06 January, 2014

*Asterisk*: Government Subsidies and inducements and alternative energy winners and losers

You can look at subsidies in two ways: as a consumer; and as an investor. We could also have a third prospective, that of a taxpayer, but that will probably just make you angry.

Let's say that aided by state and federal tax credits you can purchase a very desirable Tesla for the price of a 3-series BMW. As a consumer, that can be a great deal assuming the Tesla is the car for you. Once you make the purchase, your savings on "the real cost" of the car are locked in and you should be quite pleased.

As in investor, you might decide that Tesla has a tiger by the tail and that you'd like to get in on that by buying a small slice of the company. You can study projections for sales and expected profit margins, the typical financial underpinnings of any investment target. But you would be unwise to neglect investigating the role that subsidies play in the business. To what extent are they driving sales and how long are they likely to remain in place? Who are the competition and what might they do to reduce Tesla's subsidies or get some of their own? What is the future of carbon credits that prop up Tesla's margins right now? What are the economics and sustainability of Tesla's free SuperCharger stations? Who pays to maintain the integrity and capacity of local power grids when 100,000+ EVs are charging in the evening?

Similar questions exist for solar, wind, and geothermal energy. Subsidies will certainly reduce your installed price per kilowatt-hour. But how long of a "free ride" can you count on in the form of laws requiring your local utility to purchase from you your excess power while relying on their base-load safety net? Who pays to maintain and synchronize the 60 cycle AC we all assume is present at every wall outlet? These issues affect both consumers and investors and are significant drivers to the long-term viability of these energy sources.

Another, less obvious, variety of subsidy is where the government enters into a lucrative and possibly very large contract for services with a relative newcomer to the field. This is the case in commercial space launch services.

When Roger Maris had his 61 home-run season, breaking Babe Ruth's record, many baseball purists insist the record have an asterisk attached to it. The asterisk would denote that Maris accomplished his feat in the span of a 162 game season, while Ruth did his in the days of the 154 game season. If folks can get worked up about that distinction, a giant asterisk is certainly merited for the artificial subsidies, credits, legislation, and other inducements that tilt the cost:benefit equations for alternative energy products and sources.

Consumers can ignore (or just be pleased by) what's behind the asterisk as it lowers their purchase price below the true cost. But they must still remain wary of how their ongoing future operations and other cost of ownership items are affected.

Investors are foolish to ignore the asterisk as what's behind it can make or break the viability of their long-term bet.

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