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     Much has been written over the past few years about the domestic oil and natural gas industry.  Significant new deposits have been located and new technologies have made available previously inaccessible oil and gas.  The result has been a boom time for drillers, refiners, distributors and owners and operators of ancillary businesses.  Somewhat lost in the excitement, however, are the challenges and negative outlook for alternative energy businesses.

            It is hard to believe, in light of current natural gas and oil production rates in the United States, but just a few years ago many were predicting that alternative energy would be the future primary sources of energy in the U.S.  The two leading alternative sources – solar and wind power – were viewed as the cleanest and/or safest alternatives to coal, oil, natural gas and nuclear power.  The expectation was that, with the correct amount of federal and state government support and subsidy, both would become the preferred sources.

            Over the past decade, and primarily in the past five years, new deposits or newly-available sources of oil and gas have upended many price-based predictions.  Still-lingering questions about the merits of the global warming case have worked to remove some of the moral argument for alternative energy.  As a result, absent Federal government intervention (discussed below), the future of both wind and solar appear bleak for several reasons.

            First, the development of solar and wind power has never been market driven.  Both have relied on substantial government subsidies to survive and expand.  Such subsidies have been justified by climate-related concerns, but are increasingly more difficult to justify as oil and gas in the U.S. becomes more available and potentially cheaper.

            Second, solar and wind both have reliability problems.  One cannot produce electrical power with windmills on a calm day or solar power at night or on a cloudy day.  Until cost-effective and large-scale storage becomes available, solar and wind will remain spotty and limited power resources.

            Third, to the extent a business model for wind and solar exists, it depends on an overall increase in the price of coal, oil and natural gas.  Right now, those prices are not rising, and it would appear they are unlikely to rise in the near-, mid- or long-term.  Of course the federal government could impose draconian taxes on all three, driving up their prices to levels that would make solar and wind more attractive.  As a political matter, that is unlikely.

            President Obama, seeking to avoid the political battle, outlined a series of steps that his administration will take to reduce carbon emissions.  The anticipated result of such steps—which include an EPA-mandated limit on greenhouse gas emissions from existing power plants—is expected to boost the use of natural gas and wind and solar power, while reducing the use of coal.  The political battles may not be completely avoided, as several Congressional leaders and business groups have promised stiff opposition to, and challenges of, the administration’s efforts.

            The implications for companies in the alternative energy space are significant.  Market forces have made their products uncompetitive absent significant subsidies, drastic taxes on competitive sources and/or government intervention.  The political landscape does not bode will for any of those outcomes.  Accordingly, many are being forced to rewrite their business plans and financial projections.

            Several large bankruptcies of alternative energy companies have made headlines—Solyndra, Abound Solar, Beacon Power and Ener1—but the real news may be that most companies in the solar and wind power industry are confronting significant headwinds.  The general, world-wide economic landscape is not good.  The U.S. is experiencing a tepid recovery, the European Union may be in a new recession and China has signaled that growth is slowing.  As a result, the appetite for continued subsidies for alternative energy are diminishing.  Moreover, the prices for petroleum and natural gas are unlikely to rise materially for quite some time, making more expensive alternative sources less attractive.  Finally, the solar energy industry is confronted with excess capacity, as a result of inadequate demand.

            What does all of this mean?  It would seem that, absent significant, additional federal government intervention, the future of alternative energy in the US will be difficult, at best.  An abundance of low-cost natural gas and oil in the American market makes alternative energy uncompetitive.  Federal government intervention – at least on the level necessary to overcome the cost disadvantage – is all but impossible politically.  Alternative energy providers will struggle, particularly as sources of financing recognize that, whatever the moral case, alternative energy is, for the near-term, a risky investment.