This article was distributed in the Summer 2014 issue of REsource: Business and Financial Insights for the Renewable Energy Industry
Congressional inaction a time for tactical skirmishes
Heading into the midterm elections, tax extenders and its impact on renewable energy, rather than reform, is the central topic on Capitol Hill. On the renewable energy policy front, though far from dead, extenders rather than overall tax reform now fill the space dedicated for the topic of tax policy leading up to the election. Unfortunately, the two key tax programs affecting the renewables space (the production tax credit and bonus depreciation) currently have no hope of getting the legislative attention they need until after the election. While there was some hope for an early, pre-election compromise on extenders in the Senate, Republican objections and the Senate amendment process caused Senate Majority Leader Harry Reid to recently announce that there was no way extenders would pass prior to the November elections. Yet for those with a vested interest in the Federal tax and regulatory environment for renewables, there has been plenty of recent activity.
PTC/ITC extensions: the saga continues
The Production Tax Credit (PTC), covering wind, biomass, landfill gas, municipal solid waste and certain other technologies including hydroelectric projects, still waits for an actual extension that would cover projects that are scheduled to begin construction after the currently expired deadline of December 31, 2013. Just as importantly, potential investors and lenders continue to look for additional clarification from the IRS on nuances for both the continuing and previously started construction tests under current tax law. In a show of concern over this lack of clarity, in May, executives of companies prominent in wind energy, including General Electric, took to the Hill to make their case for both the PTC and additional Treasury guidance on the PTC begun construction rules. Subsequent rumors have since been confirmed that the Treasury, through the IRS, will provide additional guidance this summer on the continuous construction rules. While that guidance is still pending, in a separate move, the IRS did issue a Notice, clarifying that projects that had received Section 1603 cash grants were ineligible for ITC or PTC tax credits (a mistake some less sophisticated taxpayers were making, but which did not change existing law.)
In the meantime, Ron Wyden (D-Oregon), Chairman of the Senate Finance Committee, which is responsible for tax legislation on the Senate side, has eschewed moving to extend stand-alone tax provision extensions in favor of a bill (the EXPIRE Act) that would address all 55 tax provisions that have either expired or which will expire later this year. Once Wyden’s EXPIRE Act left Committee for consideration by the full Senate, it quickly met defeat at the hands of Senate Republicans.
On the House side, Ways and Means Chairman David Camp (R-Michigan) is taking a different approach, which is now serving as a delaying tactic, and the House committee working through each of the 55 provisions in groups of three or more provisions reaching a sense of the committee as to what action they will recommend on each provision, at some point in the future, passing some and delaying others. Not surprisingly in an election year, the order in which the provisions are being considered is largely a function of the size of each provision’s lobby and political constituency. Unfortunately, while the renewables industry enjoys more political clout than it once did, it is not yet enough to move the PTC up to the top of the list, although bonus depreciation fares better given its general small business appeal.
In related news, Kevin McCarthy’s elevation from House Majority Whip to House Republican Majority Leader following Eric Cantor’s upset primary loss represents another hurdle for the PTC, as McCarthy, who supported the PTC when it last came up for extension, now publicly states that he believes the PTC is not a priority, further stating that “the training wheels need to come off” for the wind industry.1
Though it does not expire until the end of 2016, the Investment Tax Credit (ITC), which covers solar, CHP, fuel cells, small wind turbines and other technologies, faces its own expiration challenges as well. Last expanded by the American Recovery and Reinvestment Act of 2009, the provision offers tax credits to eligible power systems that are placed in service by December 31, 2016. While the deadline for expiration is more than two years away, the current “placed in service” requirement means that individual projects or pipelines of projects that do not begin construction by this coming September at the latest, run a growing risk of being ineligible for the ITC given the pre-construction and channel supply requirements for projects scheduled to come on line in 2016. For this reason, some in the solar industry have been lobbying Congress to change the current “placed in service requirement” to also include a “commence construction rule,” like the PTC. In reality, if extending the PTC, which has already expired, can’t get sufficient traction on the Hill, a provision like this for the ITC on a tax credit that won’t expire for another two election cycles should not reasonably be expected to get Congressional attention as part of an extenders bill.
The intangible costs of inaction are real
Regardless of how the question of extending the PTC and ITC is ultimately resolved, legislators and policy makers are well to be reminded of both the tangible and intangible costs of start-stop initiatives.
Start with the fact that, because the PTC has not been extended, dozens of wind financing deals are in limbo, as tax equity investors back away from finalizing investments that might not fulfill the IRS’ safe harbor requirements. A shortage of available financing naturally raises the cost of capital and strains the assumptions written into business plans. But there are upstream effects as well. Turbines that would have been ordered are not being built. This is not the first time wind power industry has been in tax equity limbo; the industry is thus facing another stop-start cycle that affects its ability to cannot innovate, achieve scale and reduce costs in the same way it could if it were running at full throttle. (For a pointed counter-example, look at improvements in the production of solar panels, which has led to exponential reductions in solar’s cost per watt.) The industry is also losing the collective experience that could be won by building Cape Wind and other large offshore projects. The practical effects of this can be seen in the cost of wind farm development vs. the price of electricity that can be commanded in a Purchase Price Agreement: While development costs are decreasing, PPA prices are falling even faster. This spread will only make it more difficult for wind power to become fully viable.
On the solar front, the ITC’s December 2016 deadline for having a system operational translates to a practical, if not literal, 2014 deadline for commencing construction for many firms. Exactly when in 2014 depends on the type of project and the size of the cushion investors are building into their calculations. Hence, there now is a flurry of deals as investors and developers seek to line things up before the window starts to close. Even so, because the risk of missing the deadline is proportional to project size, one can already see a drop off of investor interest in large 200-300 MW projects. Conversely, distributed generation projects, which require a much shorter window, are more or less unaffected.
Utilities step up their involvement
Meanwhile, Distributed Generation projects continue to face a concerted challenge at the state level from the electric utilities, who have been calling for taxes and tariffs on distributed generation. However, a few state regulatory agencies have bought the argument that tariffs are necessary to compensate utilities for acting as backup for solar panel users. Minnesota, for instance, has gone so far as to require tariff deliberations to counterbalance the costs claimed by utility companies with the positive contributions of distributed generation, including reducing the grid's operating and maintenance costs and lessening any potential environmental impact.2 TVA is currently weighing the value of solar, as is South Carolina, while utility commissions in Hawaii and New York have each announced a top to bottom analysis of how renewables fit into grid operations.
The state level battle over tariffs is simultaneously unfolding along with attempts by electric utility and fossil fuel groups to roll back the renewable portfolio standards that have required utilities to generate a certain percentage of their output from renewable methods. However, as The Washington Post recently outlined, the renewables industry has reached a critical mass that has allowed it, if not to prevail, at least to fight its opponents to a standstill.
The growing critical mass of wind and solar is why we continue to be optimistic about renewable energy in the U.S., despite its current political challenges. Given what is at stake, it would be naïve to expect that those who perceive alternative energy as a threat to their bottom line would do anything but oppose it with all the resources at their disposal. However, the fact that the renewables industry has held its own on multiple fronts for an extended period of time and is growing in terms of favorable public opinion, suggests a long-term upward trajectory.
Just in: Upcoming House vote to make Bonus Depreciation permanent.
Washington analysts are reporting that the House will vote week ending 11 July to permanently extend a tax benefit that allows companies to accelerate how they write off investments. Analysts report that the House Rules Committee is expected to consider the rule for a bill to reinstate and extend the expired bonus depreciation provision; this could lead to a final vote on Friday 11 July. However, without a separate Senate approval, even this move is likely to go nowhere for now.
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