An article in Tuesday's Washington Post described the current funding woes of US research into nuclear fusion, focused on anticipated budget and job cuts at the Princeton Plasma Physics Laboratory, MIT and several other sites. Aside from the general challenge of funding all of the Department of Energy's programs at a time of huge federal deficits and ballooning debt, it appears that domestic fusion research is being cut mainly to meet our commitments to the International Thermonuclear Experimental Reactor (ITER) being built in France. The article goes on to suggest that fusion has been excluded from the list of "all-of-the-above" energy technologies that the administration has embraced. That raises questions that would merit attention at any time but seem particularly relevant in an election year.
Before discussing its proper priority in US federal energy research and planning, it's important to recognize, as the article does, that fusion is very much a long-shot bet. We know that nuclear fusion works, because it's the process that powers our sun and all the stars. However, that doesn't guarantee that we can successfully harness it safely here on earth for our own purposes. I've heard plenty of energy experts who think that the only fusion reactor we need is the one 93 million miles away, which remains the ultimate source of nearly all the BTUs and kilowatt-hours of energy we use, except for those from nuclear (fission) power plants and geothermal energy.
Unfortunately, the challenges of harnessing the sun's energy bounty in real time, rather than via the geologically slow processes that produced fossil fuels or the faster but still ponderous growing cycles of biofuels, are distinctly non-trivial--hence the debate about whether and how to overcome the intermittency and cyclicality of wind and solar power through optimized dispersal, clever use of Smart Grid technology, or with energy storage that requires its own breakthroughs if it is to be an economical enabler of wind or solar. A working fusion reactor would provide an end-run around all those problems and fit neatly into our current centralized power grid, with what is expected to be negligible emissions or long-term waste. Who wouldn't want that?
Of course fusion power isn't easy, either; it's the definition of difficult. Scientists around the world have been chasing it for at least five decades. I recall eagerly reading about its potential when I was in my early teens. Then, it was seen to be 30-40 years from becoming commercial, and that's still a reasonable estimate, despite significant progress in the intervening decades. I admit I don't follow fusion research nearly as closely as I used to, in all its permutations of stellarators, tokamaks, laser bombardment chambers and other competing designs, all pursuing the elusive goal of "net energy"--getting more energy back than you must put into achieving the temperatures and pressures necessary to fuse the chosen hydrogen isotopes.
So where does a high-risk, high-reward investment like fusion fit into the concept of all-of-the-above energy that now dominates the energy debate on both sides of the political aisle, and in the trade-offs that must accompany any serious energy strategy or plan for the US? After all, "all of the above" is an attempt to recognize the widely differing states of readiness of our various energy options, the time lags inherent in replacing one set of sources with another, and the need to continue to supply and consume fossil fuels during our (long) transition away from them. While I've never seen an official list of what's in and what's out, my own sense of all of the above is that it's composed of technologies that are either commercial today or that have left the laboratory but still require improvement and scaling up to become commercial. In contrast, fusion hasn't left the lab and it's not clear when or if it will, at least on a timescale that's meaningful either for energy security or climate change mitigation. No one can tell us when the first fusion power plant could be plugged into the grid, and every attempt at predicting that has slipped, badly.
Fusion wasn't mentioned once in the Secretary of Energy's remarks to Congress concerning the fiscal 2013 Energy Department Budget, and it was only shown as a line item in his latest budget presentation. Yet I can't think of any other new technology that's customarily included in all of the above that has even a fraction of fusion's potential for delivering clean energy in large, centralized increments comparable to today's coal or nuclear power plants. We could spend all day arguing whether that's as desirable now (or in the future) as it was just a few years ago, but from my perspective it contributes to the option value of fusion. No one would suggest fusion as a practical near-term alternative, but with the prospect of a shale-gas bridge for the next several decades, it might be an important part of what we could be bridging towards.
Overall, the DOE has budgeted just under $400 million for fusion R&D in fiscal 2013, out of a total budget request of $27 billion. That's not insignificant, and devoting 1.5% of the federal energy budget to fusion might be about the right proportion for such a long-term endeavor that is decades from deployment, relative to funding for medium-term efforts like advanced fission reactors and near-term R&D on renewables and efficiency. The problem is that DOE is cutting deeply into US fusion capabilities, not just at Princeton but also at Lawrence Berkeley Laboratory, Livermore, Los Alamos and Sandia, in order to boost US funding for ITER from $105 million to $150 million next year. Only the fusion budgets for Oak Ridge Laboratory, which is managing the US role in ITER, and for the D.C. HQ grew.
I'm certainly not against international cooperation in science, which has become increasingly important as the costs of "big science" projects expand. However, even if ITER represented the very best chance to take fusion to the next level on its long path to deployment, the long-term implications of these cuts for US fusion science capabilities look significant. As with the space program, once the highly trained and experienced fusion workforce and teams are laid off and broken up, it becomes enormously difficult to reconstitute them, if needed. This is particularly true of those with advanced degrees in fields that have declined in popularity at US universities, or for which the majority of current graduates are non-US students who will return to their countries of origin in search of better opportunities. I wouldn't support keeping these programs going just to provide guaranteed employment for physicists, but we had better be sure that we won't need them later. I am skeptical that we can be sufficiently certain today of the likely deployment pathways for fusion to be able to make such an irreversible decision with confidence.
I understand that in times like these we must make tough choices; that's the essence of budgeting. I'm also sympathetic to those who might think that fusion researchers have had ample time and support to deliver the goods, already. Yet I can't help being struck by the contradiction of a DOE budget in which US R&D for such a long-term, high-potential technology is cut, at the same time that Secretary Chu and the President are pushing hard for multi-billion dollar commitments to extend the Production Tax Credit for renewable energy and reinstate the expired 1603 renewable energy cash grant program, a substantial portion of the past benefits from which went to non-US manufacturers and project developers. The total 2013 budget cuts for the US fusion labs are equivalent to the tax credits for a single 90 MW wind farm, which would contribute less than 0.01% of annual US power generation. Although we clearly can't fund every R&D idea to the extent researchers might wish, I believe it is a mistake to funnel so much money--about 40% of which must be borrowed--into perpetual support for the deployment of relatively low-impact and essentially mature technologies like onshore wind, when the same dollars would go much farther on R&D.
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Showing posts with label renewable energy credit. Show all posts
Showing posts with label renewable energy credit. Show all posts
Wednesday, June 27, 2012
Thursday, March 03, 2011
Could Competition and Low Demand Stall Wind Power's Growth?
In the last week I've seen reports that two of the biggest wind power developers in the world, Spain's Iberdrola Renovables and Portugal's EDP Renovaveis, plan to reduce their wind power investments in the US for at least the next couple of years. That's significant because these two firms together accounted for just under a third of the 5,115 MW of new wind turbines installed in the US last year. This isn't for lack of opportunities or incentives, but for some very old-fashioned reasons: low demand and competition from other energy sources. It's an important reminder that renewable energy can't just be viewed as a set of technologies; they are also businesses, and as such are subject to the normal ups and downs of the market. It also highlights the limitations of government incentives.
Wind power had been on a tear in the US as recently as 2009, when a record 10,010 MW of turbines were installed, extending an enviable 5-year run of 40% average annual growth in wind capacity. Last year that growth slowed to 15% as new installations fell by half. That occurred in spite of the federal stimulus program that converted tax credits for renewable energy projects into up-front cash grants, paying $ 3.5 billion to wind developers out of a total of $4.2 billion expended in 2010. Although eligibility for that benefit was due to expire on 12/31/10, it was subsequently extended through 2011 under December's "lame duck" tax legislation, largely on the strength of arguments that it would keep wind and other renewables growing at a brisk pace. What happened?
At least two major factors related to the business environment are weighing on wind development, as well as another factor unique to renewables. First, electricity demand that was depressed by the recession is apparently still at least 1% below pre-crisis levels. That doesn't sound like much, but the difference is roughly equivalent to the entire amount of electricity generated from wind power in 2008. As a result, utilities have become less keen to sign long-term offtake agreements, or "power purchase agreements" (PPAs), with new wind farms. Both EDP and Iberdrola cited this problem in reference to their 2011 plans.
Wind power also faces strong competition from cheap natural gas, as you've probably heard many times by now. Despite some resistance to shale drilling in states like New York, there's every indication that US gas output will continue to expand. Last year the US produced more natural gas than in any year since 1973, and the end of this boom is not in sight. Although advocates may claim that wind is now cost-competitive with gas, that remains a best-case analysis for locations with excellent wind resources and good access to transmission. Natural gas at $5 per million BTUs yields electricity at 5¢/kWh from a combined-cycle gas turbine. That sets a pretty tough bar for wind, especially when gas turbines can produce power on-demand, 24/7, while wind turbines generate power an average of 30% of the time, intermittently.
Unexpectedly, wind power may also be facing competition from solar power. In a recent interview the CEO of NRG Energy Inc., a large power generator, pointed to the greater opportunities for innovation in solar, compared to wind. The cost of installed photovoltaic modules, particularly in utility-scale applications, has fallen much faster in recent years than the cost of wind turbines. That's not to say that power from solar is cheaper than from wind, but solar is starting to look like a better investment for utilities, which have been signing PPAs with solar project developers in droves. It's also noteworthy that for the first time last year more solar power was installed in Europe than new wind power, by a healthy margin.
It's probably premature to conclude that the US wind boom has ended, and that wind capacity is now likely to grow at lower, more normal rates in the future, compared to its extraordinary past performance. This could just be a lull, as the enormous additions of the last few years are absorbed into a power grid that is still modernizing and remains a long way from the smart grid that will be needed to accommodate much larger contributions from intermittent renewables of all types. At the same time, it's worth noting that government incentives can't eliminate every obstacle that renewables face, and that arguments that the Treasury cash grants in lieu of tax credits should be extended beyond 2011 should be assessed with much more critical judgment than was possible in the scramble of a lame duck Congressional session.
Wind power had been on a tear in the US as recently as 2009, when a record 10,010 MW of turbines were installed, extending an enviable 5-year run of 40% average annual growth in wind capacity. Last year that growth slowed to 15% as new installations fell by half. That occurred in spite of the federal stimulus program that converted tax credits for renewable energy projects into up-front cash grants, paying $ 3.5 billion to wind developers out of a total of $4.2 billion expended in 2010. Although eligibility for that benefit was due to expire on 12/31/10, it was subsequently extended through 2011 under December's "lame duck" tax legislation, largely on the strength of arguments that it would keep wind and other renewables growing at a brisk pace. What happened?
At least two major factors related to the business environment are weighing on wind development, as well as another factor unique to renewables. First, electricity demand that was depressed by the recession is apparently still at least 1% below pre-crisis levels. That doesn't sound like much, but the difference is roughly equivalent to the entire amount of electricity generated from wind power in 2008. As a result, utilities have become less keen to sign long-term offtake agreements, or "power purchase agreements" (PPAs), with new wind farms. Both EDP and Iberdrola cited this problem in reference to their 2011 plans.
Wind power also faces strong competition from cheap natural gas, as you've probably heard many times by now. Despite some resistance to shale drilling in states like New York, there's every indication that US gas output will continue to expand. Last year the US produced more natural gas than in any year since 1973, and the end of this boom is not in sight. Although advocates may claim that wind is now cost-competitive with gas, that remains a best-case analysis for locations with excellent wind resources and good access to transmission. Natural gas at $5 per million BTUs yields electricity at 5¢/kWh from a combined-cycle gas turbine. That sets a pretty tough bar for wind, especially when gas turbines can produce power on-demand, 24/7, while wind turbines generate power an average of 30% of the time, intermittently.
Unexpectedly, wind power may also be facing competition from solar power. In a recent interview the CEO of NRG Energy Inc., a large power generator, pointed to the greater opportunities for innovation in solar, compared to wind. The cost of installed photovoltaic modules, particularly in utility-scale applications, has fallen much faster in recent years than the cost of wind turbines. That's not to say that power from solar is cheaper than from wind, but solar is starting to look like a better investment for utilities, which have been signing PPAs with solar project developers in droves. It's also noteworthy that for the first time last year more solar power was installed in Europe than new wind power, by a healthy margin.
It's probably premature to conclude that the US wind boom has ended, and that wind capacity is now likely to grow at lower, more normal rates in the future, compared to its extraordinary past performance. This could just be a lull, as the enormous additions of the last few years are absorbed into a power grid that is still modernizing and remains a long way from the smart grid that will be needed to accommodate much larger contributions from intermittent renewables of all types. At the same time, it's worth noting that government incentives can't eliminate every obstacle that renewables face, and that arguments that the Treasury cash grants in lieu of tax credits should be extended beyond 2011 should be assessed with much more critical judgment than was possible in the scramble of a lame duck Congressional session.
Tuesday, April 13, 2010
Fueling Wind's Surge
Last week the American Wind Energy Association (AWEA) released its annual report on the US wind industry. By most measures it reflects another banner year. New wind power installations topped 10,000 Megawatts for the first time, bringing cumulative capacity to just over 35,000 MW, roughly 93% of which was added in the last 10 years. Last year's increase was sufficient to expand US wind generation from 1.3% to 1.8% of total US net power generation, though a fifth of that gain in market share was the result of a 4% decrease in the denominator, due to the recession. The portions of the report that I was able to access provided much food for thought, particularly with regard to the government policies that helped the wind industry overcome the near-paralysis it faced when financial markets froze in late 2008. A crucial contributor to that recovery is now due to expire at the end of the year, and the industry's supporters are already calling for its extension.
Most of AWEA's 2009 report is only available to non-members for a fee. Some of the information I'll be referring to can be found in the media version, but not in the free "teaser" available on AWEA's website. One interesting comparison featured in both versions shows that wind accounted for 39% of new US power generation installed last year, having overtaken all other technologies except for gas-fired generation within the last few years. Coal was a distant third, and "other renewables" lagged far behind, despite the high profile of solar and geothermal energy. It's a toss-up whether wind can overtake gas on new additions anytime soon, considering that wellhead gas prices are running at less than half their level of just two years ago. That ultimately translates into lower levelized electricity costs, particularly compared with wind and other new sources vying for the non-baseload portion of the power market.
One of the other main uncertainties for wind energy concerns the financial and policy environment in which it operates, both of which were changed drastically by the recession and financial crisis. Prior to the demise of Lehman Brothers and the retrenchment of the entire banking sector, many wind projects relied on the "tax equity" market, in which the rights for future tax credit receipts were exchanged for prompt cash. The collapse of that market threatened to bring the US wind industry to a standstill, as developers without sufficient taxable earnings, or lacking the financial strength to wait to receive tax credits once their projects began to sell power, had few options for financing new activities. That would have left turbine manufacturers with unsold inventories or unacceptably risky receivables. Into this void stepped the US Congress with the Renewable Energy Grant program included in the stimulus bill. Importantly, in order to qualify for up-front cash grants in lieu of tax credits, a project must at least have begun construction by the end of 2010. After that, new wind projects would still be entitled to the Production Tax Credit (PTC), or to an Investment Tax Credit in lieu of the PTC, but as before the financial crisis they'd only receive it as a reduction to future income taxes. Two Senators introduced a bill last year to extend the grants for another two years, but it is apparently still in committee.
You might also recall that the grant program was the subject of considerable controversy, when it turned out that most of the money disbursed as of last fall had gone to non-US companies, mainly to purchase non-US wind energy equipment. A review of AWEA's 2009 statistics shows that the situation probably hasn't changed. Of the top 10 wind turbine companies in the US last year, only two, GE and Clipper--now part-owned by United Technologies--were notionally domestic. Together they accounted for just 45% of installations by capacity. The list of top wind farm owners also includes many foreign companies. Spain's Iberdrola and Germany's E.On , both of which were leading recipients of the Treasury grants last year, were in the top 5, along with the US subsidiary of EDP.
My intent here is not to vilify foreign wind companies, most of which either have US manufacturing or source significant portions of their wind turbine supply chains here, and without which US wind installations would slow dramatically. However, the structure of the US wind market does raise serious questions about who stands to gain the most from an extension of this temporary stimulus program beyond the end of 2010. That's especially pertinent, since most of the companies that now dominate US wind on both the manufacturing and project side--including GE, Siemens, UTC, Iberdrola, MidAmerican, and big utilities like FPL, Edison Mission, and Duke--are again strong enough financially to afford to wait for their tax credits as projects are completed and power is actually produced, as intended under the original PTC rules. Moreover, it's not clear how the tax equity market could be expected to revive fully--and the larger renewable energy financing business with it--as long as companies can continue to turn directly to the government for nearly a third of their project costs, paid up front.
This leaves the Congress and administration with two fundamental questions to address. First, as the economy recovers from the worst recession in decades, when do temporary measures to prevent the complete breakdown of business activity during a crisis begin to retard full recovery and become counter-productive? Second, how forcefully should the government be promoting wind power, which has developed into the most competitive and mainstream of our new energy sources? Fairly soon the focus should turn to how we might eventually wean wind power off subsidies, altogether, rather than continuing to accelerate them in a manner more appropriate to less well-developed, less-competitive energy sources. To complicate matters further, this must be considered against the backdrop of climate change policy, which is still very much in flux, and the growing debate over deficits. I'm sure we'll be hearing a lot more about this issue as the wind industry begins to consider projects that couldn't realistically start construction before the year-end deadline for the current grant program.
Most of AWEA's 2009 report is only available to non-members for a fee. Some of the information I'll be referring to can be found in the media version, but not in the free "teaser" available on AWEA's website. One interesting comparison featured in both versions shows that wind accounted for 39% of new US power generation installed last year, having overtaken all other technologies except for gas-fired generation within the last few years. Coal was a distant third, and "other renewables" lagged far behind, despite the high profile of solar and geothermal energy. It's a toss-up whether wind can overtake gas on new additions anytime soon, considering that wellhead gas prices are running at less than half their level of just two years ago. That ultimately translates into lower levelized electricity costs, particularly compared with wind and other new sources vying for the non-baseload portion of the power market.
One of the other main uncertainties for wind energy concerns the financial and policy environment in which it operates, both of which were changed drastically by the recession and financial crisis. Prior to the demise of Lehman Brothers and the retrenchment of the entire banking sector, many wind projects relied on the "tax equity" market, in which the rights for future tax credit receipts were exchanged for prompt cash. The collapse of that market threatened to bring the US wind industry to a standstill, as developers without sufficient taxable earnings, or lacking the financial strength to wait to receive tax credits once their projects began to sell power, had few options for financing new activities. That would have left turbine manufacturers with unsold inventories or unacceptably risky receivables. Into this void stepped the US Congress with the Renewable Energy Grant program included in the stimulus bill. Importantly, in order to qualify for up-front cash grants in lieu of tax credits, a project must at least have begun construction by the end of 2010. After that, new wind projects would still be entitled to the Production Tax Credit (PTC), or to an Investment Tax Credit in lieu of the PTC, but as before the financial crisis they'd only receive it as a reduction to future income taxes. Two Senators introduced a bill last year to extend the grants for another two years, but it is apparently still in committee.
You might also recall that the grant program was the subject of considerable controversy, when it turned out that most of the money disbursed as of last fall had gone to non-US companies, mainly to purchase non-US wind energy equipment. A review of AWEA's 2009 statistics shows that the situation probably hasn't changed. Of the top 10 wind turbine companies in the US last year, only two, GE and Clipper--now part-owned by United Technologies--were notionally domestic. Together they accounted for just 45% of installations by capacity. The list of top wind farm owners also includes many foreign companies. Spain's Iberdrola and Germany's E.On , both of which were leading recipients of the Treasury grants last year, were in the top 5, along with the US subsidiary of EDP.
My intent here is not to vilify foreign wind companies, most of which either have US manufacturing or source significant portions of their wind turbine supply chains here, and without which US wind installations would slow dramatically. However, the structure of the US wind market does raise serious questions about who stands to gain the most from an extension of this temporary stimulus program beyond the end of 2010. That's especially pertinent, since most of the companies that now dominate US wind on both the manufacturing and project side--including GE, Siemens, UTC, Iberdrola, MidAmerican, and big utilities like FPL, Edison Mission, and Duke--are again strong enough financially to afford to wait for their tax credits as projects are completed and power is actually produced, as intended under the original PTC rules. Moreover, it's not clear how the tax equity market could be expected to revive fully--and the larger renewable energy financing business with it--as long as companies can continue to turn directly to the government for nearly a third of their project costs, paid up front.
This leaves the Congress and administration with two fundamental questions to address. First, as the economy recovers from the worst recession in decades, when do temporary measures to prevent the complete breakdown of business activity during a crisis begin to retard full recovery and become counter-productive? Second, how forcefully should the government be promoting wind power, which has developed into the most competitive and mainstream of our new energy sources? Fairly soon the focus should turn to how we might eventually wean wind power off subsidies, altogether, rather than continuing to accelerate them in a manner more appropriate to less well-developed, less-competitive energy sources. To complicate matters further, this must be considered against the backdrop of climate change policy, which is still very much in flux, and the growing debate over deficits. I'm sure we'll be hearing a lot more about this issue as the wind industry begins to consider projects that couldn't realistically start construction before the year-end deadline for the current grant program.
Labels:
renewable energy credit,
subsidy,
tax credit,
wind power
Monday, March 08, 2010
Renewable Energy and Domestic Content
The current scuffle between the US Congress and the wind industry began last fall with reports of a large wind farm in Texas involving both Chinese investors and Chinese wind turbines. It ratcheted up last week, with four key Senators proposing to close the "loophole" that enables renewable energy projects built with imported hardware to receive stimulus funds. The American Wind Energy Association (AWEA) promptly retorted that the problem wasn't the wind projects and their suppliers, but a lack of consistent renewable energy policies coming out of the Congress. The more I've thought about this situation, the more I am convinced that both parties to this tiff are missing the bigger picture.
Let's start with the response by AWEA, which used the occasion to reiterate their consistent support for a national renewable electricity standard they contend would provide a clear policy signal for anyone contemplating investing in the facilities and workforce needed to manufacture wind turbines, solar arrays and other renewable energy gear here in the US. That sounds good, but it's equally clear from the record rate of wind installations last year that demand wasn't the problem, nor was it lack of government incentives to stimulate that demand. The Production Tax Credit for wind power has already been extended through 2012 and seems unlikely to be allowed to expire again, and the Investment Tax Credit for solar was extended through 2016. For that matter, 29 states plus the District of Columbia already have Renewable Portfolio Standards of the type AWEA is advocating for the country as a whole, and many of the states without one lack good wind resources in any case. The main aspect that has been in contention is whether the option to convert these tax credits to up-front cash grants--the benefit at the heart of the controversy over foreign-sourced wind turbines--should be extended beyond the end of this year. On the whole, then, the uncertainties faced by wind manufacturers don't look any worse than those confronting other manufacturers, and they might not even be as bad.
Next consider the complaint of the four Senators that such renewable energy grants ought to be reserved for projects that create green jobs here in the US, rather than overseas. This concern was prompted by a study suggesting that the lion's share of such grants to date has gone to non-US firms. While that negates most of the Keynesian stimulus benefits of the policy, it's also a nearly-inevitable result of the way that global manufacturing is now structured. Expecting all wind turbines funded by stimulus grants to be stamped "Made in USA" is no more realistic than expecting every car, computer, and paperclip paid for by stimulus money to have been made by American workers in an American factory. For good or ill, we don't live in that world anymore, and that's one reason that the entire federal stimulus has been less effective than hoped in promoting domestic employment: a large fraction of what we consume is either made elsewhere or includes many non-US components. Although wind turbine manufacturing started as a small, localized undertaking in the US and a few European countries, it has grown with extraordinary speed during precisely the same period that the supply chains of numerous industries became thoroughly globalized.
While these trends of manufacturing globalization and blanket support for renewable energy set the stage for it, the current collision over domestic content in the wind industry is the direct consequence of the pervasive green jobs theme that both politicians and advocacy groups like AWEA adopted for similar reasons of expediency last year: how else do you justify spending billions in tax dollars on this sort of thing during a recession, if it doesn't stimulate the US economy and create lots of jobs?
The solution to this conundrum is tricky. Since it's unlikely that either side can now admit that green jobs have been oversold as a justification for renewable energy policies, both sides ought to focus their efforts on manufacturing, and by that I don't mean just throwing up a few final-assembly plants where imported turbine parts can be bolted together, but rather addressing the factors that have affected US competitiveness across a wide range of industries. That includes high corporate tax rates, weak tax incentives for manufacturing investment, and the stifling overlap in federal, state and local regulations. More urgently, it should be clear that the solution does not involve erecting trade barriers in the form of domestic-content rules that would provoke retaliatory measures that would harm successful US export sectors. Nor does it include obscuring the magnitude of renewable energy subsidies by moving them out of the federal budget--where they are at least visible--and into the cost base of utilities by converting them into renewable energy mandates. While it might be appropriate to shift the burden from taxpayers to ratepayers, the industry needs smart incentives, not a perpetual subsidy along the lines of corn ethanol (three decades and counting.)
I used to think that all of these arcane and inefficient incentives could be swept aside by putting a price on greenhouse gas emissions, via either cap & trade or a carbon tax. I'm now skeptical about that, because of the way that Congress has insisted on combining cap & trade with a renewable electricity standard plus direct, technology-specific subsidies in the Waxman-Markey bill and its siblings. The spectacle of the US Treasury writing checks for hundreds of millions of dollars to Spanish and Chinese wind turbine companies is the inevitable result of this kind of convoluted thinking.
Let's start with the response by AWEA, which used the occasion to reiterate their consistent support for a national renewable electricity standard they contend would provide a clear policy signal for anyone contemplating investing in the facilities and workforce needed to manufacture wind turbines, solar arrays and other renewable energy gear here in the US. That sounds good, but it's equally clear from the record rate of wind installations last year that demand wasn't the problem, nor was it lack of government incentives to stimulate that demand. The Production Tax Credit for wind power has already been extended through 2012 and seems unlikely to be allowed to expire again, and the Investment Tax Credit for solar was extended through 2016. For that matter, 29 states plus the District of Columbia already have Renewable Portfolio Standards of the type AWEA is advocating for the country as a whole, and many of the states without one lack good wind resources in any case. The main aspect that has been in contention is whether the option to convert these tax credits to up-front cash grants--the benefit at the heart of the controversy over foreign-sourced wind turbines--should be extended beyond the end of this year. On the whole, then, the uncertainties faced by wind manufacturers don't look any worse than those confronting other manufacturers, and they might not even be as bad.
Next consider the complaint of the four Senators that such renewable energy grants ought to be reserved for projects that create green jobs here in the US, rather than overseas. This concern was prompted by a study suggesting that the lion's share of such grants to date has gone to non-US firms. While that negates most of the Keynesian stimulus benefits of the policy, it's also a nearly-inevitable result of the way that global manufacturing is now structured. Expecting all wind turbines funded by stimulus grants to be stamped "Made in USA" is no more realistic than expecting every car, computer, and paperclip paid for by stimulus money to have been made by American workers in an American factory. For good or ill, we don't live in that world anymore, and that's one reason that the entire federal stimulus has been less effective than hoped in promoting domestic employment: a large fraction of what we consume is either made elsewhere or includes many non-US components. Although wind turbine manufacturing started as a small, localized undertaking in the US and a few European countries, it has grown with extraordinary speed during precisely the same period that the supply chains of numerous industries became thoroughly globalized.
While these trends of manufacturing globalization and blanket support for renewable energy set the stage for it, the current collision over domestic content in the wind industry is the direct consequence of the pervasive green jobs theme that both politicians and advocacy groups like AWEA adopted for similar reasons of expediency last year: how else do you justify spending billions in tax dollars on this sort of thing during a recession, if it doesn't stimulate the US economy and create lots of jobs?
The solution to this conundrum is tricky. Since it's unlikely that either side can now admit that green jobs have been oversold as a justification for renewable energy policies, both sides ought to focus their efforts on manufacturing, and by that I don't mean just throwing up a few final-assembly plants where imported turbine parts can be bolted together, but rather addressing the factors that have affected US competitiveness across a wide range of industries. That includes high corporate tax rates, weak tax incentives for manufacturing investment, and the stifling overlap in federal, state and local regulations. More urgently, it should be clear that the solution does not involve erecting trade barriers in the form of domestic-content rules that would provoke retaliatory measures that would harm successful US export sectors. Nor does it include obscuring the magnitude of renewable energy subsidies by moving them out of the federal budget--where they are at least visible--and into the cost base of utilities by converting them into renewable energy mandates. While it might be appropriate to shift the burden from taxpayers to ratepayers, the industry needs smart incentives, not a perpetual subsidy along the lines of corn ethanol (three decades and counting.)
I used to think that all of these arcane and inefficient incentives could be swept aside by putting a price on greenhouse gas emissions, via either cap & trade or a carbon tax. I'm now skeptical about that, because of the way that Congress has insisted on combining cap & trade with a renewable electricity standard plus direct, technology-specific subsidies in the Waxman-Markey bill and its siblings. The spectacle of the US Treasury writing checks for hundreds of millions of dollars to Spanish and Chinese wind turbine companies is the inevitable result of this kind of convoluted thinking.
Thursday, January 07, 2010
The Dependence of Renewables on Government
As I was catching up on a large backlog of articles from December, I ran across one from the New York Times that dovetailed with my thoughts about trends to watch this year. It concerned the difficulties being experienced by US green energy companies, particularly relative to competitors operating in countries with more generous subsidies for renewable energy manufacturing and deployment. Instead of becoming progressively less dependent on help from the government, many of these firms are even more reliant on aid as a result of the financial crisis, which disrupted their access to credit and capital from the market. This is a worrying development, because it tends to shift the focus of management away from the attainment of operational excellence and profitable innovation, and toward the task of lining up a steady pipeline of government grants and tax credits. This might be necessary for the moment, but it undermines long-term competitiveness.
As I read the article, I was struck by some of the comments from industry executives, which included a complaint from the US arm of a Spanish wind turbine manufacturer about the lack of necessary legislative support for the industry, and this astonishing remark from a director of the Pew Charitable Trusts' Environment Group, "But if we don't have the policies in place to make investment here a sure thing, then we could potentially lose to other countries." I wasn't aware that it has ever been the proper role of government to ensure that any business is a "sure thing." And then there was a comment from the head of the Solar Energy Industries Association to the effect that the US would have a bigger solar sector if our incentives were more like those in China, where "80 percent of the entire cost of a factory and worker training is paid for by the government." No doubt.
There's something deeply corrosive about such attitudes, and they put anyone investing in renewable energy in a difficult position. Now, there's a strong argument that some level of government support is necessary to help renewable energy compete with traditional energy sources that operate in a market that doesn't account for significant externalities such as environmental and energy-security effects. That's one of the main arguments for establishing a cap & trade system for greenhouse gases, or a carbon tax. Yet we now see government not only helping to level the playing field by means of renewable energy tax credits for investment or production and mandates requiring a set percentage of energy to come from renewable sources, but also playing the role of venture capitalist and banker. These are roles for which government is ill-equipped, not least because the necessary Darwinian feedback mechanisms don't exist. A VC that consistently invests in impractical ideas or start-up firms with incompetent management will eventually run out of capital and close its doors; a government agency with a similarly poor track record will continue to be funded, and its employees will enjoy their customary job security.
Of course, renewable energy firms aren't the only ones to have enjoyed generous government support as a result of the stimulus and other measures put in place to address the recession and financial crisis. The key difference is that while the government has poured billions of dollars into banks and carmakers, no one doubts that well-run banks can function without government aid and that it's possible to make and sell cars at a profit in the US--Ford and several foreign carmakers with US factories prove that every day. Unfortunately, we don't know that it's possible to produce renewable energy or the hardware it requires without government support for users, producers, developers, manufacturers, or all of the above. That acts as a deterrent to established energy companies that have, through painful experience, acquired a jaundiced view of the long-term dependability of such support. Anyone questioning that view need only ask someone in the US biodiesel industry, which just lost its $1-per-gallon subsidy and now faces oblivion.
As necessary as the continued expansion of renewable energy sources is for our long-term transition away from fossil fuels and for reducing greenhouse gas emissions, I worry that the green energy sector has become caught up in an industrial policy fad that has little to do with either emissions or energy security, and that hinges on exaggerated expectations of cleantech as the next hugely-profitable global industry and massive provider of stable, high-income employment. Yet if that profitability is merely the result of a government-mediated transfer of wealth from consumers and taxpayers to a group of fortunate firms, rather than of improvements in productivity or pervasive new consumer values, then neither those profits nor the jobs that go with them will be sustainable. And sooner or later a government less committed to these subsidies, or more focused on reducing unmanageable deficits, will take office and the gravy train will end quite suddenly.
I'm not advocating abandoning the renewable energy sector to the tender mercies of the market overnight, or ceding this important sector entirely to non-US firms, nor am I ignoring the lessons of the last two years about markets. However, I'm also recalling the lessons of the Tech Bubble. At least until we have cap & trade or a carbon tax, some level of support will be necessary. However, it should be uniform, picking no winners and treating all low-emission BTUs and kWhs equally. It should also phase out on a reasonable but firmly-established timetable, so that companies know they must become truly competitive. And instead of extending the Treasury's renewable energy grant program beyond its current October 2011 deadline, the government should focus on enabling the restoration of the flows of private capital for which the grants are filling in--and inadvertently stifling in the meantime. Nor should we seek to emulate the foolishness of Germany's extravagantly-generous feed-in tariffs for solar power, which created a market for German manufacturers that is now being lost to foreign competitors with lower costs.
Our goal ought to be a renewable energy sector that can stand on its own, rather than one that, like the US ethanol industry, has been tethered to federal life-support since the precursor of today's Volumetric Excise Tax Credit was established in 1978. The result would likely yield fewer US renewable energy companies, but also stronger ones better able to survive the turbulent energy transition that lies ahead.
As I read the article, I was struck by some of the comments from industry executives, which included a complaint from the US arm of a Spanish wind turbine manufacturer about the lack of necessary legislative support for the industry, and this astonishing remark from a director of the Pew Charitable Trusts' Environment Group, "But if we don't have the policies in place to make investment here a sure thing, then we could potentially lose to other countries." I wasn't aware that it has ever been the proper role of government to ensure that any business is a "sure thing." And then there was a comment from the head of the Solar Energy Industries Association to the effect that the US would have a bigger solar sector if our incentives were more like those in China, where "80 percent of the entire cost of a factory and worker training is paid for by the government." No doubt.
There's something deeply corrosive about such attitudes, and they put anyone investing in renewable energy in a difficult position. Now, there's a strong argument that some level of government support is necessary to help renewable energy compete with traditional energy sources that operate in a market that doesn't account for significant externalities such as environmental and energy-security effects. That's one of the main arguments for establishing a cap & trade system for greenhouse gases, or a carbon tax. Yet we now see government not only helping to level the playing field by means of renewable energy tax credits for investment or production and mandates requiring a set percentage of energy to come from renewable sources, but also playing the role of venture capitalist and banker. These are roles for which government is ill-equipped, not least because the necessary Darwinian feedback mechanisms don't exist. A VC that consistently invests in impractical ideas or start-up firms with incompetent management will eventually run out of capital and close its doors; a government agency with a similarly poor track record will continue to be funded, and its employees will enjoy their customary job security.
Of course, renewable energy firms aren't the only ones to have enjoyed generous government support as a result of the stimulus and other measures put in place to address the recession and financial crisis. The key difference is that while the government has poured billions of dollars into banks and carmakers, no one doubts that well-run banks can function without government aid and that it's possible to make and sell cars at a profit in the US--Ford and several foreign carmakers with US factories prove that every day. Unfortunately, we don't know that it's possible to produce renewable energy or the hardware it requires without government support for users, producers, developers, manufacturers, or all of the above. That acts as a deterrent to established energy companies that have, through painful experience, acquired a jaundiced view of the long-term dependability of such support. Anyone questioning that view need only ask someone in the US biodiesel industry, which just lost its $1-per-gallon subsidy and now faces oblivion.
As necessary as the continued expansion of renewable energy sources is for our long-term transition away from fossil fuels and for reducing greenhouse gas emissions, I worry that the green energy sector has become caught up in an industrial policy fad that has little to do with either emissions or energy security, and that hinges on exaggerated expectations of cleantech as the next hugely-profitable global industry and massive provider of stable, high-income employment. Yet if that profitability is merely the result of a government-mediated transfer of wealth from consumers and taxpayers to a group of fortunate firms, rather than of improvements in productivity or pervasive new consumer values, then neither those profits nor the jobs that go with them will be sustainable. And sooner or later a government less committed to these subsidies, or more focused on reducing unmanageable deficits, will take office and the gravy train will end quite suddenly.
I'm not advocating abandoning the renewable energy sector to the tender mercies of the market overnight, or ceding this important sector entirely to non-US firms, nor am I ignoring the lessons of the last two years about markets. However, I'm also recalling the lessons of the Tech Bubble. At least until we have cap & trade or a carbon tax, some level of support will be necessary. However, it should be uniform, picking no winners and treating all low-emission BTUs and kWhs equally. It should also phase out on a reasonable but firmly-established timetable, so that companies know they must become truly competitive. And instead of extending the Treasury's renewable energy grant program beyond its current October 2011 deadline, the government should focus on enabling the restoration of the flows of private capital for which the grants are filling in--and inadvertently stifling in the meantime. Nor should we seek to emulate the foolishness of Germany's extravagantly-generous feed-in tariffs for solar power, which created a market for German manufacturers that is now being lost to foreign competitors with lower costs.
Our goal ought to be a renewable energy sector that can stand on its own, rather than one that, like the US ethanol industry, has been tethered to federal life-support since the precursor of today's Volumetric Excise Tax Credit was established in 1978. The result would likely yield fewer US renewable energy companies, but also stronger ones better able to survive the turbulent energy transition that lies ahead.
Friday, February 06, 2009
Wind Power Stimulus
As reported by the American Wind Energy Association, the US added 8,358 MW of new wind power capacity last year, beating the previous year's record additions by 60%. Some of that surge in capacity likely resulted from developers racing to get their projects on-line before December 31, 2008, when the Production Tax Credit (PTC) for wind was due to expire, before it was extended in October for another year. Either way, it's a remarkable effort, and it would be tough to beat, even if the problems in the financial markets weren't undermining the ability of developers to obtain loans and attract investors looking for a stake in the tax credits that wind and other renewable energy projects generate. AWEA and the industry it represents are looking to the pending federal stimulus bill for help. However, because of the way the tax credits for renewable energy are structured, assistance for the wind industry is a microcosm of the issues surrounding the entire stimulus and its speed of delivery.
The US wind power sector faces two key challenges during this recession. First, the PTC for wind power, which after adjustment for inflation is worth 2.1 cents for each kilowatt-hour of electricity generated, is again due to expire at year end. And if that weren't bad enough, it has become much harder to capture the full value of that 2.1 cents, because it is not a cash payment, but rather a non-refundable tax credit against income taxes. If a wind generation company isn't making a big enough profit, some or all of the tax credit could be left on the table. Wind developers have historically gotten around this limitation by transferring their future tax credits to investment banks and other profitable companies with big tax liabilities, in exchange for cash or a stake in the project known as "tax equity." Lehman was a big player in this market, prior to its demise, and the financial crisis and recession have dried up many other sources. That's why the industry has been asking for Congress to make the PTC "refundable"--payable even to firms without any tax liability.
The problem with this is that the PTC lasts for 10 years, once a project that qualifies for it starts up. The current stimulus package, both the House bill that passed last week and the Senate's version, as best I can tell, would confer the PTC on wind projects put into service through the end of 2012--and even longer in the case of other renewable power technologies, such as geothermal, biomass power, and tidal and incremental hydropower. While extending the PTC would certainly increase the amount of new wind capacity added in the next several years, only a small fraction of the federal funds involved would be parceled out this year and next. However, it will reduce federal tax revenue each year until 2022. Even if wind capacity only increased at its 2007 rate of 5,000 MW per year for the next four years, and the PTC was allowed to expire in 2013, this would add around $1 billion to the annual federal budget deficit for up to a decade after the recession ends. As numbing as the long strings of zeroes in the current stimulus figures might be, we will eventually be back in a world in which every billion counts. The justification for taking on such a lasting burden for wind power looks especially shaky, in light of a recent study indicating that up to two-thirds of the "green jobs" associated with new US wind projects would be created offshore.
Instead of making the PTC refundable, the current version of the stimulus bill would allow developers to make an "irrevocable election" to receive a 30% "Section 48" energy investment tax credit (ITC) in lieu of the "Section 45" PTC, for the life of the project. Although the Section 48 credits aren't refundable, either, allowing wind and other technologies to opt for the ITC front loads their tax benefits, compensating for the shrinkage of the tax equity market. They also appear to qualify for the bill's generous "carry-back" provisions. In the process, this front loads the crucial stimulus spending without affecting future federal budgets, other than by the interest payments on the larger debt. I would be even more comfortable with this solution, if the only extension offered for wind power were for projects electing the ITC conversion, with no hangover of lost tax revenue beyond the recession. After all, the purpose of assisting wind power within the stimulus is to create "green jobs" now, and to keep the industry going through a rough patch, not to contribute to the enormous post-recovery budget deficits we must expect. If the Congress wishes to extend the regular PTC, it should do so outside the stimulus and under the "pay-go" rules that would require the cost to be offset elsewhere.
The US wind power sector faces two key challenges during this recession. First, the PTC for wind power, which after adjustment for inflation is worth 2.1 cents for each kilowatt-hour of electricity generated, is again due to expire at year end. And if that weren't bad enough, it has become much harder to capture the full value of that 2.1 cents, because it is not a cash payment, but rather a non-refundable tax credit against income taxes. If a wind generation company isn't making a big enough profit, some or all of the tax credit could be left on the table. Wind developers have historically gotten around this limitation by transferring their future tax credits to investment banks and other profitable companies with big tax liabilities, in exchange for cash or a stake in the project known as "tax equity." Lehman was a big player in this market, prior to its demise, and the financial crisis and recession have dried up many other sources. That's why the industry has been asking for Congress to make the PTC "refundable"--payable even to firms without any tax liability.
The problem with this is that the PTC lasts for 10 years, once a project that qualifies for it starts up. The current stimulus package, both the House bill that passed last week and the Senate's version, as best I can tell, would confer the PTC on wind projects put into service through the end of 2012--and even longer in the case of other renewable power technologies, such as geothermal, biomass power, and tidal and incremental hydropower. While extending the PTC would certainly increase the amount of new wind capacity added in the next several years, only a small fraction of the federal funds involved would be parceled out this year and next. However, it will reduce federal tax revenue each year until 2022. Even if wind capacity only increased at its 2007 rate of 5,000 MW per year for the next four years, and the PTC was allowed to expire in 2013, this would add around $1 billion to the annual federal budget deficit for up to a decade after the recession ends. As numbing as the long strings of zeroes in the current stimulus figures might be, we will eventually be back in a world in which every billion counts. The justification for taking on such a lasting burden for wind power looks especially shaky, in light of a recent study indicating that up to two-thirds of the "green jobs" associated with new US wind projects would be created offshore.
Instead of making the PTC refundable, the current version of the stimulus bill would allow developers to make an "irrevocable election" to receive a 30% "Section 48" energy investment tax credit (ITC) in lieu of the "Section 45" PTC, for the life of the project. Although the Section 48 credits aren't refundable, either, allowing wind and other technologies to opt for the ITC front loads their tax benefits, compensating for the shrinkage of the tax equity market. They also appear to qualify for the bill's generous "carry-back" provisions. In the process, this front loads the crucial stimulus spending without affecting future federal budgets, other than by the interest payments on the larger debt. I would be even more comfortable with this solution, if the only extension offered for wind power were for projects electing the ITC conversion, with no hangover of lost tax revenue beyond the recession. After all, the purpose of assisting wind power within the stimulus is to create "green jobs" now, and to keep the industry going through a rough patch, not to contribute to the enormous post-recovery budget deficits we must expect. If the Congress wishes to extend the regular PTC, it should do so outside the stimulus and under the "pay-go" rules that would require the cost to be offset elsewhere.
Friday, October 03, 2008
Tenth Time Lucky?
As the House of Representatives today takes up the financial rescue package passed Wednesday night by the US Senate, the renewable energy industry and its supporters now have two dogs in this fight. Restoration of the normal functioning of the country's credit markets--the main goal of this legislation--is as essential for the financing of renewable energy projects as it is for the rest of the economy. And if the House passes the same version of this package as the Senate, the renewable energy tax credits that are due to expire at the end of the year will finally be extended, by one year for wind and by eight for solar power.
It hasn't been easy to follow the legislative process involved in the creation of the "bailout" bills taken up by the House on Monday and the Senate on Wednesday. The bill passed by the Senate and referred back to the House, HR.1424, began life as the "Paul Wellstone Mental Health and Addiction Equity Act of 2007." The Senate then amended this dormant bill with the "Emergency Economic Stabilization" provisions--a modified version of the $700 billion rescue package plus a one-year boost in FDIC deposit insurance to $250,000--and the "tax extenders" package from S.3335, the "Jobs, Energy, Families and Disaster Relief Act of 2008" that I examined when the Senate considered it in August. That's where the wind and solar tax credits come in, along with the now-infamous "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children" measure to which I called bemused attention.
So here's the dilemma faced by the House: having heard from many of their constituents that Monday's defeat of the earlier rescue package was ill-considered, they can either put the bill exactly as passed by the Senate to a straight up-or-down vote, or they can amend it further to address the concerns of fiscally-conservative Democrats--the so-called Blue Dogs--and others to strip out some of the pork added by the Senate. In the former case, the bill would then be sent to the President for his signature and become law. However, if the House amends it prior to passage, then as I understand it, it must go to a House-Senate conference to resolve differences and then be re-voted by both houses. That entails further delays and possibly more market instability.
For the tenth time in a bit over a year, the renewable energy industry sees the possibility but not the certainty that the tax credits it regards as essential for continued growth will be extended. We should know the outcome later today. But whether this provision survives into the final economic stabilization package or not, this is no way to encourage a sector that both sides of the political divide agree is a key component of our energy security and climate change strategies. What is urgently needed is a predictable framework of incentives for energy technologies that are still at an early stage of their development and deployment, combined with a judiciously-planned phase-out, to ensure that we aren't simply creating industries that are addicted to subsidies, in the manner of the US corn ethanol industry. The energy provisions of the current bailout bill fall far short of that standard.
Update: The House passed the bill, without amendment, by a vote of 263-171.
It hasn't been easy to follow the legislative process involved in the creation of the "bailout" bills taken up by the House on Monday and the Senate on Wednesday. The bill passed by the Senate and referred back to the House, HR.1424, began life as the "Paul Wellstone Mental Health and Addiction Equity Act of 2007." The Senate then amended this dormant bill with the "Emergency Economic Stabilization" provisions--a modified version of the $700 billion rescue package plus a one-year boost in FDIC deposit insurance to $250,000--and the "tax extenders" package from S.3335, the "Jobs, Energy, Families and Disaster Relief Act of 2008" that I examined when the Senate considered it in August. That's where the wind and solar tax credits come in, along with the now-infamous "Modification of Rate of Excise Tax on Certain Wooden Arrows Designed for Use by Children" measure to which I called bemused attention.
So here's the dilemma faced by the House: having heard from many of their constituents that Monday's defeat of the earlier rescue package was ill-considered, they can either put the bill exactly as passed by the Senate to a straight up-or-down vote, or they can amend it further to address the concerns of fiscally-conservative Democrats--the so-called Blue Dogs--and others to strip out some of the pork added by the Senate. In the former case, the bill would then be sent to the President for his signature and become law. However, if the House amends it prior to passage, then as I understand it, it must go to a House-Senate conference to resolve differences and then be re-voted by both houses. That entails further delays and possibly more market instability.
For the tenth time in a bit over a year, the renewable energy industry sees the possibility but not the certainty that the tax credits it regards as essential for continued growth will be extended. We should know the outcome later today. But whether this provision survives into the final economic stabilization package or not, this is no way to encourage a sector that both sides of the political divide agree is a key component of our energy security and climate change strategies. What is urgently needed is a predictable framework of incentives for energy technologies that are still at an early stage of their development and deployment, combined with a judiciously-planned phase-out, to ensure that we aren't simply creating industries that are addicted to subsidies, in the manner of the US corn ethanol industry. The energy provisions of the current bailout bill fall far short of that standard.
Update: The House passed the bill, without amendment, by a vote of 263-171.
Labels:
bailout,
energy policy,
renewable energy credit
Wednesday, September 17, 2008
What Compromise?
I can't think of a single occasion on which I've reviewed the details of a piece of pending Congressional legislation when I haven't regretted the unintended civics lesson the experience provided. Poring over the text of the House Leadership's proposed "energy compromise" bill, HR.6899, the "Comprehensive American Energy Security and Consumer Protection Act" was no exception. Although the bill contains a version of the expected headline deal relating to offshore drilling and renewable energy credits, it also includes a hodgepodge of leftovers from the negotiations for last year's Energy Bill, along with some poison-pill measures such as the coerced, retro-active renegotiation of royalty relief on those late-1990s deepwater leases, plus an utterly half-baked idea to sell light crude oil out of the Strategic Petroleum Reserve and buy back heavier oil. Falling short of any dictionary definition of "compromise", this bill epitomizes my concerns about mixing energy policy with election-year politics.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
Let's start with its few unambiguously positive measures. The bill would extend the expiring Production Tax Credit (PTC) for wind energy by one year, and for other renewables such as geothermal and wave power by three years, while extending the Investment Tax Credit (ITC) for solar installations through 2016. It would also create a new credit of $3,000 to $5,000 for purchasers of plug-in hybrid cars, such as the upcoming Chevrolet Volt. This credit appears to phase out once each manufacturer reaches cumulative sales of 60,000 units. Some of the other provisions, including building efficiency standards and accelerated depreciation for smart electricity meters, which I didn't delve into in detail, probably also fall into this general category. Otherwise, the benefits of the bill's remaining provisions seem to be largely in the eye of the beholder. That includes the House's hastily-drawn response to the Royalty-in-Kind scandal.
Since this bill was intended as a compromise that would bridge the efforts of those seeking to expand US production of oil and gas with those who have been pushing for more renewables and efficiency--though I still reject the notion that these must be mutually exclusive--let's turn to drilling. About the best thing I see here for expanded domestic hydrocarbon output is accelerated leasing of the Naval Petroleum Reserve-Alaska (not to be confused with ANWR), though even this is diminished by revoking a previous rule allowing Alaskan oil to be exported. Given our large net oil imports, the latter won't do anything for the American public other than to make any oil found in the NPR-A less valuable and thus less likely to be produced under the tough conditions found near the North Slope.
That brings us to the much-touted expansion of access for offshore drilling in areas currently subject to drilling bans. By excluding the eastern Gulf of Mexico and by setting an arbitrary 50-mile-from-shore limitation, while also requiring the consent of the adjacent state--thus almost certainly excluding the California and Oregon coastlines--the Leadership has effectively ruled out over 80% of the 18 billion barrels and more than half of the 77 trillion cubic feet of the "technically recoverable undiscovered oil & gas resources" estimated by the Minerals Management Service in the off-limits areas. In the process, they have also left out the Destin Dome gas field--one of the few geological structures in the off-limits areas that has actually been explored and partially delineated.
In exchange for this paltry expansion of access, the industry loses royalty relief on the 1998 and 1999 leases, loses the Section 199 tax deduction originally extended to all US manufacturers, and loses a benefit related to foreign production that was intended to protect US companies from double taxation and allow them to compete with non-US firms, including the big national oil companies. It has been clear for some time that the Congress was determined to fund the extension of the PTC and ITC by taxing the oil & gas industry, or, as specifically singled out in this bill, the integrated major oil companies, plus Citgo and Motiva. No one other than oil company employees or shareholders (I am one) will shed tears over these measures, though we might all come to regret their long-term implications for reduced US energy production, and that goes to the heart of my objections to this bill.
My long-time readers might recall that I've been suggesting a "grand compromise" on energy for years. I have consistently supported a bi-partisan and indeed non-partisan approach to energy, because of the scale of our energy problems and the shortcomings of both major parties' prescriptions for addressing them. But a true compromise must offer something for something: a win-win deal. Unfortunately, the wins here are either one-sided or self-canceling: Renewable energy wins, while conventional energy loses. We win as taxpayers, but not as consumers. And because renewable energy still operates on a much smaller scale than oil & gas, with the latter providing more than 40 times as much energy as wind, solar and geothermal power combined, the nation as a whole gains much less than it would under a genuine compromise that included a meaningful share of our off-limits oil and gas resources. With the bill having passed the House last night by 236-189, it goes to the Senate, which is trying its own hand at compromise. If the House bill is any indication, the spirit and substance of the original bargain attempted by the Gang of 10 seem most unlikely to survive.
Tuesday, May 06, 2008
False Dichotomy
The fate of the renewable electricity production tax credit (PTC), which provides incentives for power generated from wind, solar, and other alternative energy sources, is apparently still in doubt. Last month the US Senate approved a one-year extension of the credit as an amendment to a housing bill, but the House of Representatives is balking at the provision's cost. Previous efforts to extend the credit and pay for it by revoking tax benefits for the oil industry failed. With oil companies earning record profits, the temptation to tax them to pay for alternative energy seems overwhelming, but it reflects a profound misunderstanding of the nature of our energy problems and the relative scale of the available solutions. We need more wind power and more oil, not one at the expense of the other.
To understand why taxing the oil industry to subsidize wind and solar power won't advance US energy security--never mind energy independence--consider the contribution of additional wind power to the US energy balance. In 2007 the US wind industry had a banner year, adding 5,244 MW of new wind capacity, expanding the installed wind power base by 45%. This represents an important increment of renewable energy that will help reduce our future greenhouse gas emissions. At an average capacity factor of 30%, the new wind turbines added last year will generate approximately 14 billion kilowatt-hours each year they are in operation. That's a substantial amount of electricity, though it represents only 0.3% of the 4 trillion kWh of electrical energy the US consumed in 2006. More relevant to the wind vs. oil competition created by Congress, however, the equivalent BTUs saved by that extra wind power (assuming it displaces gas-fired power generation) equate to only 63,000 barrels per day of oil--the output of a single medium-sized oil platform. If imposing higher taxes on US oil producers resulted in only one oil project being deferred or canceled, then the energy contribution of an entire year's worth of wind capacity additions would be negated.
When we prioritize our current energy challenges, the most urgent among them is the large volumes of high-priced oil we must import, in competition with the developing economies of Asia and the Middle East. This expands our trade deficit, drives inflation, and puts further pressure on the dollar, in a vicious cycle. We have many options for generating electricity, but few for producing transportation fuels, particularly with ethanol facing serious concerns about its competition with food--and emerging worries about its water consumption. Until we have large numbers of plug-in hybrid cars or other electric vehicles, electricity is not a substitute for oil in transportation. Nor is renewable energy our only option for reducing greenhouse gas emissions.
I'm not arguing that we should allow the PTC to expire. That would be a bad outcome for many reasons, not the least being the number of US jobs potentially at stake in a weakening economy. Instead, I am convinced that we need both a thriving renewable energy industry and a thriving domestic oil industry. Pitting one against the other is a terrible idea, if we really care about energy security and reducing the economic and geopolitical consequences of US oil imports. It creates a false dichotomy that owes everything to politics and nothing to a cold assessment of the facts. If the Congress cannot find $6 billion of earmarks that could be cut to fund the PTC for another year, without putting future US oil production at risk, then our problems are even bigger than they appear.
To understand why taxing the oil industry to subsidize wind and solar power won't advance US energy security--never mind energy independence--consider the contribution of additional wind power to the US energy balance. In 2007 the US wind industry had a banner year, adding 5,244 MW of new wind capacity, expanding the installed wind power base by 45%. This represents an important increment of renewable energy that will help reduce our future greenhouse gas emissions. At an average capacity factor of 30%, the new wind turbines added last year will generate approximately 14 billion kilowatt-hours each year they are in operation. That's a substantial amount of electricity, though it represents only 0.3% of the 4 trillion kWh of electrical energy the US consumed in 2006. More relevant to the wind vs. oil competition created by Congress, however, the equivalent BTUs saved by that extra wind power (assuming it displaces gas-fired power generation) equate to only 63,000 barrels per day of oil--the output of a single medium-sized oil platform. If imposing higher taxes on US oil producers resulted in only one oil project being deferred or canceled, then the energy contribution of an entire year's worth of wind capacity additions would be negated.
When we prioritize our current energy challenges, the most urgent among them is the large volumes of high-priced oil we must import, in competition with the developing economies of Asia and the Middle East. This expands our trade deficit, drives inflation, and puts further pressure on the dollar, in a vicious cycle. We have many options for generating electricity, but few for producing transportation fuels, particularly with ethanol facing serious concerns about its competition with food--and emerging worries about its water consumption. Until we have large numbers of plug-in hybrid cars or other electric vehicles, electricity is not a substitute for oil in transportation. Nor is renewable energy our only option for reducing greenhouse gas emissions.
I'm not arguing that we should allow the PTC to expire. That would be a bad outcome for many reasons, not the least being the number of US jobs potentially at stake in a weakening economy. Instead, I am convinced that we need both a thriving renewable energy industry and a thriving domestic oil industry. Pitting one against the other is a terrible idea, if we really care about energy security and reducing the economic and geopolitical consequences of US oil imports. It creates a false dichotomy that owes everything to politics and nothing to a cold assessment of the facts. If the Congress cannot find $6 billion of earmarks that could be cut to fund the PTC for another year, without putting future US oil production at risk, then our problems are even bigger than they appear.
Labels:
oil production,
ptc,
renewable energy,
renewable energy credit,
taxes,
wind power
Monday, October 29, 2007
Renewable Reality Check
Last week's issue of Business Week included a fascinating article documenting the frustrations of a manager charged with implementing green energy and sustainability strategies within his company. It also includes a scathing critique of the efficacy of Renewable Energy Credits (RECs,) a form of emissions offsets. Anyone thinking that "going green" will be simple and quickly profitable, even after the low-hanging fruit of highly-attractive projects is exhausted, ought to read this article. But they would also be wrong to conclude that emissions offsets do nothing to benefit the environment, because they allow companies purchasing them to continue to emit and pollute. In fact, it is precisely because of the way they shift the burden of those reductions that RECs help to maximize our response to climate change and local pollution, while minimizing its cost.
RECs are not quite the same thing as the greenhouse gas emissions credits officially traded in countries that have ratified the Kyoto Treaty, or on a voluntary basis here. RECs are specific to electricity produced from new renewable sources--wind, solar, small hydro, etc.--and as with many other derivative instruments, they represent the separation and repackaging of an attribute of a project's operations, risks, or cash flows: in this case the "renewable attribute." The key to this practice is that once a REC has been separated from the Megawatt-hour of renewable electricity that gave rise to it and then sold, the underlying power can no longer be sold as "green." In other words, while its REC can be traded or re-sold, the renewable attribute of a given MWh can't be counted more than once.
What seems to worry Mr. Schendler, the ski-resort sustainability manager in the article, is that the current price of a REC is too low to encourage the construction of more renewable power projects. As a result, he may be paying for something that would have been built anyway. This issue, known as "additionality" was a major concern in the design of the Kyoto emissions trading system, in which a project can't generate emissions credits unless it wouldn't have been built otherwise. For example, in the case of Kyoto's Clean Development Mechanism (CDM,) that effectively means that a developed country facing high costs of reducing its emissions can invest to build a project in a developing country that avoids a like quantity of emissions much more cheaply. Such projects generate emissions credits that can be traded. No CDM, no project; no project, no credits.
US RECs are generated in a very different environment, and not just because we didn't ratify Kyoto. First, the federal government and states provide various cash and tax incentives for the production of renewable power. In addition, 23 state governments have established Renewable Portfolio Standards (RPSs) that require utilities to buy a set fraction of their power from renewable sources--with a federal RPS currently percolating through the energy bill negotiations in Congress. Throw in tradable RECs, and it becomes hard to say why a particular green energy project got built, other than that its net financial returns looked attractive to the developer.
When you consider the rapid build-out of renewable energy capacity in the last couple of years, it shouldn't surprise anyone that the supply of such power might exceed its demand in the market, with the result that RECs end up being pretty cheap. It's still a zero-sum game, however. Because Aspen Skiing Co. paid for RECs to render its power consumption green, some other business or cluster of consumers somewhere else in the system can't make the same claim about theirs. True additionality will return with a vengeance, once federal climate change regulations, or the national Renewable Portfolio Standard now under consideration in the Congress, create a tidal wave of demand for offsets. In the meantime, uniqueness ought to be an adequate standard for RECs within US electricity markets, providing an attractive means for businesses to manage emissions they can't afford to reduce directly.
RECs are not quite the same thing as the greenhouse gas emissions credits officially traded in countries that have ratified the Kyoto Treaty, or on a voluntary basis here. RECs are specific to electricity produced from new renewable sources--wind, solar, small hydro, etc.--and as with many other derivative instruments, they represent the separation and repackaging of an attribute of a project's operations, risks, or cash flows: in this case the "renewable attribute." The key to this practice is that once a REC has been separated from the Megawatt-hour of renewable electricity that gave rise to it and then sold, the underlying power can no longer be sold as "green." In other words, while its REC can be traded or re-sold, the renewable attribute of a given MWh can't be counted more than once.
What seems to worry Mr. Schendler, the ski-resort sustainability manager in the article, is that the current price of a REC is too low to encourage the construction of more renewable power projects. As a result, he may be paying for something that would have been built anyway. This issue, known as "additionality" was a major concern in the design of the Kyoto emissions trading system, in which a project can't generate emissions credits unless it wouldn't have been built otherwise. For example, in the case of Kyoto's Clean Development Mechanism (CDM,) that effectively means that a developed country facing high costs of reducing its emissions can invest to build a project in a developing country that avoids a like quantity of emissions much more cheaply. Such projects generate emissions credits that can be traded. No CDM, no project; no project, no credits.
US RECs are generated in a very different environment, and not just because we didn't ratify Kyoto. First, the federal government and states provide various cash and tax incentives for the production of renewable power. In addition, 23 state governments have established Renewable Portfolio Standards (RPSs) that require utilities to buy a set fraction of their power from renewable sources--with a federal RPS currently percolating through the energy bill negotiations in Congress. Throw in tradable RECs, and it becomes hard to say why a particular green energy project got built, other than that its net financial returns looked attractive to the developer.
When you consider the rapid build-out of renewable energy capacity in the last couple of years, it shouldn't surprise anyone that the supply of such power might exceed its demand in the market, with the result that RECs end up being pretty cheap. It's still a zero-sum game, however. Because Aspen Skiing Co. paid for RECs to render its power consumption green, some other business or cluster of consumers somewhere else in the system can't make the same claim about theirs. True additionality will return with a vengeance, once federal climate change regulations, or the national Renewable Portfolio Standard now under consideration in the Congress, create a tidal wave of demand for offsets. In the meantime, uniqueness ought to be an adequate standard for RECs within US electricity markets, providing an attractive means for businesses to manage emissions they can't afford to reduce directly.
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