In the State of the Union President Obama renewed his commitment to the widespread adoption of renewable power as a critical piece of America’s energy and economic future. In last year’s speech he included a proposal to have 80 percent of US electricity come from renewables by 2035.
Even making incremental steps towards these goals requires better access to financing for these renewable energy projects. Energy projects, and particularly renewable energy projects, require a lot of money to build.
There appear to be 3 key challenges for a renewable energy company to access capital in today’s market.
(1) Low natural gas prices (which influence, and in some markets control, electricity prices) have shifted the economic equation by depressing near-term power prices in some markets and creating the perception of flat or lower electricity prices in others.
(2) The continued lack of liquidity in global financial markets remains a very serious problem. Access to capital for any business remains a challenge, but is more acute where the investment requires an investor or lender to commit capital for a longer term in order to realize returns.
(3) An absolute failure by the Federal government to provide a stable set of supporting policy programs—illustrated by the 2011 sunset of the 1603 Treasury Grant program, the near certain end of loan guarantee programs (due in no small part to the political/media storm over Solyndra’s insolvency), and the current expiration of tax credits set for wind in 2012 with biomass, geothermal and a host of other technologies set to expire at the end of 2013.
Is there anything meaningful that can be done to open renewable energy financing channels short of waiting for one of the 3 fundamental challenges outlined above to change (rising natural gas (and electricity) prices, a marked increase in available and active investment capital, or the development of a cogent federal energy policy)? If not, to which of these 3 challenges should the renewable energy community look for hope?
Elias,
You have outlined several critical issues that MUST be addressed in order for there to be a sustainable (no pun intended) renewable energy industry. In the short term, there are probably stop-gap alternatives that can be explored (e.g., taking advantage of other federal tax incentives like the New Markets Tax Credit, focusing development in states that have a strong RPS / compliance penalty, using nontraditional financing structures such as prepaid PPAs, etc.). However, in the long term, I think there needs to be a fundamental shift in the way that renewable energy projects are incentivized by the Federal government.
In particular, using the Federal tax code to stimulate economic development is a poor approach. When using tax incentives to finance project development, you are shrinking the pool of potential investors, which is already limited (issue #2). I will state the obvious here – what we need is a feed-in tariff system, similar to the Europeans. Creating a long-term revenue stream that is not dependent on an investor’s tax appetite should reopen the pool of investors and (assuming the feed-in tariff legislation is for a meaningful time period, if not permanent) resolve issue #3 of a durable renewable energy policy.
Ideally there would be some sort of carbon cap and trade / Federal RPS tied into a FIT system. Unfortunately, I think we can all also agree that the political climate is not going to enact this type of groundbreaking legislation any time in the near future (note the marked shift in Obama’s platform – last year, 80% renewables by 2035 – this year, open up 75% of the offshore oil drilling sites).
I am a big fan of the prepaid PPA structure, and I think that given the lack of any durable renewable energy policy, and faced with expiration of tax incentives, that this might be a viable structure to help many projects survive and get financed.
Bill Fisher
Why do we continue to utilize broken tools? While they do have an impact, I don’t believe the most efficient solution is additional targeted subsidies, complicated incentives (e.g., cap-and-trade), or regulation. Picking winners and enacting burdensome regulation will just slow the potential rate of market penetration of innovative concepts and technology.
The polluter pays principal is paramount. Sparking a near-term clean energy revolution will be difficult if we continue to hide the true cost of conventional energy in the value chain (and, often in the developing world), and prop-up EE/RE solutions through occasional government action.
The market is most efficient when subsidies no longer distort market prices, and there a clear regulatory signal from government. Furthermore, the market is most efficient when consumers pay a more equitable burden of the costs associated with bringing the goods they consume to market; it encourages sustainable product development.
In contrast to the above approach, the tax code could be used to target waste stream inefficiencies. When I say “waste stream”, I’m not just referring to “carbon”, but any type of waste created during EE/RE manufacturing/distribution, cradle to cradle. Implemented correctly, this approach could lower the total economic cost of action, equitably reduce our deficit, and encourage a quicker transition to clean energy.
Garrett,
Your initial question is spot-on – the tools we are currently using are broken. Beyond that, I am slightly confused with your response.
You state that you “…don’t believe that the most efficient solution is additional targeted subsidies, complicated incentives (e.g., cap-and-trade), or regulation.”, yet you then state that “The market is most efficient when subsidies no longer distort market prices, and there a clear regulatory signal from government.”
On one hand, you argue that the most efficient solution is not a complicated incentive such as cap and trade, yet you then go on to state that “The polluter pays principal is paramount.” Isn’t a cap-and-trade system one mechanism (not necessarily the correct one – that is clearly subject to debate) of having the polluter pay??
I have to strongly disagree with your suggestion regarding use of the tax code on several levels:
1. Using the tax code to stimulate renewable energy development means that the government (and by direct extension, the U.S. people) is footing the bill – how exactly does that fit into your idea of polluter pays principal (don’t get me wrong here – I fully realize that my argument has flaws, as well – using cap-and-trade as an example, the utilities would just pass that expense on to the consumer in the form of rate base increases)
2. Using the tax code to incentivize limits the pool of investors to those who have tax appetite, and often the benefits of the projects cannot be efficiently monetized due to other limitations inherent in the tax code (e.g., wind farm utilizing PTCs in a traditional partnership flip structure is going to be subject to various limitations in each partner’s ability to take benefits under the provisions of partnership tax law). So we are still faced with the issue of limited investor pool in #2 above.
3. Unless tax benefits are enacted permanently, then we are still faced with issue #3 above – a lack of durable renewable energy policy. Given the weak economy, presidential and congressional mandates to cut trillions of dollars from the deficit over the next ten years, can you realistically envision a scenario where all of the government agencies are having their budgets slashed, while renewable energy gets billions of dollars in tax incentives?
4. You talk about the complexity of a cap and trade system – but I would argue that trying to come up with a system to track / account for waste stream inefficiencies would be immensely more complicated.
Garrett – please understand that I am not trying to attack your arguments – I appreciate that you are a part of the discussion, and I don’t think any one person’s ideas are absolutely correct or incorrect.
I look forward to continuing this conversation with you and the group to discuss the alternatives to meet Elias’ “challenge” above.
My point above is that we often distort markets and hide the true cost of energy with an array of targeted subsidies and tax breaks. The Energy Independence and Security Act of 2007 (EISA) is a perfect example. Furthermore, the US Congress has a history of enacting non-permanent solutions (See: Elias’ example of the 1603 program above, or the Production Tax Credit). Whatever the solution, I agree that it needs to have staying power.
On the subject of EE/RE, most clean energy solutions have complicated supply chains and rely on critical materials found (predominantly) in hostile areas of the world. There is a long term viability and energy security question at play here. Do we want to prop-up clean technologies that in the long-run will move our dependency off conventional sources to critical materials (e.g., rare earths) found abroad?
A consumption-based waste stream tax would mean a fundamental shift in our tax code. To be effective, it should target ALL products (not just renewable energy). Everything from wind, to natural gas, to toilet paper. Properly implemented, it would encourage investment into cleaner supply chains, and ideally, bring manufacturing back to the United States. To Elias’ first bullet – a waste stream tax would likely increase the artificially low price of natural gas, making renewables more cost competitive.
That said, any change in the tax code ought to be coupled with a long-term U.S. tax policy strategy. At a minimum, making a change like this would require careful planning, a roadmap, and a phased approach.
A cap and trade program for a global pollutant like carbon would be hugely more complicated to manage and execute. And, fundamental to the question of cap and trade is the problem that without the third world on board (including India and China), its unlikely to achieve results. Government oversight would expand (DOE, EPA, FERC, SEC, CFTC would be involved, at a minimum). Much of the potential investment in clean energy would go to vendors/service providers, such as insurers, auditors, lawyers, consultants, etc. to ensure that the market was fair/equitable. Note: this is revenue that wouldn’t go into direct investments in solutions. Unless you envision something like “Cap and Dividend”, there also is the risk that government would continue to perpetuate the market distortion problem by taking revenue generated from trades and pouring it into pet projects and (again) targeted subsidies. At present, millions (if not billions) of dollars of our current Federal deficit is tied up in energy-related earmarks that were made decades ago by Senators/Congressmen who either are no longer in office, or are deceased. That money is sitting there on the books at many Federal departments/agencies, and they can’t even touch it without Congress passing another law.
All said, I could not support a waste stream tax without understanding how the revenue generated would be used. Right now, balancing the budget and/or tax-and-dividend is top of mind. Secondly, funding innovative high-risk R&D programs that would not otherwise get private sector support (i.e., ARPA-E), is another. Regardless, a waste stream tax is a different, and arguably, more straight-forward approach to addressing the problem that Elias tee’d up.
To enable greater financing for renewable energy projects, effective policy mechanisms must help mitigate the medium to long-term risk and uncertainty generally associated with their revenue streams. So Bill, I agree wholeheartedly with your call for the FIT. The 2010 FERC ruling helped clarify the legality of state-level multi-tier FITs, and with careful planning I believe that FITs can be designed to facilitate smart and innovative project development while avoiding a ‘Spanish solar’ collapse or other unsustainable market distortions.
In regard to Elias’s question, I think that a devolution of decision making authority related to specific policies and programs (such as loan guarantees) to the state level, while still using federal funds, would facilitate greater flexibility and impact. In addition, it could potentially appease those who are generally critical of any central government involvement in this sector while backstopping cash strapped state-level authorities (which are closer to the ground and vitally important in terms of market and regulatory issues) with much needed resources.
But in general, as Elias pointed out, stability for any policy mechanism is critical and continuity should be built in to legislation more effectively. Without that, no policy will be able to mitigate long-term risk.
There’s a lot here, and some very interesting ideas. I’ll make a couple observations, and then I have some questions.
Despite the differences, the consensus thus far seems to be that we need to move beyond incentive based programs. This isn’t really a surprise – policy tools usually work along a continuum that starts with incentives (supporting the desired activity). From there the next tools are regulatory (shifting the playing field to the benefit of the desired activity) – like state level renewable portfolio standards and the FIT that Jeffery and Bill are advocating. Finally a tax or penalty regime is created that focuses on meaningfully increasing the cost for the undesired activity – Garrett’s comprehensive waste-stream tax.
Thus far, at the national level, our clean energy policy has been limited to incentives. The reason we start at this stage is to accelerate technical development and scalability so that the regulatory stage can work (if we don’t get a little down the road on managing the technology cost and deployment, changing the playing field wouldn’t mean much), which in turn helps build the base so that the imposition of a tax or penalty isn’t overly disruptive. With that said the incentive-based programs have arguably been a success with tremendous progress on unit costs, increased sophistication in output forecasting, an exponential increase in operational data and increased sophistication on new energy technologies by investors and lenders.
This leads to some questions –
Have incentives for renewable energy been effective in preparing the country for more severe (regulatory/tax) policy tools?
Are we really ready for that next step?
Are we fundamentally more ready today than we were in the summer of 2010 when carbon legislation failed?
Garrett,
While I cannot say that I totally agree with your waste stream tax concept, I want to commend you for the obvious amount of thought that you have put into this concept, and thinking outside of the box to advocate for solutions to this complex problem, rather than just pointing out the current system’s inadequacies. I will admit that I could stand to learn a lot more about your concept, and hope we can continue our spirited debate in this forum.
I will draw upon your response to elaborate on some of my concern about the waste tax concept:
- You mention (and I agree) that most clean energy solutions have complicated supply chains (note that I totally agree with your concerns about long-term viability / energy security). Am I to understand that all of the products within this supply chain would be subject to some form of waste tax? If so – I firmly believe this would be an immensely complex system to implement. You can find a parallel in the current sales tax or value-added tax systems – and my questions are:
1. Who would pay the tax – which products would be taxed vs. which products would receive an exemption? When do the products get taxed – last step in the process or every step along the way (in which case, wouldn’t that cause an increase in cost to the end user(s)?)
2. How do you track the waste streams being produced?
3. How do you enforce the reporting / tax payment by the waste stream producers?
4. Unless the tax is accepted globally, wouldn’t this just increase the cost of manufacturing goods in the U.S. and push more jobs offshore??
I think you get my idea. Your concept is tremendously interesting, but I think if we start a conversation about the specific details about how this process will work, it will uncover the tremendous administrative burden of such a system.
I would be interested in hearing how you think a feed-in-tariff system (count the kWh, gt paid for the kWh…) would be more complex that the system you propose.
Elias,
In response to your questions:
1. I would probably look at this as chicken-and-egg, and argue the reverse of your question – that more severe policy tools (i.e., state-level renewable portfolio standards) have themselves been the incentive for a good portion of renewable energy development, in many cases with economic incentives tied to the policies (e.g., New Jersey solar industry propelled by state RPS / robust SREC prices).
To answer your question directly – I believe that the incentives have spurred renewable energy development to the point where it is a part of the mainstream energy policy conversation as a potentially viable energy source. However, I do not think that the incentives have prepared this country to accept a federally-mandated cap and trade or feed-in tariff system.
2. You’re asking the wrong crowd. I imagine most of the people in this forum would argue that we are ready for the next step. However, when we revisit your original questions – basically, how can the industry avoid nuclear winter without durable renewable energy policy / sources of financing, I think that just highlights that we have a long way to go.
3. Absolutely not. Obama fired his political bazooka at healthcare, and now, when it comes to his green economy, he is Barney Fife with the bullet in the shirt pocket.