New Energy to Recover

August 17, 2009

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

As the country wends its way out of the dark recession, more pressure will be put on utilities and other businesses to invest anew in environmentally friendly technologies. While such a cause is admirable, it will still be slow in coming.

Credit markets, of course, have been tight since the downturn officially began in December 2007. During such times, the natural inclination is to hunker down, preserve cash and wait. That survival technique, though, comes at a cost. And in this case, it's taken not just a toll on jobs but also on environmental spending. Companies, in effect, feel less immediate pressure to invest in carbon-free technologies.

The good news is that the nation's gross domestic product fell just 1 percent in the second quarter. That's less than the predicted 1.5 percent decline, which is leading to a more positive outlook in the second half of the year. By contrast, the last quarter of 2008 and the first quarter of 2009 saw declines in output of 5.4 percent and 6.4 percent, respectively. The experts now say that the economic growth will exceed 1.5 percent in the second half of 2009.

Those forecasts, however, are tempered by the current level of consumer spending that makes up 70 percent of the economy as well as the expected jobs creation. The unemployment rate is anticipated to hit 10 percent by 2010, which is the worst since the 1982 recession. The economy has lost 6.5 million jobs since the downturn began.

It's a battle that the Obama administration has taken on by spearheading a $787 billion stimulus package. Much of that money has gone or will go to energy-related ventures. The aim is to stoke the beginnings of new and green businesses that will spawn the next generation of American jobs. Corporate outlays are, in fact, improving.

Critics of such policies say that the excess spending is harmful in the long run. They add that increased government deficits do not inspire to consumer confidence -- the key ingredient to a lasting recovery.

"We won't have a recovery as long as we're losing jobs, [but] you need to have economic growth before you have job growth," the president said at a news conference. The recent "GDP is an encouraging sign that the economy is heading in the right direction. That means, eventually, businesses will start growing and will start hiring again. But this won't happen overnight."

Indeed, one of the central tenets of the Obama plan has been to get money flowing again. Along those lines, the Federal Reserve has reduced the cost of borrowing money to the lowest it has been in decades. Such a tactic, though, has created concerns that markets would become awash in money and that the rate of inflation would rise as a result, bringing down the economy again. For now, though, inflation has been kept in check and has registered about 2 percent in the last quarter.

Utility Indicators

To be sure, economic doubts still exist. While the dust has not settled, the economy is slowly progressing and therefore giving more assurances to risk-takers. Such confidence, in fact, is integral to not just overall economic development but also to that of the energy sector. As banks and other lenders get their houses in order, they will move to attractive industries and the energy sector will assuredly be one of them.

Until then, many economic analysts say that the federal government must provide not just steady guidance but also the means by which feasible ideas become commercialized. Among the elements of the stimulus plan are $83 billion for clean technology investments and $6 billion in loan guarantees to shovel-ready projects.

"We seem to be getting over our jitters and the direction is very positive," says Ed Einowski, a partner in the Portland, Ore., law office of Stoel Rives. "The intended effect of the stimulus bill seems to be realized."

Such funding along with production and tax credits provided to renewable energy projects is beginning to take root. By most accounts, however, it will take a while before those seeds sprout. Consumer, business and investor sentiment must first stabilize before the real resurgence takes place.

Utilities, by and large, have fared better than most during this time. But it was not too long ago that they emerged from the post-Enron deregulation financial morass. With few exceptions, they are still not strong enough to fund environmental and infrastructure projects out of cash flow. Most must rely on solid lines of credit. And while the capital markets may be easing, they remain tough to crack.

Utility spending will therefore reflect the broader economy. That is, those companies will also remain cautious at least until they see a much brighter horizon. As such, their investments in green technologies and carbon reduction will tend to be gradual.

"Industry demand was still declining in the second quarter of 2009, but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the second half," says the National Association of Business Economics. "Businesses were aggressively cutting costs this spring by trimming payrolls, inventories, and capital spending. Looking ahead, respondents plan milder reductions in employment and capital budgets over the next 6 to 12 months."

The recession may be coming to an end. But that won't stop the near-term pain. In time, though, consumers will get back in the saddle and businesses will stock up as a result. As this happens, the president's vision of an economy grounded in green technologies will start to materialize.