Administration is pushing for green jobs and saving the environment that regulations exist that prevent citizens from benefiting from making their own energy. This is a perfect situation for the new administration to to step in and provide the right incentive to the right people.

It is clear the Obama Administration is heading in this direction, at least as far as underlying goals for energy expenditure for the average American. Currently the U.S. Government provides a 30 percent tax credit for systems placed in service before December 31, 2016. However there is a better and more effective way of tying tax credits to the policy mentioned above that spread solar power through Europe.

Maybe the government is worried about unleashing this idea to the general public because of unforseen economic ramifications? Well there’s no reason that a smaller pilot program could not be developed. Rather than targeting the average American consumer, the Federal Government can target public servants. Rather than having local energy companies hand over profit to consumers, the Federal Government can bridge this counterincentive by providing tax credits to public servants equal to the amount of energy produced by the individual federal employee’s household.

How would this work? Solar panels are expensive, so the first thing to do would be to provide an additional tax break to federal employees purchasing solar panels. This wouldn’t have to be a tax credit, though that would be ideal, but it could be given as an additional 1-5 percent tax deduction on the cost of the panels in addition to the 30 percent already available to average tax payers as a credit.

After the federal employee purchases the panels, excess energy would go to the local energy company as savings that would eventually diminish the strain on their capacity to provide large amounts of power to a given area. These savings would be converted to a discount on power used by the department or agency that employs the public servant. This would bring down operating costs for government offices and foster a competitive spirit between departments and agencies to go green. Finally, the money saved would come back to federal employee as a tax credit or tax deduction equal to the amount of energy produced by his or her household.

Going green is a goal for American society, so it makes sense to approach this challenge through a team effort. By linking federal employees, private companies, and government tax incentives this goal ceases to be a challenge for individuals. Our history has shown that Americans coming together are capable of achieving anything they set their mind to. The difficulty lies in building the understanding that going green is a team effort.

So it’s clear this policy will reduce dependence on fossil fuels and improve the environment, but how does this really SAVE the U.S. Government money?

This is less than obvious; it actually comes from the local energy company. Remember one of the major barriers to this policy’s implementation in the United States is corporate greed. Few companies want to give money back to their consumers, why should they do that when they gain no inherent benefit? In economics this is called a market failure, which in this case is preventing the creation of a number of public goods. The plan above allows the company to keep their money, but that money is TAXED. Provided that the tax incentives for federal employees are less than the amount that is taxed from the local power company, the government will save money.

Some may argue that these savings are marginal! But look at how many other public goods are achieved through this policy for a net saving to the government? It may seem marginal on a individual scale, but multiply that by every federal household (eventually the entire American power grid) and behold the taxes on the company’s additional income derived from household energy creation is substantial.

In addition to faltering support for Democrats, there’s the simple fact that farming interests are over-represented in the Senate, and farmers are simply against the climate change bill due to the belief it will increase their energy expenditures in the short term. Additionally jobs in strongly unionized industries such as the coal will be lost. With the current unemployment rate at 10.2 percent, supporting policy that causes the loss of jobs, directly or indirectly, is political suicide.

While job loss in these politically influential industries is likely to occur as a result of the Bill becoming law, the reason for these loses have nothing to do with what would affect Green companies the most: funding through grants and loans. Satisfying farmers, oilers, and coal miners is not mutually exclusive with providing green companies with grants and loans.

You can read my ACES (H.R. 2454) article for more details, but in short the Clean Energy Development Administration and Fund (CEDA) has been empowered to dole out grants to American solar, wind, and other alternative energy companies. This is what the American renewable energy industry needs most.

Yesterday’s Senate Finance Committee panel on the Effect of Climate Change & Energy Legislation on Jobs basically stated the Bill would be costly for American workers on the whole and negatively affect GDP in general. According to Charles E. Grassley (R-Iowa), “An honest cost assessment requires us to acknowledge that there would be no economic benefit for Americans from it, at least initially.” In fact the chief economist for the American Council for Capital Formation giving testimony, Margon Thorning, admitted states such as Kansas would likely lose between 28,000-29,000 jobs compared to baseline forecasts. This kind of analysis is likely to doom Republican support of the Bill.  

With 4 weeks left until the Copenhagen climate change meetings, a definite answer to this should come soon. S.1733 in its current form is likely to fail, but it is possible that a reformulated Bill that preserves CEDA in some form will get through.

The United States will want to bring something to the table in Copenhagen, even if it’s not a policy of cap and trade that will be the primary topic of discussion in December. CEDA could serve this purpose if the Bill isn’t dropped altogether.

How does this translate to green stocks? Well, the recent news is currently pointing to a dead or impotent Bill, and this will likely exert negative pressure on green stocks. However, it is likely that the green company meal ticket will survive in some form and lead to a strong upswing in stock price after the reformed Bill is passed.

Amid all of the bad policies coming out of Washington these days, it seems legislators may actually have stumbled on something positive. The American Clean Energy and Security Act, or ACES, passed in the House of Representatives not too long ago, finally giving hope to green investors and companies for much needed government support through augmenting private demand and financing.  

There’s a load of proposals in the ACES, 1428 pages of them to be exact. However, as an investor in green energy stocks all you need to know are the following two points: 

1.) Increasing Government Demand to Augment the Private Demand 

ACES reflects the general shift in the government’s approach to supporting energy efficiency and renewable sources. It does this by establishing a requirement for the federal government to ensure that the amount of electricity consumed by federal agencies reflects an increasing percentage of “renewable electricity.” Moreover, states will have to meet new green standards for energy consumption, storage, and building construction. This translates into increased supply of federal and state government contracts for companies that can lower the cost of electricity and lower carbon emission. Government contracts are not small; if company’s can manage to get them, they can guarantee a large and steady flow of revenue for length of the contract, which can be several years.  

2.) Direct and Indirect Subsidies for Green Techs           

In addition to opening up government demand to green companies, ACES proposes direct funding of developing technologies and products. It creates a Clean Energy Development Administration and Fund (CEDA) in sections 184-190. CEDA is going to be the government’s subsidy center for new research; it will have the mandate to provide direct and indirect support for clean energy technologies, including provision of loans, loan guarantees, and letters of credit. And no company is allowed to have more than 30 percent of all available funds. In a time when low interest loans may be difficult to get, this is essential for growing the green energy industry.  

As with everything, there are drawbacks. Not with the content of ACES for the investor per se, but with the fact that it’s still H.R. 2454. The bill still has to pass through the Senate, and so nothing is final until the legislation is officially enacted. Also, it is clear this bill is meant to approach energy independence and climate change through a multi-pronged approach. This may be effective in handling the issue as a whole, but it won’t be of much use to the investor if funding for CEDA is marginal as a result of spreading the wealth throughout the bill.