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Tuesday, April 14, 2009

Renewable Fuels: Ready for Prime Time?

The Obama administration's stimulus package contains $56 billion in grants and tax breaks for US clean energy projects over the next 10 years and a budget calling for $15 billion annually for renewable energy programs.

The government dole outs usually do not work. If you need proof, you don't have to look farther than the ethanol boom and bust of the past three years:
  • 21% of the US ethanol capacity is currently idle;
  • Many ethanol companies are bankrupt: VeraSun, Greater Ohio Ethanol, Gateway Ethanol, Renew Energy, Northwest Biofuels and recently, Aventine Renewable Energy.
For the renewables to take off long term, they must be able to compete with fossil fuels economically without government assistance. We must be realistic about how much renewables could add to the energy mix and within what time frame. Estimates of the potential contribution to the US energy supply of the renewables varies from 10% to 20% in 20 years. Therefore, there is ample time for the investors to jump in. Value investors may have a feast in a few years gorging themselves on these assets for pennies on the dollar when the renewable bust comes.

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