Clean energy tax break extension fuels hopes for boom

clean energy tax incentive extension
ShutterstockIgor Samoilik
Will the renewal of the Investment Tax Credit spur a U.S. boom in renewable energy capital?

Hopes that the Paris Agreement quickly would translate into renewed national efforts to mobilize clean tech investment were given a boost last week, as the U.S. Congress approved plans to extend key tax credits for wind and solar projects for five more years.

The U.K. government may have angered green businesses and NGOs last week with its controversial moves to cut subsidies for solar power and open up National Parks to fracking activity, but on the other side of the Atlantic a surprise bout of bi-partisanship led to a level of long-term policy certainty that analysts and industry insiders agreed would unleash a surge in investment in U.S. renewables projects.

The House of Representatives and Senate last week passed a spending bill for 2016 that extends the energy Production Tax Credit (PTC) and Investment Tax Credit (ITC) for wind and solar projects through 2020. The tax breaks are designed to fall each year, as clean energy costs are expected to keep falling over the period.

However, the extension gives investors and developers considerable certainty and drastically reduces the risk of stop-start development cycles, which have emerged in recent years as renewable energy firms were forced to rush to complete projects ahead of a year-end row in Congress over whether to extend the tax credits.

Under the new rules, the wind energy PTC and alternative ITC will be extended for 2015 and 2016, before being cut to 80 percent of its current value in 2017, then 60 percent in 2018 and 40 percent in 2019. Similarly, the solar industry's 30 percent tax credit will be extended through to 2019 before being steadily cut to 10 percent in 2022.

Trading in the future of energy

The new bill was not universally welcomed by green groups: In order to secure bi-partisan backing, it also lifted a long-standing ban on oil exports from the U.S. Green groups slammed the move as a kickback to the oil industry that will undermine global efforts to tackle climate change.

Alongside the renewable energy tax credit extensions, though, Democrats were able to block a series of attempts by Republicans to water down environmental policies, and analyst firm Bloomberg New Energy Finance (BNEF) argued opening up export markets for U.S. oil producers would have limited impact on overall consumption of renewables investment. In contrast, the renewables industry is now tipped for rapid expansion.

BNEF said it expected U.S. solar capacity to more than double with an additional 20GW added as a result of the tax credit extension, while the wind energy industry is expected to provide 19GW of new capacity over the next five years. Overall, the analyst firm expects the extensions to drive more than $73 billion in investment and deliver enough power for 8 million homes.

Ethan Zindler, head of U.S. policy analysis at BNEF, said the move would have a bigger short term impact than either President Barack Obama's plans to cut emissions from the power sector by 30 percent by 2030 or the recent Paris Agreement. He argued the extension would give the renewables industry the policy certainty it needs to further accelerate cost reductions that are moving it towards cost competitiveness with fossil fuels in many parts of the U.S.

"You open manufacturing plants and then you close them. And then you open them and you close them," Bloomberg quoted him as saying. "It's economically inefficient. This will give them a good five-year line of sight on what the market will look like, and that's really important."

The wind and solar industries are similarly bullish about their prospects in the wake of the tax credit extensions.

The American Wind Energy Association (AWEA) said the move would help protect 73,000 jobs in the sector and provide foundations for continued expansion by the industry.

"We're going to keep this American wind power success story going," said Tom Kiernan, CEO of AWEA, in a statement. "With predictable policies now in place, we will continue advancing wind turbine technology, driving down our costs and passing the savings on to American families and businesses in all corners of the country. We look forward to building a future with more affordable, reliable, clean wind energy."

His comments were echoed by Jacob Andersen, CEO of Siemens Onshore Americas, who thanked Congress on behalf of nearly 2,000 Siemens wind energy employees in the U.S.

"The PTC has encouraged tremendous investment in wind energy, helping to reduce the cost of wind power while simultaneously creating a new American industry," he said. "This extension will bolster the continued growth of domestic wind energy and the jobs this growing industry supports, allowing our factories to plan for the future as we continue to deliver innovation that drives down the cost of wind power."

The market responds

Share prices in a number of leading renewable energy firms jumped at the news, and investors similarly were upbeat about the likely impact on long-term investment trends.

"These policies will provide a critical level of certainty and continuity that will encourage ongoing private investments in wind and solar energy resources at lower costs for customers," predicted Kyle Davis, director of congressional relations at Berkshire Hathaway Energy, the investment giant with a significant renewable energy portfolio.

Meanwhile, the solar industry offered an equally upbeat assessment of the bill with Rhone Resch, president and CEO of the Solar Energy Industries Association (SEIA), predicting it will unleash a period of rapid expansion.

"The ITC extension makes America and its solar industry the world's pre-eminent producer of clean and affordable energy," he said. "Thanks to the ITC, solar energy will add 220,000 new jobs by 2020, and with this extension, the solar industry can achieve its pledge of employing 50,000 veterans. Clean solar energy will cut emissions by 100 million metric tons and replace dozens of dirty power plants. Importantly, in the follow-up to the Paris accord, this establishes the United States as a model for the reduction of greenhouse gases.

"A five-year extension of the ITC will lead to more than $133 billion in new, private sector investment in the U.S. economy by 2020. ... Solar power in this nation will more than triple by 2020, hitting 10GW. That's enough to power 20 million homes and represents 3.5 percent of U.S. electricity generation."

Playing politics

The shock development came as the spending bill also retained the budget for the EPA at its current level and approved $500 million of U.S. climate funding for the international Green Climate Fund.

Meanwhile, the Department of Energy announced a new efficiency standard for commercial air conditioning units, which it expects to cut energy costs by $167 billion on utility bills and reduce carbon pollution by 885 million metric tons over the lifetime of the new products. The department said the new standard, which comes into effect in 2018 and will be tightened in 2023, is the single biggest energy efficiency standard in U.S. history.

"Just days after the Paris agreement to cut global emissions and create a new era of affordable energy, today's announcement marks the largest energy-saving standard in history and demonstrates that America is leading the effort to reduce energy costs and cut carbon emissions," said Energy Secretary Ernest Moniz in a statement. "This rule also shows that strong public-private partnerships can reap environmental and economic dividends and drive technology breakthroughs. These standards are a direct result of the Energy Department's negotiated rulemaking process which brings diverse stakeholders to the negotiating table and supports industry innovation, demonstrating how government and business can work together to meet U.S. carbon reduction goals."

Republicans continue to explore ways to block the Obama administration's recent wave of clean energy, but the president last week signaled his growing confidence that the GOP eventually will have to adopt a more progressive position on climate change.

"The American Republican party is the only major party that I can think of in the advanced world that effectively denies climate change," he told reporters. "It's an outlier. Many of the key signatories of this [Paris] deal, the architects of this deal, come from center-right governments. Even the far-right parties in many of these countries — they may not like immigrants, for example, but they admit, ‘Yeah, the science tells us we've got to do something about climate change.'"

He also predicted that the continued success of clean technologies and environmental policies would make it increasingly difficult for future Republican leaders to reverse current investment and technology trends.

"My sense is that this is something that may be an advantage in terms of short-term politics in a Republican primary; it's not something that will be a winner for the Republicans in the long term," he said of the fierce criticism aimed at green policies in the race for the GOP nomination.

There are few signs as yet of Republicans softening their stance on climate policy, but if the extension of clean energy tax breaks delivers the promised reduction in renewable energy costs, then it will become increasingly difficult for a credible GOP presidential candidate to oppose it.

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