COLUMN-Obama's investment horizon for clean energy: John Kemp

-- John Kemp is a Reuters columnist. The opinions expressed are his own --

By John Kemp

LONDON, Jan 28 (Reuters) - Like a Byzantine emperor, a U.S. president's every public move is scripted to send signals about his priorities to Congress, the electorate, business, and the vast federal bureaucracy that will actually be responsible for formulating and implementing decisions in his name.

Presidential politics is a theatrical performance in which the president takes a small number of important decisions personally, but is responsible for setting the tone and direction for many smaller ones that will never reach his desk. If he can reach out to voters and businesses he can also reshape national priorities.

So President Barack Obama's high-profile speech on energy independence this week, and public signing ceremony for presidential directives on fuel economy and climate issues, was meant to provide a strong signal of his commitment to an ambitious and costly energy agenda, despite the mounting economic crisis and other pressures on both the motor manufacturing industry and the federal budget.

The speech was intended to reassure progressive supporters that crisis management will not distract the administration from pursuing longer-term transformational changes in energy policy. It was probably also designed to provide an early payoff to liberal voters, even as the president seems set to disappoint them in other areas.

But the president's most important audience was the business community. By emphasising the eventual goal of energy independence, however vague some of the specifics, Obama's speech was meant to create a "planning horizon" for corporations and investors.

The intention is to guide investment spending towards fuel-efficient technologies and renewable sources of energy, sustaining expenditure on research, development and commercialisation despite the slump in oil prices and global slowdown.

In effect, the administration is trying to delink spending on alternative energy and fuel-efficient technologies from the business cycle and changes in oil prices.

By convincing investors it is serious about shifting the pattern of energy production and consumption, and guaranteeing a market for these technologies in the longer term, the administration wants to persuade investors and firms to "look through" short-term cyclical weakness in oil prices.

CRISIS IMPACT ON ENERGY POLICY

The interaction between the financial crisis and climate and energy policies is complex. On the positive side, prolonged worldwide recession is cutting total energy consumption for the first time since the 1970s and reducing associated emissions of greenhouse gases (GHGs). The global slump will almost certainly reduce emissions in both 2009 and 2010 relative to 2007.

More important is the longer term impact. If the crisis, and the unsustainable accumulation of debt and inflationary pressure which preceded it, convince policymakers recent growth rates were unsustainable, and force them to revise down future global growth estimates, the result would be a permanent shift to a lower trajectory for both growth and emissions.

By mid-century, the world economy would be smaller than in previous projections, and fewer people would have been lifted out of poverty, but GHG emissions would also be lower.

So one effect of the crisis is that it may have bought policymakers an extra five or even ten years to roll out new technologies and programmes to limit emissions and stabilise atmospheric concentrations of GHGs.

On the negative side, the cyclical drop in oil prices is blunting commercial incentives to develop alternative energy sources and efficient technologies, and risks delaying their adoption.

First-generation biofuels such as corn-starch ethanol need oil prices of $70 to be commercially competitive; more advanced biofuels such as cellulosic ethanol need even higher ones. In fact, all forms of alternative energy cost more than fossil sources when oil prices are at low to moderate levels ($30-60 per barrel).

Similarly, fuel-efficient technologies remain more expensive than conventional alternatives, especially in terms of upfront costs, and are unlikely to be adopted unless and until oil prices rise again. The decline in oil prices is stalling the switchover.

At the same time, the collapse in energy prices has undermined investors' enthusiasm for start-up companies and experimental projects that aim to bring new sources and efficient technologies to market. Most of these technologies remain unproven and the risk of failure is high, so they depend heavily on venture capital funding and high-risk project financing from the banks.

Both markets are now closed. With oil prices likely to remain depressed for some time, the risk of technological failure is now compounded by an unfavourable commercial environment.

Venture interest is falling. Several conventional oil companies that were sponsoring alternative projects such as wind farms and advanced ethanol plants have scaled back their involvement. Independent venture funds remain wary since the market for initial public offerings (IPOs), which they rely on to exit investments in alternative energy companies and elsewhere, remains closed; it is not clear when it will re-open and on what terms.

Even for promising technologies where the risk of technical failure is relatively small, the crisis has dried up sources of project finance. Bluefire Ethanol Inc warned investors last month it had been forced to postpone construction of a cellulosic ethanol plant because of problems with costs, permits and financing [ID:nN02372433]. Suncor has delayed expansion of a conventional corn-starch plant by more than a year to save costs [ID:nN09299898].