06 Jul 2010  Research & Ideas

Renewable Energy: Winds at Our Back?

It certainly stirred up controversy in 2001 when an entrepreneur proposed erecting 130 wind turbines off the coast of Massachusetts' Cape Cod. After nine years of struggle over regulatory, environmental, safety, and social issues, the plan appears closer to becoming a reality. HBS professor Richard Vietor reflects on wind energy and innovations in the renewable energy industry. Key concepts include:

  • The Cape Wind project has sparked controversy in the eastern United States related to regulatory, political, environmental, and social concerns.
  • Wind power is important for the near term, but in the longer term solar and nuclear power may gain ground.
  • The United States is rapidly falling behind other developed countries in its approach to renewable energy sources. Nevertheless, President Obama's stimulus package provides significant incentives and subsidies for green energy projects.
  • More than 30 states have renewable production standards that require utilities to purchase or develop from 15 percent to 30 percent of their power from renewables over the next 10 to 15 years.

 

When American energy entrepreneur Jim Gordon envisioned the first offshore wind farm lining the horizon a few miles off the coast of the eastern United States, he perhaps did not factor in blowback from almost every angle.

Gordon's nearly 10-year battle to gain approvals for building a wind farm off Massachusetts' coastline is the subject of HBS professor Richard Vietor's case study "Cape Wind: Offshore Wind Energy in the USA." The case highlights the challenges and opportunities that face green businesses as they attempt to harness energy from natural resources such as wind, sunlight, tides, and geothermal heat.

According to Cape Wind's Web site, "Cape Wind is proposing America's first offshore wind farm on Horseshoe Shoal in Nantucket Sound. Miles from the nearest shore, 130 wind turbines will gracefully harness the wind to produce up to 420 megawatts of clean, renewable energy. In average winds, Cape Wind will provide three quarters of the Cape's and Islands' electricity needs."

As the case details, however, before Cape Wind could realize its ambitions it first had to weather multiple regulatory, legal, and public relations hurdles, including concerns raised by influential residents of Cape Cod, Martha's Vineyard, and Nantucket such as the late Senator Edward M. Kennedy. Cape Wind has also confronted opposition from other political leaders as well as Native American groups, tourism and business associations, recreational fishing and boating clubs, and civic and environmental preservation organizations. NIMBYism—the "Not in My Backyard" syndrome—has fed an undercurrent of negative sentiment, too.

Vietor explains in the case how Gordon, to buttress his proposal and allay fears and concerns, has spent at least $30 million on scientific research, geotechnical exploration, Doppler oceanographic studies, avian research, socioeconomic environmental studies, community outreach, and litigation. Late last year, the Minerals Management Service (recently renamed the Bureau of Ocean Energy Management, Regulation, and Enforcement) completed its Final Environmental Impact Statement. In April 2010, Interior Secretary Ken Salazar gave his final approval. The Federal Aviation Administration added its approval in May.

As the United States attempts to cope with long-term damage on the Gulf Coast from the Deepwater Horizon environmental disaster, a look at the broader spectrum of potential energy sources in the United States, and their political and related implications, is both timely and necessary. Vietor, an expert on business-government relations and environmental management, is the Paul Whiton Cherington Professor of Business Administration and senior associate dean for the Asian Initiative at Harvard Business School. He teaches courses on the international political economy.

We asked Vietor about developments in the renewable energy industry in an e-mail interview.

Sarah Jane Gilbert: What led you to study the renewable energy industry?

Richard Vietor: Over the past 30 years I had done considerable research on fossil fuel energy policy in the United States that has been published in several books, including Contrived Competition: Regulation and Deregulation in America; Business Management and the Natural Environment: Cases and Text, with HBS professor Forest L. Reinhardt; and Environmental Protection and the Social Responsibility of Firms: Perspectives from Law, Economics, and Business, coedited with Bruce L. Hay and Robert Stavins.

Besides having long worried about climate change, I was appointed to the board of a wind developer a few years ago, and that interested me in renewables. For the Harvard Business School Centennial in 2008, I did a comparative research project on national renewables policies, and wrote cases on wind companies in Europe, India, and the United States: "(Supergrid" and "The Suzlon Edge"). Subsequently, I developed a case on solar power in China ("Sinopec: Refining its Strategy"). Now I am working on issues of geothermal energy and carbon sequestration.

Q: Where does the United States stand globally in this market space? How does it compare with other countries in its efforts?

A: This is rather disconcerting. The United States is rapidly falling behind other developed countries such as Denmark, Germany, Japan, and China, all of which use government policy to develop their renewables industries.

Whereas the United States leads in solar science, it is China, Japan, and Germany that have pushed the research by encouraging their markets to adopt solar and wind power. Of the top 10 wind-turbine manufacturers in the world, for example, only one—GE—is American.

Q: What regulation and policy activity is under way to make the development of renewable energy more favorable for businesses?

A: President Obama's stimulus package, in particular, provided significant incentives and subsidies for the development of renewables. There is, for example, an investment tax credit of 30 percent—even payable as a cash subsidy—for new developments in the next couple of years. There are also loan guarantees of $6 billion, which could stimulate up to $60 billion in renewable investments; plus the Department of Energy is working hard on research and development, and is likewise subsidizing it.

Furthermore, some 33 states have renewable production standards that require utilities to purchase or develop a certain portion of their power (15 to 30 percent) from renewables over the next 10 to 15 years. In addition, the American Clean Energy and Security Act [PDF], otherwise known as the Waxman-Markey Bill, passed the House in June 2009 with the stated goal to "create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy." This bill even has a renewable production standard for the United States.

Q: What prevents renewables from going mainstream?

A: In the United States there are significant fossil fuel interests—oil companies, gas companies, coal companies, utilities, and others that have vested interests in carbon-based energy. They very actively lobby the government to prevent policies that forcibly reduce carbon dioxide emissions. These interests, in turn, are present in dozens of states.

Q: After almost a decade of discussion and debate the Cape Wind offshore wind farm project received conditional approval from the FAA in May. Will this decision have any impact on future wind farm developments or renewable programs?

A: Yes, if Cape Wind's president Jim Gordon is able to raise sufficient funding, and if the opposition interests do not tie up in court indefinitely, Cape Wind should be the first offshore wind project in this hemisphere. By building it offshore of Massachusetts, it should help propel the state into technological leadership in wind. Eventually, in the next several decades, there could be dozens of large wind farms offshore, providing much of America's clean electricity.

Q: Which companies stand out as leaders in the renewables industry?

A: There are indeed leaders in this segment: E.ON in Germany; Scottish and Southern Energy, in Europe; and GE, Clipper, SunPower, and First Solar in the United States are just a few of the dozens of companies in the green energy space.

Q: Looking ahead, which renewable resource do you think will be the most significant contributor to meet our global energy needs?

A: Wind, in the next two decades, is most important. But in the longer term, with the development of industrial batteries, solar, along with nuclear, could become the base of the green energy pyramid.

Q: Do you feel encouraged by the industry's evolution over the past 10 years? What do you think the next decade will look like?

A: Wind and solar have developed with extraordinary speed. Turbine sizes in the past six years have grown from 0.75 megawatts to 7.0 megawatts; solar costs have fallen from $0.35 per kilowatt hour to perhaps $0.18, just in the past two years. But I worry that America will not retain a leadership position in this segment if we do not effect sound public policy.

About the author

Sarah Jane Gilbert is a product manager for Harvard Business School's Knowledge and Library Services.