It's time to reduce the uncertainty of renewable energy tax credits

By Will Coleman, Mohr Davidow Ventures

America's economic strength over the last century has been fueled in large part by access to affordable and abundant domestic energy resources. However, the energy landscape has changed. The growth in global demand continues to strain conventional resources and drive up costs, and some of the consequences of continued dependence on conventional resources are becoming more visible.

In 2010, the U.S. spent $337 billion on oil imports from foreign countries. In other words, we transferred $337 billion of America's wealth overseas—dollars that could have been reinvested here at home.

Continuing this pattern makes little sense in the current economic environment. Many alternatives are increasingly viable. Natural gas, wind, solar, biomass, and other renewables are playing increasing roles.

Wind deployments grew over 400 percent from 2005 to 2010, and solar grew more than 1000 percent over the same time period.

Despite these gains, wind still provides only 1.4 percent of our electricity and solar just 0.3 percent as compared to 44.9 percent from coal and 23.8 percent from natural gas. Yet the solar industry already employs over 93,000 people in the U.S. while the coal mining industry employs only 86,000.

Solar employment has more than doubled in the last three years alone, while coal employment has dropped over 50 percent in the last two decades, even though total coal production has remained steady.

It is worth noting that the U.S. has some of the largest wind, solar, and biomass resources in the world. The U.S. possesses over 231,000 GW of potential annual capacity from untapped wind and solar resources alone. This is over 222 times our current total electricity capacity, and it is a resource that is lost if not captured.

Energy—particularly the global transition to next generation forms of energy—remains one of the largest growth opportunities we have seen in our time. The growing market for solar in particular has fueled intense competition. This competition—in combination with rapid scaling of technologies—has helped drive down costs, but profit margins remain tight.

While significant support has been given to the wind and solar industries over the last several years and continues to sustain them as they continue to move down their respective cost curves, the supports have been less robust than those given to their more mature competitors. According to a recent report from Nancy Pfundof DBL Investors, the average annual inflation adjusted federal spending on oil over the first 15 years of its deployment was five times greater than what we have spent on renewables, and nuclear was 10 times greater.

The current production and investment tax credits have been instrumental in stimulating a market for renewable technologies, particularly in wind and solar. The existence and growth of this market has spurred tremendous new investment in capacity expansions and technology developments that have driven the cost reductions referred to earlier. Many of the longterm venture investments in new technology also would not have been made if not for the increasing confidence in the growth of the renewables markets.

However, the future of U.S. renewables markets is in question.

The need for certainty is a common refrain in the energy industry. Unlike in the oil and gas sector where the current credits are almost all "permanent" and provide investors and corporations with enough certainty to make long-term investments, almost all of the credits designed for the renewables sector are temporary and set to expire in the next few years. The lack of certainty itself is a major challenge for developers, manufacturers, and investors.

Each time Congress waits to renew these credits, a financing gap is created in the project financing market. In the past, investors had reasonable confidence that these provisions would be renewed and often took some capital risk to compress timelines and be ready for the renewals. However, given the increasing uncertainty about renewal, developers and investors are unable to depend on the credits when making their investing decisions, negating the credit's value as an incentive.

As the U.S. emerges from recession, it is critical that resources should be targeted at the most effective ways to strengthen the American economy. We need to remember that the Internal Revenue Code plays a critical role in whether American new energy companies succeed in that competition, so reducing the uncertainty of our current tax credits for alternative energy technologies and exploring the creation of innovation, performance based tax credits could not be more important or urgent.

Will Coleman is a partner with venture capital firm Mohr Davidow Ventures. For the Record is an excerpt of his testimony before the Senate Committee on Finance Subcommittee on Energy, Natural Resources, and Infrastructure Hearing on Clean Energy Tax Incentives in December 2011.

May/June 2012

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It's time to reduce the uncertainty of renewable energy tax credits