On 25-27 February 2009 I attended the RETECH 2009 conference in Las Vegas.  With thousands of attendees, 240+ exhibitors and 230+ speakers this was a busy conference.  The focus was on the renewable energy industry which composes about 2% of the world energy supply with about 29.3% of that from wind and .6% from solar.

 Renewable energy industry leaders from all over the world attended and revealed some of the latest technology.  This was a very professionally administered conference with high quality presentations.

The next RETECH conference will be held 17-19 March 2010 in San Jose and there will be a Renewable Energy Finance Forum in New York City 23-24 June 2008.

MENTAL CALCULATIONS OF VALUE

The role of money and currency are extremely important to humans in performing mental calculations of value or the pricing mechanism.  Because gold is the world's monetary commodity and because oil is the world's primary energy source therefore The Gold to Oil Ratio Does Matter.

 Additionally, I have argued the vital nature of using sound money to protect the environment.

As I wandered around the exhibits, talked with various experts and attended seminars I noticed one common deficiency:  there is no attempt to determine whether projects are viable economically from an Energy Return On Energy Invested metric (EROEI).

By analogy, if a banana provides 50 calories and it takes a monkey 75 calories to procure the banana then the EROEI would be negative and the venture of procuring bananas would be unprofitable for the monkey.  If the monkey engaged in the activity for too long then it would starve to death.

It is my understanding that an extremely rare element called tellurium is used for solar panels and could pose a significant constraint to photovoltaic companies such as First Solar.  I regret being unable to find anyone to answer my questions regarding tellurium use.

I was also unable to find a single person in the industry who has attempted to thoroughly calculate the EROEI of the projects.  As I began questioning concerning the lack of EROEI calculations and narrowed in on the issue invariably the excuse would be the impossibility due to vagaries within the supply chain.

THE GREAT CREDIT CONTRACTION

I can sympathize with this because the entire world economy is built on a derivative illusion.  By analogy, for the most part no calculations of value are performed for how many calories the banana provides or takes to procure.  As the great credit contraction grinds on the importance of performing accurate mental calculations of value will become more and more important.  The world's reserve currency and every major country uses a fiat currency illusion as their legal tender.

 This system does not so much collapse as evaporate and the evaporation is continuing at an accelerated rate.  

Murry Rothbard explained on page 18 of America's Great Depression, "It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market. But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment."

THE RENEWABLE ENERGY INDUSTRY

President Obama campaigned on a New Energy For America policy.  He wants to create 5 million Green Collar Jobs, put a million plug-in hybrids on the road, reduce dependence on foreign oil, invest $150 billion over ten years to build clean energy, provide tax relief to Americans, reduce greenhouse gas emissions and many other lofty goals.

According to Christopher O'Brein, Head of Market Development in North America for Oerlikon Solar, grid costs are rising about 6% per year and the price of photovoltaic energy is decreasing and they should cross between 2012 and 2016.  Additionally, with the removal of the $2,000 Individual Tax Credit a $40,000 project now yields a tax credit of about $12,000. 

Tax law generally plays an important role in implementing policy.  But as Steve Chadima, Vice President of External Affairs for Suntech America, said "When you have no one paying taxes it is hard to take advantage of tax credit."  With individuals and corporations facing extreme pressure during the great credit contraction being able to take advantage of tax credits for investments in renewable energy will be more difficult.  This may be a reason Suntech has recently had large layoffs and their factories are running at 50-60%.

With the failure of Lehman, Merrill, Wachovia and other single digit midgets like Citi and Bank of America there are fewer players in the tax equity pool.  John Eber, Managing Director of Energy Investments for JP Morgan touched on this issue tangentially.  The smaller pool coupled with strong demand will result in higher yields.  Another common complaint was the lack of debt financing.  The bottom line is that finding capital to fund renewable energy products will be difficult.

CONCLUSION

The goals of providing cheap, clean and renewable energy is admirable.  Surely humans can be better stewards of their planet.  But government is the largest polluter of all and in conjunction with the central banks is the chief cause of gross misallocations of capital and malinvestment.  Epic excesses are being liquidated and the inmates running the asylum, all infected with the Financial Insanity Virus, want to continue huge budget deficits to fund renewable energy projects which may or may not be profitable from an EROEI standpoint.

Unfortunately, despite the governmental support I doubt this industry will do very well over the next few years.  Sure, some politically connected companies will do fine but it is almost impossible to perform the proper mental calculations of value on the projects and therefore their success, like the bailed out banks and automakers, is unsustainable.  Wall Street and national banks are capital impaired, both human and economic, which will make more difficult capital raising.

A much better use of capital would probably be to stockpile tellurium.  After-all, it has gone from $10/pound in 2004 to about $130-180/pound in 2005 and is currently pretty cheap around $55/pound.

 While tellurium is not very liquid, in multiple ways, it is extremely safe, from an investment standpoint, because it is a very rare commodity and therefore it should do fine during the great credit contraction.  While tellurium is much rarer than gold I would not recommend touching it!

Disclosures:  Long physical gold, silver and tellurium.  No position in STP, FSLR, C, BAC and JPM.