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However, the Solyndra bankruptcy has made renewable energy firms less certain about the availability of public loan guarantees in the future.56 Incentives and Return on Equity The Commission examined the ability of the renewable energy industry to generate profits from shareholders’ equity (i.e., from assets minus liabilities). It used a global company database to assemble information about firms in 54 countries from 2003 to 2012, focusing on firms with a primary North American Industry Classification System (NAICS) code of 221119 (“other electric power generation facilities”). This code covers firms that convert solar, wind, and tidal energy (but not hydroelectric, fossil fuel, or nuclear energy) into electricity and provide such electricity to power transmission systems. The return on equity (ROE) was measured by summing the net income and summing the shareholders’ equity for all available firms in each country-year, and then dividing the former by the latter, in an attempt to capture the ROE for the entire “other electricity” sector. When a particular country in a particular year had fewer than three firms, that observation was dropped. The Commission then estimated the ROE for all industries other than NAICS 221119 in each country-year (using each country’s top 30,000 firms, excluding renewable energy firms), to compare the performance of renewable energy to the performance of the rest of the economy. The Commission derived a “ROE differential” measure for each country in each year, equal to the difference between ROE in renewable energy and ROE in all non-renewable energy sectors. The average ROE differentials are presented in figure 6.2. No clear patterns emerged, though the graph illustrates the high variance in the performance of renewable energy sectors relative to the rest of the economy in different countries. In econometric analysis, the Commission did not find a significant relationship between ROE differentials and the presence of FITs, or between total installed wind energy capacity and ROE differentials, holding other variables constant. This suggests that the deployment of FITs may not improve the ability of the renewable energy industry to turn equity into profits. It also suggests that the quantity of installed wind energy capacity in a country may primarily be driven by factors other than the profitability of its renewable energy sector. One possibility is that the introduction of a FIT may draw resources into the renewable energy sector rapidly, leading to high levels of competition that limit firms’ profits. Anecdotally, industry representatives have suggested that profits in the renewable energy industry are limited by the competitive and fragmented nature of the market, and by underlying market conditions (for example, the stagnation or decrease in energy demand in many countries following the 2008 global financial crisis). 57 Additionally, overcapacity in the solar market, as well as low maintenance costs for wind farms (i.e., they have high up-front costs and low marginal costs), may put negative pressure on prices in competitive markets.58 Finally, some industry representatives note that small investors, particularly in the EU, will often put money into small-scale renewable energy plants as a “savings account,” and are content with relatively low rates of return (e.g., 5 or 6 percent).59 FITs may not be powerful enough to consistently overcome these factors and significantly increase the profitability of the renewable energy sector. 56 Kho, “What the Solyndra Bankruptcy Means,” September 23, 2011. 57 Industry representatives, interview by USITC staff, Bonn, Germany, May 14, 2013. 58 Ibid. 59 Ibid. 6-11PDF Image | Renewable Energy and Related Services: Recent Developments
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