Long Term tax policies can help keep U.S. #1 in wind power

Victor Abate, Vice President, Renewable Energy, GE Energy

In 2008, the United States became the leading global installer of renewable energy technologies. However, there remains a strong and urgent need for continued, innovative tax policy related to renewable energy and energy efficiency.

Also in 2008, the U.S. surpassed Germany as the country with the largest installed capacity of wind power. Much of this can be attributed to the Renewable Energy Production Tax Credit (PTC).

First created in 1992, the PTC went through several boom-bust cycles, expiring at the end of 1999, 2001, and 2003. But since 2004, the credit has been extended five times (in 2004, 2005, 2006, 2008, and 2009) without expiring, resulting in an average annual growth rate of 39 percent from 2005-09.

The American Recovery and Reinvestment Act (ARRA) of 2009 extended the PTC through 2012; created the option to use a 30 percent Investment Tax Credit (ITC); and established a 30 percent ITC for advanced energy manufacturing.

ARRA also made a crucial change to address the fact that the credit crisis of 2008 reduced the usability of tax credits to finance projects.

The Act made the tax credit "convertible," so that developers could receive payments equal to the value of the ITC. This was a critical step in enabling renewable energy projects to be financed through the economic downturn.

These tax policy changes had a profound and immediate impact on wind industry installations, preserving jobs in 2009. In late 2008 analysts forecasted that, without tax policy changes, the renewable energy industry would see a 50 percent decline in installations and related jobs.

Instead, with ARRA policies put in place, 2009 saw a record year of 10 GW in wind installations, according to the American Wind Energy Association. Wind accounted for 39 percent of all new electric generating capacity in 2009, second only to natural gas.

Over the past five years, tax credits proved effective in a favorable environment of ample State Renewable Portfolio Standard (RPS)-driven demand, high natural gas prices driving attractive Power Purchase Agreement (PPA) prices, robust electricity demand growth, and availability of low-cost financing. In this environment, utilities facing State RPS requirements "went long" on wind, which led to the boom period of 2006-09.

Today, the environment is radically different. The rapid increase of wind turbine installations has satisfied much of State RPS near-term demand; electricity demand is down; natural gas prices are down, resulting in very low and unattractive PPA prices; and, as an outgrowth of the financial crisis, project financing has become more expensive.

As a result, our wind customers are finding it extremely difficult to sign power purchase agreements with utilities at levels that can support their project economics.

With developers expected to see continued PPA price pressure over the next few years, they will require all available tax policy incentives to make their projects financially viable, including the convertible tax credit.

Over the past decade, Congress has been responsive and creative in developing tax policies to support green energy-and in adapting these policies to new realities. Just as the 2008 "credit crunch" environment forced Congress to innovate and adjust tax incentives, today's "PPA pressure" environment calls for policymakers to take a fresh look at its current energy tax policy.

It is critical to recognize that the U.S. is falling behind in the race to deploy green energy. China, which led the world with 14 GW of wind added in 2009, has set a long-term target of 100 GW of wind by 2020 and is considering an increase to 150 GW. The EU has a binding directive of 20 percent renewable energy by 2020, which is expected to drive over 170 GW of new wind capacity.
Without a similar long-term policy, the U.S. can be expected to "place third" in the near future.

For a variety of reasons, U.S. energy tax policies for green energy have been deliberately structured for the short-term. We believe that it is necessary to rethink this approach if the U.S. is to remain a global leader for renewable energy and energy efficiency and a leading creator of green energy jobs.

The ability of the U.S. to keep up in the global race for leadership in green energy investment, manufacturing, and job creation is tied to our ability to be innovative with our tax and other energy policies.

For the Record is an edited excerpt of a presentation to the U.S. House of Representatives Committee on Ways and Means hearing on "Energy Tax Incentives Driving the Green Job Economy," in April  2010 by Victor Abate, Vice President, Renewable Energy, GE Energy.

July/August 2010