Wednesday, December 23, 2015

Two Steps Forward, One Step Back: A Tough Win on Renewable Tax Credit Extensions

By Andrea Lang, Energy Fellow
Congress’s last day of work this year saw a major win and a major loss in terms of transitioning away from fossil fuels. The victory was in extending the Production Tax Credit (PTC) and the Investment Tax Credit (ITC) for wind and solar development, respectively. However, to pass these extensions, Democrats on Capitol Hill had to agree to lift a 40-year-old ban on exporting crude oil. Despite this loss, I think the deal represents two steps forward and one step back in terms of the transition away from fossil fuels.

Two steps forward…

First, the deal extends the PTC for a full five years. ThePTC is a production-based credit of 2.3 cents per kilowatt-hour (KWh) of energy produced from wind, geothermal, and closed-loop biomass, and has primarily been used for wind energy. It has been tremendously important for providing financing for the relatively capital-intensive development of new wind energy projects, since the credit enables developers to get financing from banks and other institutions in exchange for the tax credit. Unfortunately, the wind industry has been in a boom-and-bust kind of cycle for years as Congress has repeatedly only extended the PTC for a year or two, and sometimes only retroactively. This uncertainty in the ability to get the credit has made financing and developing wind projects, which often takes several years, difficult. The five-year extension Congress agreed to on December 18 would thus give the wind industry much some needed certainty. To ensure the wind industry can survive if Congress lets the PTC permanently expire in five years, the deal also slowly ramps down the amount of the tax credit so that the industry has time to adjust and become cost-competitive in the absence of the PTC. The wind industry itself recognizes that the PTC cannot last forever, and this deal finally puts in place a solid plan to grow the industry in the short-term and help it find its footing in the long-term.

Second, the deal extends the ITC, the tax credit that helps finance primarily solar projects by crediting 30% of eligible costs of developing projects. The ITC, which would have expired at the end of 2016, is now set to extend at its existing 30% rate until 2019, and then gradually decline down to 10% by 2022. Moreover, the bill changes the eligibility date for the ITC from the date the project is “placed in service” to the date it “commences construction.” This is hugely important for solar developers seeking tax equity investors because it provides more certainty that their projects will receive the tax credit. Because solar projects often take years to develop, and there is a certain unpredictability in how long some permit processes take, the “commence construction” provision removes some of this uncertainty and should make it easier for projects to find investors. Between the long-term extension and the modification for eligibility, the ITC extension is a huge win for the solar industry and for the transition away from fossil fuels. Indeed, Greentech Media projects that the ITC extension will add 25 more gigawatts of solar-generated electricity to the grid by 2020, over 50% more than would be added without the extension.

…One step back

The price wind and solar advocates had to pay to get the much needed tax credit extensions was the lifting of a 40-year-old ban on exporting crude oil from the United States. The ban was put in place in 1975 with the passage of the Energy Policy and Conservation Act. Its purpose was to protect the domestic oil supply in the face of the 1973 OPEC oil embargo and the corresponding spike in oil prices.

Now, with the fracking boom providing access to shale oil, domestic oil production has vastly increased from 5.6 million barrels per day in 2011 to 9.3 million barrels per day in 2015. Oil producers wanted to see a larger market for their domestically produced product, and lifting the ban has done that. Ironically, this has happened at a time when there is an oversupply of crude oil on the global market, so there is little demand right now for U.S.-produced crude oil. But whether or not the market for oil changes, the lifting of the ban is likely to lead to increased oil production domestically, as producers hope the price goes back up and they can sell their product overseas. That means more oil—and associated carbon emissions—coming out of the ground that really should be left there. Additionally, lifting the ban may also lead to a bigger push to increase infrastructure to transport the oil to ports for shipping oversees (see my post on the Tesoro Savage project from a few weeks ago).

A win?

Just looking at the impact the deal will likely have on emissions, the compromise is probably a win, albeit a tough one to swallow. The Council on Foreign Relations estimated last Friday that accounting for both emission reductions as a result of the tax credit extensions and the emission increases from lifting the crude oil export ban, the deal would result in anywhere from 20–40 million metric tons less of CO2 emissions annually over the next five years. The argument that the renewable tax credit extensions would eliminate about 10 times more carbon emissions than lifting the crude export ban would add was exactly the argument Democratic minority leader Nancy Pelosi used to convince wary democrats to vote for the bills.

Of course, the estimate does not take into account what happens if the PTC is phased out and the ITC reduces permanently to a 10% credit in five years. Nevertheless, the tax credits, coupled with States’ need to comply with the Clean Power Plan, should lead to substantial renewable development with the potential to displace gigawatts of fossil fuel-generated electricity over the next five years. Even though the extensions came at a high cost, it is probably the best we could have hoped for from this Congress.

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