The government’s impact on the renewable-energy industry, post-2012 election

1Executive Summary

Democrats came out ahead in the November 2012 elections, which has many implications for the renewable-energy sector. Importantly, the production tax credit (PTC) for wind power now has a much better chance of being extended soon. Nevertheless, new government support for the renewable-energy industry will be significantly lower than in the past four years.

Going forward the renewable-energy industry will be swept along in broad tax and spending reform — or lack thereof. New financial stimuli such as federal loan guarantees and cash grants will not happen.

In brighter news, the PTC for the solar industry should remain unchanged, thereby ensuring strong government support for solar through 2016. Most promising will be actions that don’t cost the government money, such as a revenue-generating carbon tax that now has a much better chance of passage. In terms of changes in regulation, the watchword will be economic impact, especially impact on U.S. jobs and the fragile economy.

This report will look at some of the prospects for the renewable-energy sector in the wake of the 2012 election results. It is intended for financial investors and business developers in renewable energy, as well as for equipment and service providers and those who shape policy and laws for the U.S. cleantech sector.

 

Background

The fortunes of the U.S. renewable-energy industry are linked to the federal government. Indeed, the industry almost lives or dies depending on federal subsidies.

The government’s role in renewable energy was a major political issue in the November 2012 election. In particular the two parties advocated different visions of how and where the government should help this industry.

Bringing everything to a head is the expiration of several key federal laws. Those specific to the renewable-energy industry (e.g., PTC) are about to expire, as are major acts like the Bush-era tax cuts. Events will reach a crucial stage on January 2, 2013, the date of the fiscal cliff, when large reductions in government spending and higher taxes automatically trigger unless Republicans and Democrats rapidly reach some other agreement.

It is too soon to call the outcome, but there are three possibilities:

  1. Going off the cliff: No new agreement is reached, triggering sequestration
  2. A grand bargain is reached: The two parties agree on major comprehensive tax and spending reform
  3. Only a few select areas of government are spared sequestration

Richard Glick, the VP of Government Affairs for Iberdola Renewables, believes some areas will avoid sequestration but that no grand bargain will occur soon. Unfortunately, the overall uncertainty of the fiscal cliff hurts renewable-energy efforts, as that industry has long timelines, high capital requirements, and modest risk appetites.

 

PTC extensions may now occur

The most critical expiration date for the renewable-energy industry is December 31, 2012, when the production tax credit expires for new wind facilities. President Barack Obama’s victory significantly improves the chances for it to be extended for one to three years.

Note, however, that the extension is not a shoe in. During the 2008 elections candidate Obama promised to extend the wind PTC. Obviously this hasn’t happened. Because of that, this industry has already slashed jobs and facilities, for instance, at Siemens and Vestas.

One way the federal government could help with extensions would be to redefine the qualifying milestone. Currently it is when the power facility is “placed in service.” If this were changed to “start of construction,” more projects would qualify.

Even renewable-energy projects already approved for tax credits may be impacted by a potential sequestration. In particular, if sequestration occurs, the already promised PTC payments could take the 7.6 percent haircut too.

The PTCs for geothermal and biomass are also set to expire in December 2013. Geothermal projects take six or more years to complete. Having an expiration date this close is stopping new geothermal projects from starting up. The much smaller geothermal industry would probably need to ride on a wind PTC extension to get an extension. Indeed, the wind PTC extension itself has to ride on an even bigger bill as well. Unlike wind and geothermal, the current solar PTC does not expire until December 2016.

The PTC gives a tax credit of 2.2 cents per kWh of generated power. This contribution often determines whether a project is financially viable. Note that the above PTC discussions also apply to the investment tax credit (ITC), a close cousin of the PTC.

 

Other alternatives: Is the carbon tax now looking good?

While a carbon tax had been ruled out as almost dead, it is now starting to look more promising. This proposed tax would raise the power prices from fossil fuels, making renewable energy more cost competitive.

Over a decade it could add one trillion dollars to the government’s coffers. The tax would only get Republican approval, however, if the Republicans got something substantial in exchange — a lower corporate-tax rate, for instance.

Other possible legislation would have the government shaping markets, thereby forcing a greater uptake of renewable energy. The most talked about is a national clean-energy standard (also know as a renewable portfolio standard, or RPS). Yet another is cap and trade. A third is feed-in tariffs. All three are dark horses.

Yet another possibility for attracting capital to renewable-energy projects is the master limited partnership (MLP). The oil and gas industries have enjoyed the preferential tax treatment of MLPs. A possibility is to add the renewable-energy industry so it also qualifies for this structure.

What is clearly dead is new direct or indirect federal financing of renewable-energy companies. These include the 1603-style treasury grants and federal loan guarantees. In the 2012 campaign these became highly political. Some Republicans charged that companies received this funding in exchange for supporting the Obama campaign. Putting the nail in the coffin were the Solyndra and Abound Solar bankruptcies in 2011 and 2012, respectively. For example, Solyndra went under after receiving a $535 million federal loan guarantee.

In contrast, both parties do support federal funding of research and development. Everyone seems to back technology innovation as a way for the country to return to financial health and energy independence. This should help the Department of Energy’s national labs, universities, and firms doing leading-edge work.

 

Regulatory hits coal; market forces remain most powerful

In the next two years, new regulations could help renewables, mainly by penalizing fossil-fuel rivals. The Environmental Protection Agency will continue to come down on coal, namely through additional requirements that will restrict carbon dioxide, mercury, and sulfur dioxide emissions. These actions will certainly raise the price of coal-generated power.

Another big regulatory wild card centers on fracking. The growing unconventional-gas industry may see regulations fragment and proliferate, stated Greg Webstone, the VP of Government Affairs for Terra-Gen Power. New jurisdictions may seriously complicate compliance. An extreme example is in Longmont, Colo., where citizens just voted to ban fracking altogether.

Unconventional gas is one of the few booming areas in the economy. Consequently, the Obama administration may federalize its regulation, suggested EPA’s former general counsel, Roger Martella, to E&ETV on November 8, 2012. This would be to maintain the growth of natural gas without the environment taking too big of a hit.

Regulatory streamlining for renewable energy will likely remain modest. This will be true even for development on federal land. The Bureau of Land Management will continue to announce new, clean megawatts of power. Unfortunately, the number of new, clean MWs actually going into production will be nowhere near the BLM numbers. The required sign-offs of dozens of other agencies and courts will continue to retard development. They hold the cards for permitting building construction, tying into the electric grid, protecting water quality, and so forth.

Far more influential in the power sector than any government action is the price of natural gas. Cheap gas is accelerating the retirement of coal plants faster than tough EPA regulations. Likewise, the natural gas boom diminishes the energy-independence and economic-justification arguments for renewable energy. Indeed, it is much faster and cheaper to build a gas plant than a renewable-energy plant in most circumstances today.

 

State elections: California shines; Michigan votes thumbs down

At the state level California once again leads the way for cleantech, according to Jonathan Weisgall, the VP of Government Affairs at MidAmerican Energy Holdings. Californians’ approval of Proposition 39 will add $550 million per year to “create energy efficiency and clean energy jobs” in the state. Democrats now have a supermajority in state government, together with longtime cleantech advocate Governor Jerry Brown. Indeed, California may push its utilities to draw 40 percent of their power from renewable energy.

On the other hand, Michigan voters resoundingly rejected a key constitutional amendment. Proposition 3 would have bumped up the state’s RPS to 25 percent by 2025. This was up from Michigan’s current RPS requiring 10 percent renewable-energy power by 2015. Only 4 percent of the state’s power now comes from renewable sources.

Yet another way that states can participate is through a green bank. Here a state governmental unit partners with the private industry to provide low-cost loans or loan guarantees for renewable-energy projects. This may include low-interest bonds, for instance. Nevertheless, it is unlikely that green banks could pick up the slack if the wind PTC was not renewed, according John Stanton, the VP of Government Affairs at SolarCity.

 

Summary of the government’s impact on renewable energy

Solar development looks most promising in terms of government support for the next three years. In particular, California looks like fertile ground with its combination of a carrot and stick — namely Proposition 39 grants and a potential 40 percent RPS.

The prospects for a wind PTC extender are now better than ever. Developers and suppliers should be prepared for a rapid restart of the industry. Geothermal’s fortunes will ride on a wind PTC extension.

Most important for the renewable-energy industry will be how the big budget issues, including the fiscal cliff, are resolved. Economics will weigh heavily in the federal government’s actions within the cleantech sector. Job creation, deficit reduction, and the like will dominate negotiations, not climate change.

The cleantech industry will need to lobby hard to get its voice heard. This lobbying will take place through key industry groups such as the American Wind Energy Association and Solar Energy Industries Association. Broad and deep local citizen outreach to every congressional representative and senator will also be essential. Who will get funded in the next two years will be a high-stakes game of musical chairs.

 

You must be logged in to post a comment.

No Comments Subscribers to comment

Explore Related Topics

Learn about our services or Contact us: Email / 800-906-8098