Industry Focus: Renewable Energy – What The Election Results Mean
This post will be of interest to those in the renewable energy industries. I attended a highly informative panel discussion/conference call Thursday, November 8, sponsored by Chadbourne & Parke LLP, one of the nation’s foremost law firms working in renewable energy industries. As a courtesy to clients, and potential ones, I have summarized some key points of the 1 ¼ hour discussion, titled “What the November Election Results Mean for the US Renewable Energy Market.”
I invested the time to summarize this conference to stay abreast of key solar industry trends. This discussion confers no political slant or judgments on my part.
If you want to listen to the entire recording, it is available on the Chadbourne web site, here.
President Obama was reelected, and Democrats increased their majority in the US Senate. Republicans retained control of the House. Some of the most influential men in renewable energy shared their thoughts on what this is likely to mean.
Keith Martin, Partner, Chadbourne & Parke LLP, Washington, D.C. Office (Moderator) Richard Glick Vice President, Government Affairs Iberdrola Renewables, Inc. (global utility headquartered in Spain, U.S. subsidiary is #2 U.S. wind company). Former senior policy advisor to the U.S. Secretary of Energy in the Clinton Administration. Joseph Mikrut Partner, Capitol Tax Partners (one of premier tax lobbying firms in D.C.). Former tax legislative counsel of the U.S. Treasury under President Clinton, formerly on Joint Tax Committee Staff in Congress. |
John Stanton Vice President, Government Affairs SolarCity (solar sales, installation, financing, just filed for initial public offering). Former General Council of Solar Energy Industries Association Jonathan Weisgall Vice President, Legislative & Regulatory Affairs MidAmerican Energy Holdings (large utility holding company that owns two utilities, two pipelines and a number of renewable energy projects – Berkshire Hathaway’s holding company for energy sector investments). Gregory Wetstone Vice President of Governmental Affairs Terra-Gen Power, LLC. (Utility scale renewable energy developer with wind, geothermal and solar installations). Former chief lobbyist for the American Wind Energy Association. |
The Backdrop
The discussion began with a review of key factors affecting the renewables industries over the past four years, until now.
Wind generator and solar panel
Four years ago the renewable energy industries were euphoric about the potential for their business with the election of Obama, whom they perceived as interested in promoting renewable energy. Two years later, after the mid-term 2010 elections, the euphoria faded. There was great nervousness in the industry leading up to this recent election.
Congress returned to Washington, D.C. Tuesday the 13th for a lame duck session that will last through the end of year with the existing members of Congress, a number of whom will be leaving at the start of next year. Republicans criticized Democrats for the 2009 stimulus package, saying that it added too much to the national debt without dropping unemployment quickly enough. The renewable energy industry was a notable beneficiary of the stimulus program.
- Treasury cash grants for 30% of the project costs, AKA section 1603 payments (temporary measure to augment a weak tax equity market)
- Expanded program of loan guarantees for renewable energy via DOE. Both are winding down.
In general the U.S. renewable energy industry has been driven by tax incentives at the Federal level and by Renewable Portfolio Standards (RPS) in 29 states + D.C. A RPS requires states’ utilities to produce a certain % of their energy from renewable sources.
Obama started with an ambitious agenda to reduce global warming by the promotion of renewable energy sources over fossil fuels. By summer, 2010, much of the agenda stalled. A cap & trade program to reduce greenhouse gas emissions failed in the House. Other failures include: a federal green bank to finance renewable projects, national energy standard and efforts to make it easier to build more robust transmission lines.
The rapidly plummeting price of natural gas is reducing the demand for renewable energy. Additionally, it proved hard for renewable energy providers to convince utilities to sign long term electricity purchase contracts.
Renewable energy became highly politicized (think Solyndra). Perhaps this was because, as a former Republican Chairman of the Federal Energy Regulatory Commission suggested, a new class of House Freshmen (inferring the Tea Party Caucus) mistakenly thought that federal support of renewable energy began with the Obama Administration – it didn’t! – therefore, they’d oppose it.
The Senate Tax Writing Committee voted in August 2012 to the extend production tax credits for wind farms for another year through 2013, and to change the deadline from its current specification of “in use” (project completion) to mean that project construction must have started. In September, the Office of Management and Budget announced that Treasury Cash Grants paid on or after 1/2/2013 will be subject to a reduction of 7.6% due to automatic spending cuts (budget sequestration) which goes into effect January 1st.
Congress is facing an enormous “Fiscal Cliff,” that is generating much media coverage elsewhere.
- $1.2 Trillion in spending cuts take effect Jan. 1st, over 9 years
- Income, payroll, estate tax rates increase
- Capital gains rates and dividend rates increase
- Federal Debt Ceiling must be raised to keep the government solvent; the last time this issue was before Congress the US debt rating was downgraded a notch because Congress couldn’t reach agreement and “kicked the can down the road until today” with the Sequestration mandate.
What’s ahead?
Selected discussion topics are summarized below.
A key issue is that the President will no longer be running for re-election so it may make it easier to govern and reach agreements on big issues, like tax reform. He will want to secure his legacy with various initiatives, and will be in a position to compromise to move legislation forward. The President will be able to govern for policy, not for politics; opponents can engage without giving him political advantage.
Will the very aggressive attempt by Republicans to politicize renewable energy fade, following the election? There had been a marked shift by Republicans to isolate the renewable energy sector from the “all of the above” answer to U.S. energy needs. Renewables became a partisan target, whereas the industries have largely had bi-partisan support previously.
Negative advertising against solar energy was used with intent to harm solar’s goodwill in the marketplace. The result was that poll data showed Republican constituency support for solar dropped from the low 90%’s to high 80%’s. But still, 87% of those polled “agreed” or “strongly agreed” that the government should play a leadership role in supporting solar energy deployment, so presumably these people will realize that there’s not public support for bashing solar (especially, after the election results became apparent).
Solar could not have hoped for a better result from this election, but nothing is guaranteed. The industry had more at risk in this election than ever. The President feels that the Production Tax Credits should be permanent and refundable, and supports a Federal renewable energy portfolio standard. The Senate tax writing committee, demonstrably supportive of solar, will remain the same as pre-election. According to Richard Glick, “In the Senate, there has traditionally been strong bipartisan support for renewable energy. Senate Democrats, who are a key voting bloc for the administration’s programs, increased their majority. There is bipartisan support for renewable energy in the House as well, but the Tea Party members who caucus with the House Republicans have been less keen to see the government promote renewable energy, so it remains to be seen how much the Democratic gains will translate into any specific actions by Congress. Bills must pass both houses to become law.”
Will production tax credits for wind be extended? Probably, and hopefully during the lame duck session, attached to all the other extensions. It is reasonably likely that the extenders will be taken up in lame duck or early in 2013. A one year extension with a change to claim the credit from in-use to construction start date, is the probable best case.
Do you see a phase out of the PTC as being part of the discussion? Probably not time within lame duck, but probably later in tax policy overhaul. A one year extension is crucial. Placed in service metric for permanent tax credits like that enjoyed by the fossil fuel industry is not appropriate for expiring credits like these for renewables.
Group Consensus
- Election on balance was good for the renewable market; it’s good to have people in White House that are favorably predisposed to the renewable market, even if there are few specifics that are evident today.
- Production Tax Credits are likely to be extended during the lame duck session, if not then it’ll happen early next year. Production tax credit extension might be the onlyspecific likely output of the election, but this is quite significant. Note: while “likely,” nothing is certain.
- Things that are unlikely to happen in the upcoming administration: Carbon controls, green energy bank to fund renewable energy projects, or a carbon tax Two of the five participants speculated that to be only a 20-25% likelihood, however, the possibility of a carbon tax exists. It’s an easy place to find revenue; estimates suggest a potential of over $1 trillion over a decade period, and it would discourage the use of carbon fuels.
- Key question: Will the marketplace have a bigger role than the legislative and regulatory processes? The rapidly declining cost of natural gas prices is crowding out the demand for renewables. One cannot dismiss the “huge impact of natural gas prices.”
- There will likely be a Congressional partial grand bargain, to address some aspects of the Fiscal Cliff problem.
- Parts of sequestration (spending cuts that trigger next year) will be delayed from the January start date, but TBD whether it’s only the Defense cuts that get delayed, or will it be that the domestic spending elements are, too? This matters to those waiting for payment of section 1603 Treasury Cash Grants because the Office of Management and Budget said that they’ll be subject to a 7.6% cut, starting in 2013. If funded in 2012, that does not apply.
- The solar investment credit scheduled to run through 2016 is unlikely to be rescinded prematurely if massive corporate tax reform takes hold. While it is possible legally, doing so would send all the wrong messages to the business community, suggesting an inability to trust the government to do what it says. One participant said that he was not aware of any tax incentive that was terminated before its end date in the last 30 to 40 years.” On the other hand, it is unlikely to be extended past 2016. Another said that the House tax-writing committee Chairman, has been very clear that the investment tax credit that is currently scheduled to run through 2016 for solar will not be repealed before the scheduled expiration date.
- Since California now has a Democratic super-majority in both its State Assembly and Senate , it is feasible that the CA Renewable Portfolio Standard could be raised as high as 40% eventually (it’s now 33% renewable energy by the year 2020), but the transmission capacity to distribute that electricity is a constraint. CA only has about 40% of the transmission capacity it needs even to support its existing renewable energy target of 33%.
Business Implications
The political risk that the renewable energy industries faced has diminished considerably. As investment entities and merger/acquisition candidates, companies would present less risk, and thus have greater economic value. This should translate to easier credit at better terms, too. The risk of low natural gas prices reducing demand for renewable energy remains however, as a compelling concern for the industry.
Please contact me if your company may contemplate the need for additional capital to keep up with a changing industry, and/or may consider merger and acquisition activity to divest or strengthen your competitive position.
Disclaimer: This article provides general information, and is not intended to constitute, and should not be construed as, legal, tax, accounting or business advice, nor does it constitute an offer to sell or to purchase securities. Rather, it is summary compilation of timely issues confronting your industry and as such does not purport to be a full recitation of the matters presented. Prior to acting upon any information set forth in this article or related to this article, you should consult independent counsel and/or more detail contained in the Source Information. The article reflects the opinion of the writer, and does not necessarily reflect the opinions of Mid-Market Securities, LLC, or its affiliates. IRS Circular 230 Disclosure: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax discussion contained in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
