Expiration of producer tax credits for renewables
Since we’ve been on the topic of renewable and investment, HREG members may find the following interesting. It sounds like lack of congressional action may have a significant impact on renewables.
The Daily Reckoning PRESENTS: There is no geothermal fairy waving a magic wand and ZAP, you have electrons in the grid. From exploration to drilling to development to spinning turbines, you have to know what you are doing in the geothermal field. Byron King explains...
“WE NEED TO TALK”
by Byron King
There is a looming problem for the renewable energy business. It affects the geothermal producers. As the expression goes, “We need to talk.”
I have argued over and over that in an energy-short future, geothermal power will play a key role in meeting power needs. Geothermal systems are well-known technology, at least to people who follow the technology. And some geothermal fields have been making power for many decades. So there’s a real track record for geothermal, unlike for many other alleged technological “solutions” to the energy problems of our time.
Geothermal offers some unique benefits. It is “clean,” emitting essentially no carbon dioxide (CO2). Plus, geothermal comes with its own fuel supply, namely the heat of the Earth. That is, once you drill the wells, you don’t have to buy coal or oil or natural gas over the decades of operation. In essence, when you set up a geothermal power system, you are “buying” not just the installation, but also the fuel upfront.
Keep that last point in mind. Geothermal has higher upfront capital costs. But it has far lower operational costs over the life of the project. It’s like buying a car and never having to buy any more gasoline.
So geothermal works. But like most good things in life, it requires a specific skill set up and down the industrial ladder.
And there is no geothermal fairy waving a magic wand and ZAP, you have electrons in the grid. From exploration to drilling to development to spinning turbines, you have to know what you are doing in the geothermal field. This includes accounting for the costs of operation and production.
OK, here is the issue. Under current U.S. tax law, a power producer gets an income tax credit (called a “production tax credit,” or PTC) for producing electricity using renewable energy resources. This includes geothermal, as well as wind, biomass, low-head hydropower, landfill gas and even trash combustion.
The PTC is a key part of the economics of geothermal. The prospect of the eventual PTC helps get projects funded and developed. The PTC helps overcome the higher upfront capital costs to drill into the Earth’s hot spots.
So the PTC offers some serious incentive for geothermal development. A taxpayer can claim the PTC for 10 years, beginning on the date the qualified facility is placed in service. But under current tax law, in order to qualify for the credit, the geothermal facilities must be placed in service by Dec. 31, 2008.
In the past, Congress has set the PTC to last for two years, and has renewed it periodically. When Congress has not renewed the PRC, investment in renewable energy systems has crashed the next year. See how in this graph (Page 19 of 29).
Do you see the pattern? Boom-crash. Boom-crash. Boom-crash. Then Congress extended the PTC in 2006, so the installed base of power systems began to take off in the past couple years. Renewable power is gaining traction.
But for some strange reason, Congress has not extended the PTC beyond Dec. 31 of this year. So starting Jan. 1, 2009, the tax incentive for renewable energy in the U.S. will expire and go away. Poof. Gone. Adios.
Really, can you imagine anything more stupid than eliminating the PTC in the midst of the current round of skyrocketing energy costs? Oil hit $135 per barrel a couple weeks ago. Natural gas is in the midst of a stealth rally to over $12 per mcf. Coal is so expensive some producers are signing “open contracts,” meaning they promise to deliver, but won’t tell you the price until you take the coal in a couple years.
And while fossil fuel costs are shooting up, Congress, apparently, wants to put at risk any new investment in renewable energy systems after the end of this year.
Whoever is the next U.S. president – of either political party – do you want him immediately to confront a crash in investment in renewable power systems? What a way to tie the hands of the next president as he tackles the nation’s energy problems.
The good news is that the Senate has passed a bill called S. 2821, the bipartisan Cantwell-Ensign Clean Energy Tax Stimulus Act of 2008. S. 2821 has 43 co-sponsors. It provides for the limited continuation of the PTC for renewable energy. The Senate vote was 88-8 in favor.
There is a companion bill in the House, called H.R. 5984, with 70 co-sponsors. There is another version of this bill called H.R. 197, the “Pomeroy bill.” But both versions are being blocked by the “pay-as-you-go” (PAYGO) rule that prevents “tax cuts” without corresponding tax increases.
But wait a minute. Extending the PTC is not a “tax cut.” The PTC is already in effect. So extending it will just be continuing the status quo.
And does the government really think it will raise more revenue if the PTC goes away? C’mon. It’s more like how much revenue will the government LOSE if investment in renewable energy systems takes its characteristic plunge when the PTC goes away. How many jobs will go away? How much progress will we just toss?
The logic of PAYGO governance at work in Washington, D.C., has Congress believing that extending the PTC to promote renewable energy development – in the midst of soaring costs for fossil fuels – is something that the U.S. cannot afford to do. Actually, we cannot afford NOT to develop renewable energy systems.
This makes so little sense that we could all have a good chuckle if it were not such a serious issue of national energy policy. What does it take for Congress to figure this out? Do the lights really have to flicker and die before the issue gets some attention?
So I’m asking you to contact your member of Congress and confront him or her with this issue. The future of the renewable energy industry in the U.S. depends on this.
Action to take: Contact your representative and urge him or her to support H.R. 5984 or the alternative H.R. 197, called the “Pomeroy bill.”
Here is a link to find the contact information for your member of Congress.
Shoot me an e-mail (OI@... ) to let me know what you hear. Thanks for your help on this one.
You’ll be helping yourself, and helping the country,
Byron W. King
for The Daily Reckoning
Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments , and editor of Energy & Scarcity Investor .