Incentives double edge sword for alternative energy

Since the law of supply and demand isn’t going to be overturned any time soon, it is perhaps a good opportunity to revisit another immutable law:  When all you got is incentives to make something economically viable – removing those incentives will lead to failure.  This lesson, often repeated but willfully ignored, is now being replayed for those companies that tried to make a go of ethanol production, relying on government incentives to buyers with a $0.45/gallon federal tax break.

Ethanol industry lurches in wake of lost subsidy, oversupply 

Since the subsidy ended Dec. 31, ethanol profit margins have declined sharply, even slipping into negative territory. Experts see no quick turnaround in sight.

Now that the subsidy has disappeared, the ethanol downturn is being felt nationwide, including in Minnesota. The state’s $2 billion-plus industry ranks fourth in the nation in capacity and production.

At the Al-Corn Clean Fuel ethanol plant in southeast Minnesota, CEO Randall Doyal sees how the loss of the subsidy has hurt this business. He said his profit margin — the difference between the cost of making the corn-based fuel and what he can sell it for — has disappeared.

“Since the first of the year it’s been even-to-slightly negative,” Doyal said.

The loss of the 45-cent-per-gallon federal tax break marks a major change in the economics of ethanol. It also created a double whammy beginning with the closing months of last year, when ethanol producers saw a rush of buyers for the last of a subsidized product.

The charge was lead by [sic] the gasoline companies that actually received the subsidy for buying ethanol, Doyal said. As the end of the year approached, the companies stocked up, knowing that every gallon would cost 45 cents more after the first of the year.

The heavy demand prompted the nation’s ethanol industry to produce as much fuel as possible, Doyal said. That’s the other part of the double whammy. Ethanol plants flooded the market with too much ethanol, much more than the nation’s fuel capacity could absorb.

So what is the right path?  I still contend it is important for the government to be proactive with support for alternative energy.  Picking new technology winners and losers invariably leads to more losers than winners.   How could it be different? 

There is no evidence or suggestion that  government investment/promotion of new tech has any better success rate than any other type of start-up.  But like investing in any start-up or emerging technology, it is a numbers game where you only need a few very extraordinarily successful outcomes to make up for the far more numerous losers.  Regretfully those few winners may never develop while a large number of losers is guaranteed.  Such is the price/cost of progress.

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