New technologies are opening the utility domain to innovation and competition. Traditional utilities will shrink as outsourcing providers and competitors grow. Survival in this new market requires...
Renewables attract utility investment dollars.
One year ago, Fortnightly’s May 2008 Frontlines column criticized structural barriers preventing utilities from leading the green energy revolution: “Since the 1980s, many utility companies have viewed renewable energy as [a] bitter pill shoved down their throats by do-gooder politicians… While power purchase agreements can transfer some benefits as a function of prices, the production tax credit’s structure has sent utilities a clear message: They shouldn’t profit from the green energy revolution.”
Since then, a wave of policy changes has washed over those barriers and reduced them to rubble.
First, the Internal Revenue Service in July 2008 revised the rule that barred utilities from claiming the production tax credit (PTC) (see IRS Notice 2008-60) . As a result, load-serving entities that sell power generated by their own renewable plants now can qualify for the PTC. Second, the Emergency Economic Stabilization Act, the bill that funded the Troubled Asset Relief Program (TARP), expanded both the PTC and renewable investment tax credits (ITC) to include load-serving utilities, and extended the ITC for solar-power investments for eight years, through the end of 2016.
Third, the American Recovery and Reinvestment Act, popularly known as the federal stimulus package, further sweetened the pot for renewable investments. The stimulus package included:
• A three-year extension to the renewable energy PTC;
• An option for asset owners to claim a 30-percent investment tax credit (ITC) in lieu of the PTC;
• A temporary option to convert the ITC into a federal grant; and
• A new DOE loan-guarantee program for investments in renewable power and other green-energy projects.
These policy changes and incentives have spurred some utility companies to consider investing in renewable assets for the first time—and encouraged others to invest in a bigger way than they had previously. “With the recent changes, utilities now have the same type of incentives from a tax standpoint as do third parties,” says Roy Kuga, a vice president with PG&E. “So you’re seeing a greater amount of activity from investor-owned utilities.”
Indeed, news wires recently are filled with announcements of major renewable power projects—many of them sponsored by utilities and utility holding companies. At press time, SDG&E affiliate Sempra Generation announced plans to add 48 MW of photovoltaic (PV) modules to the 10 MW already installed at a site near Boulder City, Nev. In Florida, FPL said it would install 75 MW of PV modules at Babcock Ranch, a “solar-powered city” planned for development near Fort Myers. And in Oklahoma, OG&E began building a $200 million transmission line to bring power from the state’s windy panhandle to Oklahoma City. (OG&E also said it would spend $3.75 million to provide habitat for prairie chickens affected by plans to add between 600 and 700 MW of new wind turbines in the state.)
In short, renewable energy is booming in America. But for utilities, the story isn’t that simple.
Renewable Rate Base
State regulatory treatment for utility investments varies widely, and it’s a moving target.