As part of our continuing effort to provide current, topical information relating to renewable energy projects, RenewableEnergyLawInsider provides a series of posts from individuals with a wide range of experience and expertise. Today, Tracy Hammond from the Polsinelli Public Policy Group in Washington D.C. provides an update about the impact that the federal government shutdown will have on renewables in the United States.

The federal government shutdown is now in its fourth day, and there is no quick resolution of the   partisan standoff in sight.  Both Republicans and Democrats appear to be digging in instead of reaching out, and it is likely that this shutdown could last two to three weeks, with a breakthrough coming only as the U.S. approaches its borrowing limit (or debt ceiling) October 17th.

Although there’s enough speculation, prognosticating and second-guessing to fill volumes; I’ll focus here on how this shutdown will impact renewable energy.

In thee near term, the government shutdown could delay the release of federal renewable fuel requirements for 2014.  Renewable fuels stakeholders expected the U.S. EPA to release its proposed targets—levels of conventional and advanced biofuels that must be blended into gasoline and diesel—in mid-October.  The release will almost certainly be delayed and the longer the shutdown, the longer the delay.  A long delay in the release of the requirements will increase  uncertainty in the fuels market, giving critics of the RFS additional opportunities to call for repeal or modifications to the program.  A delay will also affect efforts in Congress, where a group of lawmakers from the House Energy and Commerce Committee are crafting legislation to reform the standard. However, their efforts will hinge  on what EPA decides to do with its 2014 numbers.

Other rules that could drive renewable energy development, like EPA’s efforts to draft emissions caps for greenhouse gases will also be delayed, making it even more difficult to meet the timeline laid out by President Obama earlier this year.

During the shutdown, many Congressional offices are working with significantly reduced staffs.  And with much, if not all, of the attention focused on funding the government and raising the debt ceiling, work is not being done on a host of other legislative priorities.  Just one example is the renewable energy Production Tax Credit (PTC), now set to expire in less than three months.  In addition to wind, the PTC provides a 2.3 cent-per-kilowatt-hour credit for geothermal energy and closed-loop biomass, and a 1.1 cent-per-kilowatt-hour credit for qualified hydropower facilities, marine and hydrokinetic power, landfill gas, trash combustion, small irrigation power facilities and open-loop biomass. The Congressional Joint Committee on Taxation found that a one-year extension of the tax credit would cost about $6.1 billion over 10 years. A five-year extension would cost roughly $18.5 billion.  Given the current budget pressures, these are not insignificant amounts.  Without some sort of as-yet-unknown “grand bargain”, it seems very unlikely that the PTC will be extended before the end of 2013.

Because nearly all other legislation has taken a back seat to the funding and debt discussions, the Farm Bill remains in limbo.  With no new Farm Bill agreement, programs like the Renewable Energy for America Program (REAP), the Biomass Crop Assistance Program (BCAP) and the Advanced Biorefinery Assistance Program are attempting to operate with only leftover money from previous years.  Soon, these programs will expend all of their resources and be forced to shut down until Congress passes a Farm Bill authorizing new funding.

Speaking of REAP, BCAP and other similar programs, with no one at USDA, DOE and other agencies to review and approve applications, no new funds will likely be released to worthy recipients.  Projects will be put on hold and construction will stop on efforts to increase energy efficiency and deploy new renewable energy across the country.  Although this may only be a short term hiccup lasting a few weeks, delays take a toll on project financing, increase expenses and push off potential completion.  As the budget battles continue, federal departments and agencies will almost certainly continue to try to do more with fewer resources—both human and monetary.  This trend will inhibit deployment and make it more difficult for deserving projects to move forward.

The first rule of medicine is do no harm.  As Congress continues to fail at its most basic task—funding the federal government—renewable energy and those that earn a living in the sector won’t be mistaking their congressional leaders for doctors anytime soon.

As part of our continuing effort to provide current, topical information relating to renewable energy projects, RenewableEnergyLawInsider provides a series of posts from individuals with a wide range of experience and expertise. Today, Tracy Hammond from the Polsinelli Public Policy Group in Washington D.C. provides an update about the ongoing attention being paid to the Renewable Fuel Standard by the U.S. House of Representatives.

The House Energy and Commerce Committee this week completed 2 days of hearings on the renewable fuel standard (RFS), the federal mandate to blend 36 billion gallons of biofuels into the nation’s gasoline supply by 2022.  Multiple industries and interests weighed in on the economic, environmental and technical impacts of the law. The hearing capped off an effort that began with a series of white papers the panel released this summer to gather information and feedback on the program.

The RFS is one of the largest and most controversial renewable energy program ever mandated by the federal government.  Since its creation in the 2005 and expansion in 2007, interest groups have launched major lobbying campaigns both supporting and opposing the standard. It has suffered additional criticism since last summer’s record drought badly damaged the nation’s corn crop, raising questions about the viability of corn-based ethanol, the most common biofuel in the U.S.

For the first time since 2007, Congress is taking a very serious look at revising the standard.  Although some, like the oil and refining sectors and their congressional allies, are calling for a full repeal of the law, there is not sufficient support for such a dramatic policy reversal.  This sentiment was summed up best by senior Democrat Rep. Gene Green (D-TX), “I would probably vote for repeal of the RFS, but I don’t just see where we’re going to get there.”

There does, however, seem to be support—at least in the committee—for making changes to the standard to address rising ethanol credit prices and the 10% “blend wall,” or the technically feasible limit to the amount of ethanol that can be blended into the nation’s fuel supply.  This is echoed by Rep. John Shimkus (R-IL), “You don’t have enough for a repeal, but you do have enough for a reform.”

Other Members complained that U.S. EPA, which administers the RFS program, sets excessively high targets for cellulosic biofuels.  These fuels made from purpose-grown plants, ag waste, algae, energy grasses and other feedstocks that don’t conflict with food crops are 2nd generation biofuels and were hoped to eventually displace corn ethanol and soybean biodiesel.  Unfortunately, the development of these fuels has been agonizingly slow.  For example, the mandate calls for 1 billion gallons of cellulosic biofuels made this year. Instead, EPA has proposed revising that number down to just 14 million—and that target will not likely be met by the advanced biofuels industry.

Senate Democrats from the Mid-Atlantic states are also wading into the debate.  Sen. Ben Cardin (D-MD) is working on legislation to reform the RFS, while senators from neighboring states, including Delaware and Pennsylvania, are urging the EPA to temporarily waive some blending requirements for obligated parties (refiners) in their states.  Like their House counterparts, oil-patch Republicans in the upper chamber have also called for a full repeal.

As with many things involving Congress, this process will take a long time to play out.  After 6 years of “fuel vs. food” fights, questions about the sustainability of corn ethanol, and the near non-existence of a cellulosic biofuels industry; however, we may be reaching a tipping point that will force lawmakers to make changes to the most contentious parts of the RFS both in order to appease critics and perhaps even prevent the standard’s total collapse.

As part of our continuing effort to provide current, topical information relating to renewable energy projects, RenewableEnergyLawInsider provides a series of posts from individuals with a wide range of experience and expertise. Today, Tracy Hammond from the Polsinelli Public Policy Group in Washington D.C. provides an update about the U.S. House of Representative’s failed Farm Bill and its impact on the renewable industries.

I was prepared to title this piece “A Tale of Two Farm Bills” after the U.S. House of Representative’s presumed-passage of comprehensive farm legislation this week.  I would have reported on the drastic differences between the Energy Titles within the House and Senate Farm Bills while speculating on what a future compromise might look like.  However, after the House failed to pass its version of the bill (H.R. 1947) 195-234, it is now unclear if we will even see legislation enacted at all.  While the Senate approved its bill (S. 954) on June 10th by a bipartisan vote of 66-27, the House’s failure leaves the fate of the Farm Bill and its energy provisions uncertain at best.  This, coupled with the expiration of current programs at the end of September, leaves us all with an option no one wants—an extension of current policy with no real funding for renewable energy in rural America.

How did we get here?  Well, in addition to setting federal agriculture policy, the Farm Bill also has a dramatic impact on rural, renewable energy. In 2002, Congress began shaping energy policy through farm legislation.  Then—and again in the 2008 bill—Congress has used the Farm Bill to create renewable energy programs for rural America and incentivize ethanol and biodiesel production.  This year; however, many of these innovative programs are likely to receive reductions in funding or may be ended completely.

The 2008 Farm Bill expired in 2012; however, Congress approved a bare-bones extension (to September 30, 2013) of current policy in the year-end “Fiscal Cliff” deal.  Unfortunately, this deal failed to include any funding for the bill’s energy programs, essentially suspending them for 9 months.

Even if Congress can get the Farm bill back on track, the House and Senate bills treat their respective energy titles very differently in terms of funding levels and prioritization.  The Senate bill provides $880 million in mandatory funding (over 5 years) for various energy programs like the Rural Energy for America Program, the Biorefinery Assistance Program, and the Biomass Crop Assistance Program. S. 954 would also authorize another $1.12 billion in discretionary funds. H.R. 1947, on the other hand, would eliminate all mandatory funding and authorize $1.4 billion in discretionary funds.  By comparison, the current 2008 farm bill authorized $1.1 billion in mandatory funds and $1 billion in discretionary funds.

Although these figures sound like a lot of money, Congress rarely (if ever) actually appropriates any of the discretionary funds included in these bills.  Thus, the only money that will ever go to farmers and rural small businesses must come from mandatory funds.  Because of their budgetary concerns, House Republicans have essentially called for the end of several energy programs aimed at rural America even if they can pass a bill out of their chamber.

It is still possible that the House can approve a bill and that some funding will survive a House-Senate compromise later this year; however, it’s increasingly likely that several energy programs will receive dramatically reduced funding and may end altogether if Democrats and Republicans can’t compromise and cobble together a path forward.

As part of our continuing efforts to provide current, topical information relating to renewable energy projects, RenewableEnergyLawInsider provides a series of posts from individuals with a wide range of experience and expertise. Today, Tracy Hammond from the Polsinelli Public Policy Group in Washington D.C. provides an update about the various energy industry tax policy options that are being considered by the Senate Finance Committee. Enjoy!

Last week, the Senate Finance Committee outlined a variety of options to overhaul many of the provisions of the tax code that relate to the energy industry.  Options included eliminating all existing incentives, replacing energy tax expenditures with a carbon tax or making narrower tweaks to credits, deductions and other preferences that apply to energy sources. The document is only an early indication of how comrehensive tax reform could impact the energy sector.

The white paper developed by Democratic and Republican committee staff serves as a menu of nearly all prominent energy tax reform ideas that have been put forth over the past several years. It is presented as a set of options—not recommendations.  None of the varied proposal have been endorsed by Finance Chairman Max Baucus (D-MT) or ranking member Orrin Hatch (R-UT).  Instead, it represents a non-exhaustive list of prominent tax reform options” for committee members to consider.

Suggested principles include:

  • providing certainty to energy firms
  • simplifying the tax code
  • making tax expenditures fair and efficient
  • encouraging energy independence
  • addressing externalities inherent in energy production

The document cites Congressional Budget Office estimates that this year alone energy-related tax expenditures will cost the government over $16 billion in unrealized revenue in addition to $3 billion in direct spending. Renewable energy companies will receive 45% of the benefits, with 29% going towards energy efficiency, 20% for fossil fuels and 7% for nuclear power.

Options for reform include eliminating all energy expenditures—including permanent oil and gas tax deductions and temporary renewable PTCs—to maintaining some incentives while tweaking others. The paper discusses a carbon tax, and considers expanding master limited partnership (MLP) treatment and extending accelerated depreciation to renewable energy companies.

The paper reflects a growing sentiment that may ultimately result in the elimination of temporary tax breaks targeted at wind and solar energy, biofuels, and electric vehicles; and replacing them with “one or more technology-neutral tax incentives.”

Upon release, Finance Committee members met for over an hour to discuss the paper, but did not disclose which options they might seek to enact into law.

Sen. Debbie Stabenow (D-MI), Chair of the Finance subcommittee on energy, said she had suggested the need to provide longer-term certainty for renewable energy companies, but admitted there was no consensus among committee members.

“It was a pretty good discussion,” Sen. Pat Roberts (R-KS) said after the meeting.  “But I think everybody agreed we need more information…then we can get into the weeds.”

After several months of anxious anticipation, yesterday the IRS released guidance on its interpretation of certain provisions relating to Congress’ extension of the federal Production Tax Credit (“PTC”).

Specifically, the provisions in question relate to how far along in development a project will need to be in order to qualify for the PTC before the credit expires on January 1, 2014.  In January of 2013, Congress passed the American Taxpayer Relief Act of 2012.  Among the many provisions in that legislation, Congress agreed to extend the then-expired PTC so that it would include projects that have begun construction before January 1, 2014.  This represented a welcome departure from prior versions of the PTC statute, which required projects to be “placed in service” by the deadline, as opposed to having to “begin construction.”

Though this modification was excellent news for the wind industry, replacing the “placed in service” requirement with a “begin construction” requirement created some ambiguities in how the statute would be interpreted and applied by the IRS.  What does it mean to “begin construction” in this context?  How much money will need to be spent?  What kinds of activities will qualify?  While there was some previous precedent for a similar “begin construction” requirement with the Section 1603 Grant program, there was no guarantee that the IRS would apply a similar rationale to the PTC extension.  Though it is impossible to measure the exact impact of this ambiguity, there is little doubt that the uncertainty about what it means to “begin construction” created some degree of a chilling effect on wind developments in the first quarter of 2013.

In an effort to resolve this issue, IRS has released Notice 2013-29, entitled “Beginning of Construction for Purposes of the Renewable Electricity Production Tax Credit and Energy Investment Tax Credit.”  Using the Section 1603 standards as a guide, IRS states that there are two methods for satisfying the “begin construction” requirement:

1.)    Starting physical work of a significant nature; or

2.)    Meeting a safe harbor threshold by paying or incurring 5% of more of the total cost of the facility and thereafter making continuous efforts to advance towards completion.

Physical Work of a Significant Nature

The first alternative is to begin construction before January 1, 2014.  The IRS Notice makes clear that “[c]onstruction of a qualified facility begins when physical work of a significant nature begins,” whether performed by the taxpayer or by other persons for the taxpayer under a binding written contract. 

Ultimately, the determination of whether activities qualify as “physical work of a significant nature” is a judgment call by the IRS based upon the relevant facts and circumstances of a particular project.  However, IRS does provide the following guidelines:

  • Both on-site work (excavation of the faoundation, setting of anchor bolts, pouring of concrete pads) and off-site work (manufacturing of components if performed pursuant to a binding contract and not held in manufacturer’s inventory) may be taken into account;
  • Production of property that is held or normally held in inventory by a vendor does not qualify; and
  • Preliminary activities do not qualify, including the following:

Safe Harbor

The second alternative is to qualify for the PTC safe harbor by paying or incurring 5% or more of the total cost of the facility before January 1, 2014, and thereafter making continuous efforts to advance towards completion of the facility.

For the purposes of calculating the 5% threshold, all costs properly included in the depreciable basis of the facility are to be taken into account, not including the cost of land or any property not integral to the facility.

Additional Issues

Construction of Individual Portions of Larger Projects

Answering a question that has been posed by many industry insiders over the past few months, the IRS Notice specifies that, for the purposes of determining whether construction of a facility has begun, work on individual turbines that are part of a larger project can qualify as work on the entire project.  For example, a wind developer may commence work on some but not all of the planned turbines for a wind project and qualify as having begun construction for the entire project.  It is not necessary to have begun construction of each individual turbine within that larger project.  Whether a single facility will be deemed to be part of a larger project will be a question left to the discretion of the IRS, but the major factors considered are as follows: 

Integral Versus Non-Integral Property

Construction of a wind project involves numerous small tasks, some of which are integral to the production of electricity and some are not.  For the purposes of determining whether construction of a facility has begun, only tasks that are integral to the production of electricity will be counted. 

Continuous Construction & Continuous Efforts

Finally, in order to qualify the “physical work of a significant nature” standard, the taxpayer must engage in a continuous program of construction.  As with many of the other requirements discussed above, this is determined through a facts and circumstances analysis by the IRS. 

In regards to the “continuous efforts” standard for the 5% safe harbor, the IRS Notice provides the following list of factors which may be considered in determining whether there have been continuous efforts:

However, for both the Physical Work and theSafeHarboralternatives, the IRS does allow certain disruptions in construction that are beyond the taxpayer’s control, such as:

 

 

 

 

 

 

 

 

Cost Overruns

The IRS Notice briefly touches on one final point relating to situations where the costs of a single facility that is part of a larger project (i.e., a single wind turbine) ends up costing more than anticipated, and causes the total project cost to rise by the placed-in-service date such that the safe harbored funds no longer satisfy the 5% threshold.  In that event, the Notice state that IRS will allow the PTC to be claimed with regards to some, but not all, of the individual turbines, but the total aggregate cost of the individual facilities for which the PTC will apply cannot be more than twenty times the amount of safe harbor funds that the taxpayer claimed prior to January 1, 2014.

If you have any questions about the IRS Notice or the requirements discussed therein, please feel free to leave a comment below or contact the Polsinelli Energy Group at (913)234-7416 or lhagedorn@polsinelli.com.

As part of our continuing efforts to provide current, topical information relating to renewable energy projects, RenewableEnergyLawInsider provides a series of posts from  individuals with a wide range of experience and expertise.  Today, two representatives from the Polsinelli Public Policy Group in Washington D.C., Andy Wright and Tracy Hammond, provide an update on the Obama administrations efforts to extend Master Limited Partnerships and Real Estate Investment Trusts to renewable energy projects.  Enjoy!

Earlier this week, President Obama’s top climate and energy advisor Heather Zichal stated that the White House is working with Congress to open up new financing avenues for renewable energy projects that would help put them on more equal footing with their incumbent, fossil fuel counterparts.

Zichal indicated that the White House is reaching out to both Democrats and Republicans in both Chambers of Congress on several energy-related tax measures that could be included in a more comprehensive tax reform effort later this year. Specifically, the Administration is working with Members of Congress to “help get their heads around” two financial structures called Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs) that would allow renewable energy companies to leverage more equity financing for building new infrastructure.

“Because we view the tax code as an important way to actually affect energy policy, we’re doing a lot of groundwork right now to help provide technical assistance to some of the other Members on both sides of the aisle,” Zichal said.

MLPs allow a business to organize a partnership where ownership interests are traded in financial markets like common stock, allowing a broad pool of investors to put up needed capital. A REIT is a security that sells like a stock and invests in real estate property directly.

Currently neither MLPs nor REITs are open to renewable energy projects, forcing developers to partner with tax equity investors that provide financing in exchange for the benefits of the renewable energy tax credits. This arrangement increases financing costs and limits the universe of possible investors to about $3 billion to $5 billion by some estimates. However, the MLP and REIT products open up potential pools of $350 billion and $800 billion of market capitalization, respectively.

Senators Chris Coons (D-DE) and Jerry Moran (R-KS) introduced legislation last Congress that would extend MLPs to renewable projects and Coons has promised to reintroduce his legislation this year. REITs, meanwhile, could be extended to renewable energy through administrative action by the Treasury Department, or Congress could pass new legislation authorizing renewable developers to access the tax structure.

In addition to Zichal’s comments, Ernest Moniz, nominated to be the next Secretary of the Department of Energy (DOE), also spoke out in favor of “Green MLPs” in his confirmation hearing before the Senate Energy Committee on April 9th. DOE has already convened several workshops to explore how it can assist companies that want to organize MLPs or REITs to attract investment. These include ongoing efforts focusing on how to standardize power purchase contracts to make them easier to use as investment vehicles and on continuing DOE’s role as an information clearinghouse for the private sector.

While conservative Members in Congress have been widely critical of the Production Tax Credit (PTC) for renewable electricity generation, MLPs and REITs offer ways to support energy development with little cost to the federal government. Neither is a direct subsidy for the industry. Rather, they are designed to attract additional private investment in renewable projects. These financial vehicles can also help the renewable power sector avoid more boom-and-bust cycles that have plagued the industry’s reliance on tax credits.

In a time of hyper-partisanship inWashington, extending MLPs and REITs to the renewable energy sector offers a rare opportunity to enact meaningful, bipartisan public policy that can both increase domestic energy production and equal the playing field for energy technologies.

Late last night, President Obama officially signed into law legislation to avoid the “fiscal cliff.”  The adoption of this measure, which was approved overwhelmingly by the Senate and by a vote of 257 to 167 in the House of Representatives, is excellent news for advocates of renewable energy, as it includes an extension of the vitally important Production Tax Credit for wind facilities. 

There has been some confusion by the various media outlets covering the PTC over exactly how much additional time this extension buys for wind developers.  Prior to this fiscal cliff deal, IRC 45(d) (the section of the Internal Revenue Code setting forth the PTC) stated that qualifying wind facilities had to be placed in service before January 1, 2013, meaning that the projects have to be fully constructed and capable of generating energy.  Over the last few months, this requirement has forced many developers to aggresively ensure that their projects were placed in service by Monday, December 31st.  With the new deal, this provision has been amended by replacing the deadline of “before January 1, 2013” with “the construction of which begins before January 1, 2014.”  Thus, as amended, IRC 45(d) will read in pertinent part as follows:

In the case of a facility using wind to produce electricity, the term “qualified facility” means any facility owned by the taxpayer which is originally placed in service after December 31, 1993, and the construction of which begins before January 1, 2014.

Thus, effectively, the extension grants wind project developers another year to design, procure equipment, and break ground on new projects. 

It is important to note that this is more time than might have been granted had the legislation followed the current statutory language and required the projects to be placed in service by December 31, 2013.  Such a measure would have been significantly more onerous on the industry, as wind projects typically require more than a year to  engineer, acquire the necessary land rights, locate potential offtakers for the power generated, and complete construction.

This is certainly excellent news for renewable developers across the country, and credit should be given to all of the lawmakers who fought for this vital incentive to be included as part of the fiscal cliff package.  A special thanks should be extended to President Obama for his insistence that the wind PTC be included in any final deal.

If you have any questions or comments about the Production Tax Credit or the wind industry, please feel free to leave a comment below or contact me directly at lhagedorn@polsinelli.com or (913)234-7416.

 

 

 

 

 

 

 

 

 

 

 

 

Photo Credit: Larry Downing, Reuters

The votes have been cast and the dust has settled, and it is now clear that Democrats were able to score some significant points in the 2012 election.  For the advocates of wind, solar, and biomass projects across the U.S., however, the key question is what this means for the future of federal renewable energy policy.

President

Of course, the big news of the night was the re-election of President Barack Obama.  President Obama has been a consistent supporter of renewable energy of all types, and has publically endorsed an extension of the vitally important federal Production Tax Credit (“PTC”). 

Governor Romney, on the other hand, appeared to be less enthusiatic about the PTC.  As pointed out in an excellent article by Laura DiMugno in North American WindPower, Gov. Romney stated in July that he was in favor of letting the PTC expire, but then revised that opinion to support a phase-out of the credit at a late-October campaign event in Iowa.  “We will support nuclear and renewables but phase out subsidies once an industry is on its feet.” Romney said.

Fortunately, the uncertainty of the election is now behind us, and with voters showing strong support for Democrats across the board, it is much more likely that President Obama will have the political capital necessary to ensure continuing, consistent support of the various renewables industries.

Senate

With the imminent consideration of the wind energy Production Tax Credit on the immediate horizon, and a more broad evaluation of tax incentives for renewables likely to occur over the next legislative session, it is extremely important that the renewable industries continue to find strong support in the U.S. Senate. With this in mind, taking a broad look, the fact that the Democratic Party has maintained its majority should be excellent news for advocates of renewable energy.

More specifically, renewable project developers have been fortunate to find a number of staunch allies on the floor of the Senate, and for the most part this core of support appears to have remained largely in-tact through the election.  Of particular note, Republican Sen. Scott Brown of Massachusetts (who co-sponsored a bipartisan four-year PTC extension bill) appears likely to lose his bid for re-election, but he will be replaced by Democrat Elizabeth Warren who is likely to share his support for the PTC.  Many other stalwart advocates of renewables, such Sens. Chuck Grassley (IA), Mark Udall (CO), Al Franken (MN) and Ron Wyden (OR), were not up for re-election in 2012.

Additionally, as Ben German of The Hill’s Global Affairs Blog points out, the election also has a significant impact on key Senate committees relating to energy issues.  Of particular importance, Sen. Jeff Bingaman (D-N.M.) is retiring and will step down as Chairman of the Energy and Natural Resources Committee.  Because Democrats retained control of the Senate, the chairmanship will likely pass to Sen. Ron Wyden (D-Ore.), rather than passing to Sen. Lisa Murkowski (R-AK). Sen. Murkowski, who will likely be the ranking member of the Energy and Natural Resources Committee, has said in the past that she is in favor of a phase-out of the PTC.  As quoted by Nick Juliano, Sen. Murkowski has stated “I’m in the camp that says we need to figure out how we phase down, how we transition out, but I’m also not one that just wants to cut it off cold turkey.”

House

Leading up to the 2012 election, Democrats held 190 seats as compared to Republicans 240 seats in the U.S. House of Representatives.  Increasing, or at the very least maintaing, this number is extremely important for the renewable industries, as there are a number of Representatives who are willing to reach across the aisle in support of renewable energy. With this in mind, it is fortunate that voters in the 2012 election appear to have looked favorably upon Democrats.  With a number of races still too close to call as of the time of this writing, it appears very likely that the Democrats will manage to win a few additional seats in the House, but those gains will fall short of taking back control from the Republicans.

Of particular relevance to wind developers, however, is how the most vocal opponents of the federal Production Tax Credit have fared.  In September, 47 House Republicans signed a letter to House Speaker John Boehner asking that the PTC not be extended.  Using those signatories as a representative group of PTC opponents, it appears that the core group of PTC opponents in the House remains largely in-tact.  Specifically, 43 of the 47 signatories were reelected.  Of those four, one successfully ran for Senate (Jeff Flake of Arizona), and three were replaced by Republicans (Jeff Flake, Cliff Stearns of Florida, and Jeff Landry of Louisiana).  Only one signatory of the anti-PTC letter has been replaced by a Democrat, as Joe Walsh of Illinois lost to Tammy Duckworth.

Of course, not all of the excitement yesterday was at the federal level, as renewable project developers also had significant stake in a number of state-level races.  With the continued support key incentives and state Renewable Energy Standards hanging in the balance, these races also deserve some commentary, but that analysis will have to be left for another day.

President Barack Obama delivers the State of the Union address in the House Chamber at the U.S. Capitol in Washington, D.C., Jan. 24, 2012. (Official White House Photo by Pete Souza)

On Tuesday, President Barack Obama presented his annual State of the Union address. One of the most interesting topics discussed, at least to my biased ears, was the importance of pursuing an “all-of-the-above” strategy for developing every potential energy resource at the country’s disposal.

While I’m always thrilled when renewable energy policy gets a prominent place in our public discourse, the President’s remarks necessarily only skimmed the surface of the issues that the administration will face when seeking to continue promoting renewable energy in 2012, especially in light of the significant uncertainty caused by the PTC issue.  So, I went digging for more information.  Fortunately for me, the White House has released a “Blueprint for An America Built to Last”, which contains additional information about the President’s energy policy.  This is in addition to the “Blueprint for a Secure Energy Future” issued by the White House last March.  Boiling these documents down into the main points, it appears that the administration is planning on focusing its renewable energy efforts on the following:

Implementing a federal clean energy standard: During the State of the Union address, I was surprised and pleased to see the President renew the call for a federal Renewable Energy Standard, something which has been introduced numerous times through legislation but has failed to gain any serious traction among the legislators.  We have discussed state-level Renewable Energy Standards at length on this blog, but action taken at the federal level would provide much needed regulatory uniformity and a more robust and consistent REC market, both of which would make it quite a bit easier for projects to get financing from risk-averse lending institutions.

Targeted tax incentives: The President briefly called upon Congress during the State of the Union to “[p]ass clean energy tax credits.  Create these jobs.  We can also spur energy innovation with new incentives.”  The most obvious example of a program that needs a life-line from Congress is the Production Tax Credit originally set forth by Section 1603 of the American Recovery and Reinvestment Act of 2009.    These credits have been a major driver of project financing for the last few years, and the uncertainty surrounding their extension has put a major damper on the number of projects in the pipeline past 2012.

Opening public lands:  Community-level opposition has long been an obstacle that many renewable projects have faced.  President Obama’s energy plan seeks to assuage some of this resistance by opening up sizable tracts of public lands to renewable developers.  To this end, the President has directed the Department of the Interior to commit to issuing permits that will enable the generation of 10 gigawatts of renewable generation capacity.  Of course, projects that are developed on these lands will also introduce additional regulatory burdens, including compliance with the National Environmental Policy Act (“NEPA”).

Powering the U.S. military with renewable energy: During the State of the Union, President Obama announced that the Department of the Navy will make a 1 gigawatt renewable energy purchase.  As the largest consumer of goods and services in the world, the Federal Government consumes an enormous amount of energy.  Additionally, the government often asserts requirements upon its agencies and departments to take into consideration societal benefits rather than pure price points when making its purchasing decisions, as is seen through the “Buy American” mandates and small and disadvantaged business requirements in federal procurement.  Ultimately, as far as the renewable industries are concerned, the more heavily-invested the various departments and agencies become in renewable energy, the better.

Ultimately, the President’s energy plan will not guarantee a bright future for renewable energy, but such guarantees are exceptionally rare in the business world (if you know of any, my contact information is below).  The key question that must be answered is whether or not this plan will incentivize the development of renewable projects.  To answer that question, we have to take a step back and look at the plan’s impact on the most significant risks that all renewable projects face, such as:

1.) Finding land for the project, and overcoming any community-level resistance.  The President’s plan reduces this risk by opening up public lands for development.

2.) Finding buyers.  The plan would increase the number of buyers by implementing a federal renewable energy standard and allowing the federal government to be a major consumer of renewable energy.

3.) Making a profit.  If tax incentives are increased, projects make more money.  Additionally, introducing a federal RES and opening up a federal REC market could potentially increase profits.

4.) Acquiring financing.  Lenders don’t like to lend money to risky ventures.*  However, by decreasing the risks discussed above, the President’s plan should increase the level of financing available to new projects.

* stunningly insightful analysis, I know, but you get what you pay for.

Taken as a whole, this plan appears to address a number of key areas of risk that renewable developers face over the life of their projects and this should help the various industries as they continue to grow.

Now, if only we could convince the federal legislature . . .

If you have any questions or comments about the information discussed above or about renewable project development generally, please feel free to leave a comment below or contact me directly at lhagedorn@polsinelli.com.

I’m proud to announce that Dave Strieker, a partner in Polsinelli Shughart’s Energy Group, and I recently published a paper for the annual meeting of the American Bar Association’s Section of Environment, Energy and Resources. 

The paper, entitled “Greenhouse Gas Permitting Advantages for Biomass Projects,” explores the EPA’s “Tailoring Rule,” which places significant regulatory burdens on certain emission sources of greenhouse gases.  Importantly for biomass project developers, the Tailoring Rule specifically exempts biomass projects for a period of three years, thus giving biomass an important advantage over traditional energy sources.  The abstract for the paper is as follows:

Ground breaking greenhouse gas regulation, know as the Tailoring Rule, has recently been implemented at the federal level. The Tailoring Rule will have far reaching impacts on industries that produce significant amounts of carbon dioxide emissions. While this may prove to be a heavy burden to established industries using fossil fuels, the Tailoring Rule contains a three year exclusion for projects utilizing a qualifying biomass feedstock. Accordingly, the Tailoring Rule’s biomass exclusion may provide a window of opportunity for the biomass industry to compete on a more level playing field with fossil fuel based projects. This paper will provide background regarding the Tailoring Rule and explore its specific implications on the biomass industry.

The paper can be downloaded here.  If you have an interest in biomass projects, or if you know anyone that does, feel free to download this paper and pass it along as you see fit.  If you have any questions or comments, feel free to contact either myself (lhagedorn@polsinelli.com) or Dave Streiker (dstreicker@polsinelli.com).