Renewable Energy Must Make Tax Policy Change its Friend

SOURCE: Black & Veatch Energy Market Perspective Dec 2011

‘Make Change Your Friend. ’ That was the political advice of former President Bill Clinton when people would come to him seeking support for one cause of another.  It is a strategy that offers promise of political compromise, something we do not see often in Washington DC today.

But it also carries risk by appealing to the worst of Washington’s modus operandi because it often results in large omnibus bills larded with earmarks and policy giveaways.  Citizens hate this but conflict is the mother’s milk of Washington. The dirty little secret of Washington is that the more controversial, contentious and outrageous the proposals the better it is for political contributions for legislators as lobbyists compete with each other to win favor or fend off hurtful actions.

SOURCE: AWEA Wind Manufacturing in the US

Eavesdropping on the Conversation about Renewable Energy 2012 Prospects.  I recently had the opportunity to participate in a webinar sponsored by a large Washington DC-based law firm that represents players in the renewable energy business.  The speakers were all government affairs directors of well-known renewable energy companies.  The topic of the event was discussion of the legislative prospects for renewal of the 1603 treasury tax grants this year (not likely) to prospects for renewal of the production tax credits and investment tax credits next year.(possible but you can’t take it to the bank).

SOURCE: GTM Research PV Price Decline Curve

There was a sense of trepidation in the voices, but not panic. What was curious was how the tone of the discussion even when speaking about the need for policy and regulatory certainty had matured into a strategic discussion of long term policy needed to keep the renewable energy industry going rather than a knee-jerk plan to survive the next expiration date of one subsidy or tax gimmick or the other.  That tone can best be summed up in the following views:

  1. State Renewable Portfolio Standards are Nearing Goal Protecting the RPS standards is important since many of the state requirements depend upon it.  Perversely the result of achieving the current levels of RPS and declaring victory means less need for PTC/ITC since fewer new products will be needed to achieve the mandates.
  2. Prospects for National Clean Energy Standards or Carbon Taxes are Nil.  This is an idea whose time has past and it is unlikely to come back soon given.  States with such targets argue a national CES is not needed.  States without one argue it is not wanted.
  3. Looking for an Omnibus Opportunity to Hitch Renewable Ornaments.  The view of the speakers was the current controversy over renewing the payroll tax credit and unemployment benefits may actually be a good thing for the renewable energy industry because it sets up the prospects for a big omnibus bill in early 2012 onto which PTC/ITC, 100% depreciation bonus and maybe 1603 grants could be attached.
  4. China PV Panel Dumping Issue is Posturing and Politics.  The current trade debate is causing both sides to posture and hold alleged offenders accountable under the WTO rules.  China has responded to the US anti-dumping complaint on PV panels with a threat of countervailing tariffs on US autos.  This escalation has risks for both sides but also may result in some compromise. In short, politics since both sides recognize they each have more to lose than gain from letting this dispute escalate out of control.
  5. Go for Master Limited Partnership for Renewables.   Current legislative constraints prohibit use of MLPs to new industries including renewable energy.  This lives into the Clinton Corollary about making change your friend by substituting MLP as an alternative to PTC/ITC.  Opposition was seen as low key but persistent mostly as existing MLP industries protect their own.
  6. Sequestration will affect Federal R&D Spending.  Worries were apparent over the implications of the failure of the Super Committee and the need for spending reductions on the prospects for research and development investments in energy by the Federal Government.  Most of the panelists expected only modest reductions in overall appropriations but were pessimistic about loan guarantee programs and 1603-like tax grants.
  7. Grid Parity Blessing and Curse.  The potential loss of 1603 was estimated to affect 37,000 solar industry jobs mostly for installations but perversely falling solar PV prices would mitigate some of that impact.  The biggest impact is a slowdown of new wind and solar development until the industry gets to grid parity and finds alternative financing.  It could also see the attractiveness of the US market adversely affected if demand and subsidies in other markets were more attractive.

SOURCE: EIA Domestic Growth of Low Priced Natural Gas is the Real Challenge for Renewable Energy

The Renewable Energy Bottom Line: 

The transition from adolescence to adulthood for renewable energy is underway. A big part of that process of maturation is a recognition that if you want to be an independent adult and make your own decision you must give up your allowance and quit using your Daddy’s credit card to support yourself.  The subsidies and tax policy supports are more likely than not going to phase out and go away.  Renewable energy must learn to make its own way at grid parity prices in competitive markets.  That said, there are lots of ways to participate in the adult games of tax policy poker and spin the bottle lobbying.  Sometimes the experience is wonderful, sometimes you wake up with a hangover.

Renewable energy leaders expect a continued hard push in 2012 to complete as many wind and solar projects as possible to qualify for the PTC or ITC to take advantage of Uncle Sam’s allowance for as long as it lasts.  In that sense the renewable business strategy continues to look like a sprint on the project side of the business. They expect to continue to work to protect renewable portfolio standards gains state by state.

On the policy side of the renewable energy business, however, there is a near-term focus on not missing an opportunity to leverage legislative friends to get renewable energy ornaments attached to any omnibus spending, tax or tax policy bill likely to pass.  In this sense, the renewable energy industry is trading its jeans and tee shirt for a business suit and sipping wine with members of congress instead of swilling beer with its frat brothers in AWEA and the solar lobby.  But there also is a growing recognition that the tax policy and business model framework of the renewable energy industry is changing as it reaches as appetite for tax subsidies wanes in the face of debt and deficit spending pressures.  New ideas are emerging that live into the probably future of a clean energy economy—but do not depend upon FiT or other gimmicks.  Going mainstream is a strategy for long term success in renewable energy as in other fields of endeavor.

The good news is both wind and solar renewable energy is at or near grid parity offering hope that strategies to ‘make change the friend of renewable energy’ is possible if good ideas can be planted and nurtured that wean renewables off unsustainable subsidies and fickle tax policy swings and more toward sustainable, certain and mainstream financing and investment policies like MLP as a politically acceptable trade-off as Congressional wrangling over debt, deficits and tax policy plays out in an election year.