Montreal, September 15, 2009 • No 270

 

Harry Valentine is a
free-marketeer living in Eastern Ontario.
 

 

 THE EMPEROR'S DERRIΘRE

Economic Recovery or Signs of an Emerging Malinvestment Boom?
 

by Harry Valentine
 

          Over the past few weeks, various news stories have suggested that the economy may be recovering. Some so-called experts have even suggested a "jobless economic recovery." Amidst mounting job losses in the manufacturing sector and in several service sectors, there have been reports of increased activity in the Canadian housing market. There are also allegedly some signs of possible economic recovery emerging from the United States and claims from elected officials that the "economy has bottomed out," despite mounting job losses.

 

          Over the past 12 months, the US Federal Reserve has increased the amount of printed money by over 70% and dropped interest rates nearly to 0%. Canada has done likewise and dropped interest rates to record lows. While politicians complain about banks not lending out enough money, both the governments of the United States and of Canada have initiated various economic stimulus packages that include public works projects and green energy projects. Much of the money that has been allocated to the renewable/green energy sector is regarded as seed money that will grow new business opportunities.

Ontario's Power Glut

          Toward the end of July, Ontario provided an example of the downside of government investment in new energy projects. Prior to the mortgage meltdown of late 2008, the government of Ontario had for several years indicated a projected shortfall in electrical generation capacity. The industrial heartland of Ontario (and of Canada) had seen numerous cutbacks and layoffs during that period and authorities seemed willing to build new nuclear power stations to meet the projected power demand.

          Then in July 2009, the government received bid prices for new nuclear reactors, and these were far in excess of what officials expected. It had no sooner cancelled plans to build new reactors than the power operator announced that the province had excess generating capacity. Factory closures across Ontario had reduced the demand for electrical power dramatically, a situation that is now expected to remain unchanged for the next 5 years. Tax revenue that had been allocated to develop new renewable energy technology for use in Ontario may now achieve little.

          Ontario may not be the only jurisdiction in North America to make the transition from a projected shortage of electrical power to an excess of generating capacity, courtesy of factory closures and a drastic drop in demand for electrical power. But in several cases, companies will use state stimulus funds as seed money to develop new electrical generation technology from clean and renewable resources, a policy supported by no less eminent an official than the new American president.
 

"There is likely to be a boom in the development of a variety of renewable energy power generation technologies. But once they are developed, not all energy conversion technologies are going to be cost-competitive in a free market against traditional technologies."


Green Boom Would Likely Bust

          There is a very high propensity for state funding of the renewable energy technology sector to follow the path of the high-tech sector of a decade ago. During the 1990s, a large number of companies in the high-tech sector gained easy access to government funding and special low-interest loans. The easy money first gave rise to a high-tech boom that was followed by the high-tech malinvestment boom, culminating in the dot-com bust and high-tech meltdown just after 2000. The US Federal Reserve tried to re-ignite the high-tech boom by making special funds available, but to no avail.

          There is a high propensity over the short term for state-provided stimulus funding to create the illusion of economic recovery as various public works projects and some green energy projects get underway. Public works projects such as road repairs and infrastructure upgrades are essentially short-term projects. The manufacturing sector is ultimately the cornerstone of wealth creation, provided they produce useable products for which there will be a long-term and growing market.

          Earlier forecasts had indicated a growing market for electric power in Ontario, prior to the extreme contraction of that province's manufacturing sector that consumes a large proportion of their electric power. There are forecasts of growing demand for electric power coming from across North America. Much stimulus funding has become available to fund the development of a variety of clean, renewable energy technologies. However, the accuracy of some of these forecasts are questionable given the recent precedent set by Ontario.

          While a few renewable energy technologies can compete cost-wise with fossil-fuel power technologies in an unfettered free market, most cannot. State stimulus funding is available to almost anyone with a renewable energy technology concept or idea. There is likely to be a boom in the development of a variety of renewable energy power generation technologies. But once they are developed, not all energy conversion technologies are going to be cost-competitive in a free market against traditional technologies. Ontario had earlier proposed to offer 80 cents per kilowatt-hour to purchase electric power from solar-electric farms.

          Several other jurisdictions are considering similar programs that essentially subsidize the operation of costly technologies. Such programs would likely encourage companies to use easily available state stimulus funding to develop a variety of power generation technologies that produce electricity from clean renewable energy at very high costs. Not all of these companies or their technologies will be viable or competitive as they enter a subsidized, state-regulated market. Just as the high-tech bust followed the high-tech malinvestment boom, a green energy technology bust will likely follow a green energy technology malinvestment boom.