Support for clean, renewable energy
Government support has been critical in the development of many key technologies, as private companies are not always able to make the risky, expensive bets necessary to bring innovation from the laboratory to the marketplace. Indeed, fossil fuels have benefitted from substantial government investments in research and development. To take a recent example, the spread of hydraulic fracturing (aka fracking), a technique used to extract previously inaccessible natural gas and oil deposits, would have been delayed for many years without R&D support from the U.S. government.
Similar support for renewable energy does not only level the playing field, it is an investment in clean, sustainable technologies that have already generated hundreds of thousands of jobs. This support can take many different forms, from ending all subsidies to the fossil fuel industry, to setting mandatory targets for the generation of electricity from renewables sources (these are known as Renewable Portfolio Standards).
Some of the policies supporting clean, renewable energy that EESI examines are:
- Feed-in Tariffs (FIT) / Renewable Energy Payments
- Master Limited Partnerships (MLP)
- Renewable Biomass Definition
- Renewable Energy Tax Credits / Investment Tax Credits (ITC) and Production Tax Credits (PTC)
- Renewable Fuel Standard (RFS)
- Renewable Portfolio Standard (RPS)
The feed-in tariff (FIT), also known as a renewable energy payment (REP), is one policy option used to encourage the deployment of renewable energy by making it a more secure long-term investment. Under a feed-in tariff, renewable energy producers are guaranteed a connection to the electric grid and a payment rate set above market price by the government. These structured payments usually last for 15 to 20 years, with cost recovery commonly obtained through a charge on all electric customers of that utility. The FIT is typically phased out over time, or once the qualifying renewable energy sources reach a certain share of overall energy production. Large scale deployment of renewable energy systems generally brings production costs down and should make renewable energy competitive with fossil fuels by the end of the FIT.
FITs have been very successful in increasing renewable energy production in Germany and several other countries. Germany passed its Renewable Energy Sources Act in April 2000, guaranteeing privileged grid access and a premium rate to generators of renewable energy for 20 years. The German government set different rates for different types of renewable energy according to how costly it is to produce, and the rates decrease annually. Germany more than doubled its production of renewable electricity between 2000 and 2007 and met its 2010 target of 12.5 percent renewable electricity three years ahead of schedule. In 2015, Germany recieved 78 percent of its electricity from renewable energy sources. Spain also passed legislation in 2007 creating national feed-in tariffs, one for photovoltaics and another for a variety of energy technologies, including wind, geothermal and hydroelectric power. The Spanish feed-in tariff ended in 2012. Italy also had a feed - in tarriff that ended in 2013. Other countries with national FITs include France, the United Kingdom, China and Japan. In countries such as Australia and Canada, FITs have been established in several regions, though legislation has not yet been passed to create a national feed-in tariff.
Policymakers in the United States have begun looking at incorporating FITs into energy legislation. The first state to enact a feed-in tariff was California, whose Assembly Bill 1969 established a FIT law in 2006 for public water and wastewater utilities that produced up to 1.5 megawatts (MW) of renewable electricity. In 2008, this program was expanded to include other sources of renewable energy, with qualified technologies including biomass, wind, solar thermal, photovoltaic and geothermal, among others. A July 2010 Federal Energy Regulatory Commission ruling partially rejected the State of California’s proposal to require investor-owned utilities to purchase renewable energy from small renewable generators at state-prescribed prices. The decision is significant in that it is likely to be viewed as setting limits on the power of the States attempting to follow the lead of California by prescribing wholesale prices for environmentally favorable forms of electric energy.
The city of Gainesville, Florida, became the first U.S. municipality to adopt a feed-in tariff for solar photovoltaic systems in 2009. California, New York, Florida, Oregon, Texas, Vermont, Washington, Wisconsin, Maine, Hawaii, Rhode Island, Colorado all have feed-in tariff programs within the state. Many city-based feed-in tariffs have opted to call them CLEAN (Clean Local Energy Accessible Now) contracts.
Master Limited Partnerships (MLPs) are a corporate structure defined in Section 7704 of the Internal Revenue Code (IRC). MLPs, in their current state, were permanently codified in the IRC by the Tax Reform Act of 1986 and the Revenue Act of 1987 as an opportunity for small investors to invest in companies which benefit from tax privileges and for companies to raise new capital. MLPs are taxed as partnerships but are traded on stock exchanges and can sell shares similarly to C-corporations. MLPs pass the majority of their income down to their shareholders. In practice, this provides tax benefits because MLPs are not taxed at the corporate level, only at the shareholder level, avoiding the ‘double-taxing’ of profits that occurs in C-corporations. Additionally, individual investors can purchase stock in MLPs, freeing up significant capital and decreasing the cost of borrowing for companies. Indeed, according to Felix Morgan and Dan Reicher of Stanford University’s Steyer-Taylor Center for Energy Policy and Finance, the current market capitalization of MLPs is more than $350 billion and the average returns are 6 percent, which is a marked decrease from the current cost of equity for renewable energy projects.
MLPs have proven very successful at attracting investment for energy projects – indeed, such projects represent 83 percent of current MLP market capitalization. However, at the moment, the benefits of energy-related MLPs are only available to fossil fuel projects. Section 613 of the IRC requires that MLPs receive 90 percent of their income from a qualified ‘depletable’ resource such as coal, oil, or natural gas extraction or pipelines. In June 2012, Senators Chris Coons (D-DE) and Jerry Moran (R-KS) introduced the bipartisan Master Limited Partnerships Parity Act (MLP Parity Act, S.3275) which modifies the tax code to include renewable energy as a qualified resource. By amending Section 613 to include renewable energy generation or transportation fuels, as defined by Section 45c(1) and 48 of the IRC, MLPs would be able to finance and own clean energy projects. A study conducted by researchers at Southern Methodist University’s Cox School of Business estimates that extending the MLP structure to clean energy could make an additional $3.2 billion to $5.6 billion in capital available over the next decade. An additional benefit is that, unlike the temporary Production Tax Credit, MLPs are permanent in the tax code, which provides the industry with investment certainty.
The Energy Independence and Security Act of 2007 (EISA, P.L. 110-140) included a definition of renewable biomass that outlined what feedstocks would be eligible for use under the Renewable Fuel Standard (RFS). Included in the definition is a series of ‘safeguards’ intended to ensure that only sustainable and environmentally-friendly feedstocks are allowed. Unfortunately, these provisions are not so much sustainability safeguards as they are a series of exclusions based on broad ownership and management categories. For instance, biomass from public lands is excluded, as is municipal solid waste. Most woody biomass (except for slash and pre-commercial thinning) is excluded from private, non-industrial forests (NIPFs), even if that land is being sustainably managed. On the other hand, all material is allowed from forest plantations, regardless of how poorly managed they might be. This definition will not help improve the sustainability of biomass production. What it will do is lock up enormous quantities of biomass, complicate implementation of the RFS, and retard the development of this renewable energy source.
Currently, this definition only affects the Renewable Fuel Standard, but it has set an unfortunate precedent that has impacted the discussion surrounding a federal renewable electricity standard, renewable energy tax credits, and a number of other state and federal laws affecting biomass energy. Currently, there are different (and sometimes conflicting) definitions of renewable biomass in energy policy, agricultural policy, and the tax code. Arbitrary distinctions between what is and what isn't considering 'renewable biomass' give farmers, foresters, and land managers mixed signals, and frustrate the development of biomass markets. What is needed is a universal definition that is flexible and functional and promotes feedstock diversification, ensures access for local and small-scale producers, and encourages improved land stewardship on all productive lands.
One key principle to remember as policymakers examine what constitutes renewable biomass is that there is no such thing as waste. Everything can be a resource: plant and animal waste can be used to generate energy, to create new materials, or simply as compost.
A chronic concern in the U.S. renewable energy industry has been the lack of a long term commitment by Congress to encourage renewable energy. Short term tax incentives leave little time to develop complex long term projects, and the political uncertainty over whether incentives will be renewed from one year to the next deters financing. For renewable biomass energy, there is an additional concern: the lack of incentive parity with other renewable energy production.
Energy efficiency and renewable energy have been shown to generate more jobs and more domestic wealth than other types of energy development. As many as one out of four workers in the United States could be working in the renewable energy or energy efficiency industries by 2030. These jobs are not just engineering‐related, but also include millions of new jobs in manufacturing, construction, accounting, clerical work, and management. Long-term extension of the production tax credit (PTC), investment tax credit (ITC), and clean renewable energy bonds (CREBs) would help to reassure investors, attract additional capital, and create jobs to implement projects. Making the tax credits fully refundable and/or transferable is also essential if they are to be effective during an economic downturn, when few companies are likely to have taxable profits. Additionally, these credits should be equalized among all renewable technologies, including biomass used in cofiring at existing plants, which is currently excluded.
The renewable electricity investment tax credit (ITC) helps many renewable energy companies reduce their tax liabilities. The tax credit is generally equivalent to 30 percent of deployment costs in the case of solar energy, fuel cells, small wind and PTC-eligible technologies (see below); and to 10 percent of deployment costs in the case of geothermal energy, microturbines, and combined heat and power (CHP) systems. The one-off credit is generated when the qualifying facility is placed in service.
The renewable electricity production tax credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by qualified energy resources. Eligible resources include closed-loop and open-loop biomass, geothermal energy, hydropower facilities, landfill gas and municipal solid waste combustion, marine and hydrokinetic resources (such as wave, tidal, current and ocean thermal), poultry-waste energy, small irrigation power, and wind energy. Solar facilities, though initially eligible for the PTC, have no longer been eligible since January 2006.
Originally enacted by the Energy Policy Act of 1992, the PTC has been renewed and expanded numerous times, most recently in January 2013 by the American Taxpayer Relief Act of 2012. The tax credit amount for some technologies was 1.5 cents per kWh (1.5 ¢/kWh) in 1993, but has been indexed for inflation and is now around 2.3 ¢/kWh). Other technologies only receive half that amount. The tax credit is also reduced for projects that receive other federal tax credits, grants, subsidized energy financing, or tax-exempt financing. In most cases, the credit is available for the first 10 years after the date the facility in question is placed in service.
All PTC-eligible technologies can take a 30 percent investment tax credit in lieu of the PTC (see above).
The Renewable Fuel Standard (RFS) is a federal program requiring transportation fuel sold in the United States to contain a minimum volume of renewable fuels. Congress expanded the RFS in 2007 as part of the Energy Independence and Security Act of 2007 (P.L. 110-140) to reduce oil imports faster, to stimulate rural economic development, and to reduce climate-changing carbon emissions from transportation fuels. The statute requires a total of 36 billion gallons of renewable biofuel to be blended into the nation’s fuel supply annually by 2022, of which at least 21 billion gallons must be "advanced biofuels" (i.e., not made from cornstarch). Advanced biofuels in 2022 must include a minimum of one billion gallons per year of biomass-based diesel and 16 billion gallons per year of biofuel made from cellulosic biomass. The RFS allows up to 15 billion gallons per year of ethanol to be made from cornstarch.
The production and consumption life cycle of advanced biofuels must emit at least 50 percent fewer greenhouse gas (GHG) emissions than petroleum-based fuels; cellulosic biofuels must emit at least 60 percent fewer GHG emissions; and corn ethanol from new ethanol plants must emit at least 20 percent fewer GHG emissions on a life-cycle basis.
A Renewable Portfolio Standard (RPS) is a market-based mechanism that requires utilities to gradually increase the portion of electricity produced from renewable resources such as wind, biomass, geothermal, solar energy, incremental hydropower and marine energy. Thirty states and the District of Columbia have mandatory RPSs, covering about 42 percent of the nation’s electrical load. Another seven states have voluntary RPSs. In many states, including Kansas, North Carolina, Montana, Massachusetts and Maine, the RPS has helped decrease renewable energy prices, created thousands of clean energy jobs and drawn billions of dollars of investment.
Recently, many attempts have been made to repeal state-level Renewable Portfolio Standards. Opponents argue that such standards encumber free market economics, increase the cost of energy and of doing business, and threaten the reliability of the electricity grid. However, these efforts have, in the vast majority of cases, been unsuccessful.