Olaf Babinet, Senior Manager, Global Expansion Optimization Group, Deloitte Consulting (Apr/May 10)
In many respects, the cleantech industry growth trajectory now rivals the Internet - in a short time, it has attracted staggering capital and is evolving rapidly. Cleantech encompasses a broad range of products, services, and processes designed to reduce cost, environmental impact, and natural resource use.
Evolution of Cleantech
Prior to 2005, the cleantech landscape looked dramatically different than it does today. Subsidies were generally limited to specific sectors, such as wind energy. Solar manufacturing was nascent - its technology too expensive for consideration beyond hobbyist or specialized installations. Mass-scale electric automobile production was on the drawing board, but still years away. And "green" and "clean" were adjectives best suited for crunchy environmental types, rather than shrewd venture capitalists. As illustrated in Figure 1, subsequent years saw a surge of investment as technologies matured on the adoption curve - led by Europe and Japan.
The credit crisis and global economic downturn temporarily slowed the flow of capital to solar and wind manufacturing facilities and generation projects. In response to a sharp downturn in traditional manufacturing and an increased environmental focus by the Obama administration, the U.S. federal government boosted its effort to advance clean-energy manufacturing with clearly stated objectives to increase energy independence, mitigate carbon emissions, and create jobs. The Emergency Economy Stabilization Act of 2008 (EESA) and the American Recovery and Reinvestment Act of 2009 (ARRA) created a more favorable policy environment and economic outlook for clean energy.
In 2009, the U.S. Department of Energy also announced $30 billion in federal loan guarantees and allocated $2.3 billion in investment tax credits to accelerate cleantech manufacturing - including solar, wind, advanced batteries, and numerous other technologies. In addition to government, private companies and venture capital firms invested billions in the U.S. cleantech market. To attract coveted green jobs, state and local governments offered manufacturers hundreds of millions in incentives - including tax breaks, grants, low-interest loans, and other subsidies. Finally, several other exogenous factors fueled growth of the U.S. clean-energy industry, including relatively lower wages when compared to abroad (also due to favorable exchange rates), rising commodities prices, and state policies for Renewable Energy Standards.
Fast forward. Clean energy is again poised for rapid expansion, and the United States is now racing to keep pace with Europe and Asia on related strategic growth initiatives. The next five years may determine which countries emerge as net importers vs. exporters of solar panels, wind turbine components, and other technologies. Billions of dollars in profit and millions of jobs are at stake. According to the National Renewable Energy Laboratory (NREL), the U.S. market for clean energy is estimated between $14 billion and $20 billion annually through 2030 (in 2008 dollars, not adjusted for inflation). This puts the industry on par with construction machinery, farm machinery, and household appliances.
Where Are the Green Manufacturing Jobs?
From a local perspective, clean energy is mainly about jobs. In Indiana, Brevini Wind will produce wind turbine gearboxes and employ 450 workers. In Albuquerque, New Mexico, Germany-based SCHOTT Solar has already invested $100 million of a planned $500 million and hired 300 out of an eventual work force of 1,500 to produce solar products. In Pennsylvania, the Greek-owned HelioSphera will invest $500 million to create thin-film solar panels, creating 400 jobs in the process.
Behind these and other cleantech capital investments are complex matchmaking rituals between companies and communities. In New York, SpectraWatt, an Intel Corp. spinoff, is building its first manufacturing plant with an investment of $85 million that will employ 161 workers. SpectraWatt also benefits from a 200-metric-ton-per-year supply agreement with New York for metallurgical grade silicon sourced from Globe Specialty Metals, also located in New York State. The sourcing agreement was part of the state's negotiated incentives package with Globe that gives New York an option on 20 percent of its in-state production in return for hydro power from Niagara Falls.
Within the United States, green jobs are surprisingly dispersed. Figure 2 provides several insights into the domestic market. Unlike other capital- and skill-intensive industries - such as biotech, semiconductors, or auto manufacturing - the overall cleantech industry is presently not particularly clustered. Medium-sized cities are as successful as the largest metropolitan areas at attracting green jobs. And while some environmentally friendly states such as California and Oregon top the list, other historically industrial cities such as Chicago, Houston, and Greater Detroit are among the ranks.
Government incentives awards provide some insight into local job creation. On a national level, two existing programs will help drive manufacturing expansion: loan guarantees and tax credits, including the Advanced Manufacturing Tax Credit (48C). Following a complex and competitive application process, the U.S. Department of Energy (DOE) recently awarded 137 clean energy companies with investment tax credits ranging from $75,000 to $140 million. The solar industry captured the largest portion of the funds, with over $840 million in tax credits.
The Midwest and so-called Rust Belt states such as Michigan, Ohio, and Indiana landed the largest portion of the 48C program. The ITC (investment tax credit) awards follow large-scale private investments in Tennessee and Michigan, both for solar polysilicon production. Beyond the ITC, if other projects backed by the DOE Loan Guarantee Program proceed as planned, Arkansas, California, New Mexico, and Oregon will also be home to several next-generation solar companies.
Within specific sectors, the distribution of manufacturers is slightly more concentrated. Figure 3 illustrates the geographical dispersion of solar and wind manufacturers. While the solar industry is concentrated on the coasts - with notable companies such as SunPower, Sanyo, and SolarWorld in California and Oregon - the wind industry is anchored in the Midwest.
The data is fairly intuitive. The West and Northeast regions of United States have higher electricity costs, and several areas currently offer aggressive incentives for solar installation projects. Further, the state of California is a magnet for thin-film solar start-ups, with many R&D facilities clustered in Silicon Valley. The wind corridor extends in a V-shape from Texas northward through the Midwest, and manufacturers (OEMs and Tier 1 suppliers) often prefer to locate in proximity to customers (wind farms) to help mitigate logistical constraints and potential bottlenecks related to the wind sector's complex supply chain.
What Location Factors Matter Most?
Companies typically expand for three reasons: to enter new markets, reduce costs, or attract top talent. In most cases, location decisions tilt toward one or two drivers; clean energy companies face the daunting challenge of pursuing all three.
Driven by government investments and incentives, demand for renewable energy has begun to shift from Europe to North America and China, putting growth strategy top of mind for industry executives. Simultaneously, manufacturers are under pressure to vigorously lower cost, improve quality, and innovate to keep pace with peers. Hundreds of solar panel, wind power, and battery manufacturers are racing down their cost curves to build cheaper, more efficient products. Industry analysts predict a shakeout - with a much smaller number of companies achieving significant scale, market share, and profitability.
Fortunately, manufacturers enjoy some temporary reprieve with respect to attracting talent. In the aftermath of the global recession, U.S. unemployment remains high and skilled workers are joined by a generation of younger workers eager to start careers in the clean-energy industry. However, training issues - and more broadly the education system - remain ongoing concerns and bottlenecks. Since clean energy is a new industry, time, money, and public-private collaboration are required in order to develop a qualified work force.
Clean energy is heavily localized and manufacturers are increasingly locating in close proximity to customers. For example, Deloitte Consulting recently worked with Indar - a Spanish-based company, which is part of Ingeteam Corp., that manufactures electric generators for large-scale, multi-megawatt wind turbines - on its U.S. site selection analysis. Indar's CEO Alex Belaustegui always thought that the case for expanding to the United States was strong - not only did the U.S. wind energy market grow at 39 percent in 2009, but the company's products are not well suited for shipping across the Atlantic - especially in high volumes.
While the case for market entry was clear, choosing the right location required a comprehensive site evaluation process. After several months of search, Indar executives ultimately chose Milwaukee, Wisconsin, for its electric motors and generators manufacturing plant - in close proximity to the U.S. wind corridor states. As noted by Milwaukee's Commissioner of City Development Rocky Marcoux, "Projected operating costs were very comparable to other manufacturing states, and Indar liked our work-force environment, our government's willingness to cooperate, and what they saw in our modernizing, industrial city".
While customer proximity and logistics play a strong role in clean-energy site selection decisions, other variables come into play for the solar and wind industries. Figure 4 summarizes some of the key drivers, based on Deloitte experience and a recent NREL study.
Taxes and Incentives
What are state and local governments doing to attract investment? To understand perspectives of state and local communities on attracting clean manufacturing jobs, Deloitte recently interviewed a number of economic development officials from state and local organizations across the nation. Nearly all respondents emphasized low-cost and high-quality labor as their perceived competitive advantage, and downplayed the relative importance of quality of life and community support. Noted one Midwest-based economic developer, "If you strip away the clean moniker, these companies are manufacturers.so we've played up our traditional manufacturing pedigree and concentration of firms and jobs in the industrial sector."
Most survey participants noted that aggressive, targeted incentives - for product manufacturers and customers alike - were essential to lure large projects.
According to Bruce Laird with the Oregon Business Development Department, "Persistence pays. Targeted marketing, incentives, and policies, combined with aggressive execution and follow-up, will eventually produce results. Oregon recently won eight solar projects, including two from Sanyo and SolarWorld for a combined $600 million."
Deloitte's recent client experience indicates that communities with demand-side incentives and sustainability initiatives have been particularly adept at attracting European-based companies, most notably from Germany, Spain, and France - where direct grants schemes to manufacturing companies are strictly limited by the European Commission. We expect local and state production and consumption incentives - such as manufacturing grants, tax credits, feed-in tariffs, rebates, and creative financing - to play a key role in location decisions, provided that the candidate locations fulfill other essential manufacturing requirements. Figure 5 highlights states that have implemented mandates (or goals) for clean energy, as well as state-sponsored grant programs.
Particularly with solar production - which will likely be more widespread than wind industry production - we expect local programs to strongly influence siting decisions. For example, Pennsylvania has allocated nearly $240 million toward consumers, and $430 million for clean energy projects and economic development. Thus far, the state has attracted upwards of $800 million in private investment.
Ontario, Canada, went even further with its public policy: in 2009, the province introduced an aggressive feed-in tariff to promote solar, wind, water, and biomass projects; it offers owners above-market rates for producing electricity. The stipulation: upwards of 50 percent of the goods and services used in the project must come from Ontario. The role and impact of relevant incentives in the United States will strengthen, as companies will compare the business case to manufacture within the United States vs. other countries such as Mexico, Singapore, Malaysia, or Eastern Europe.
Finally, half the respondents cited various perceived risk factors - political, economic, and labor market - as critical location-drivers, which certainly aligns with our recent experience. Several Deloitte clients openly expressed concern for locating in communities with high perceived potential for labor disputes, uncertain government policies and budgets, and natural disasters. Circumstances that could potentially hinder speed to market and operational success simply aren't worth the risk.
Beyond Solar and Wind
Cleantech and clean energy extend far beyond solar and wind - and include emerging technologies that promise to deliver everything from pure water to smarter electric grids to cleaner coal. One sector poised for significant growth is advanced batteries. As automakers gear up to produce pure-electric cars, the U.S. federal government is helping to fund development of this essential component. While Asian companies have long dominated battery manufacturing, the Obama administration announced that it would invest $2 billion to boost domestic production. Figure 6 summarizes a portion of ARRA funding for battery manufacturing announced in August 2009.
Michigan's aggressive efforts to evolve and revive its ailing auto industry have attracted over $4 billion in private and public investment in lithium ion batteries. According to Bob Metzger of the Michigan Economic Development Corporation, the state will gain over 14,000 related jobs by 2014 - a meaningful boost to one of the states hardest hit by the recession. Just as makers of wind turbines are locating close to the wind farms, battery makers are expected to locate in close proximity to auto manufacturers - primarily in the Midwest and Mid-South.
Looking Toward the Future
During the next decade, the U.S. clean-energy industry is expected to grow rapidly and solidify its position as a significant contributor to the economy. At the federal level, public-policy decisions made in the next few years will play a critical role in determining whether the United States exports or imports clean-energy technologies.
As manufacturers enter the U.S. market or expand existing facilities, traditional geographic factors such as labor cost and availability, logistics, and manufacturing infrastructure will undoubtedly influence location decisions. However, clean-energy companies are still highly motivated by incentives and grant programs to fund initial growth. Communities that develop targeted, proactive strategies for leveraging their core strengths and targeting specific sub-sectors should fare well attracting clean-energy manufacturers and have a distinct competitive advantage as these companies expand.
Phil Schneider, Partner in the Global Expansion Optimization Group of Deloitte Consulting LLP, also contributed to this article. In recent years, Deloitte Consulting has played an active role helping clean-energy manufacturers expand. Since 2007, we have helped clean-energy manufacturers select locations for over $9 billion in capital expenditures for domestic and global deployment projects creating more than 6,000 jobs.