Perspective

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Renewable Energy in the 21st Century:

Fortnightly Magazine - March 2005

Perspective

Renewable Energy in the 21st Century:

State involvement in promoting renewable technologies has profound implications for the future of the energy industry.

 

Election-year posturing seems to have prevented the federal government from reaching consensus on a number of energy issues ranging from standard market design to global warming, MBTE to Kyoto, ANWR to nuclear waste disposal. At the precise moment the federal government appears so stymied, state governments throughout the United States have avoided the pitfalls of partisan politics as governors and legislatures, both Democrat and Republican alike, have united to take significant actions to promote new energy technologies and renewable energy. The policies, programs, and regulations being adopted at the state level are making a real difference and foreshadow the powerful political forces that underlie energy issues in the 21st century.

Almost immediately upon assuming the governorship of California, Republican Arnold Schwarzenegger announced the creation of a public/private partnership to build a hydrogen highway in California and called for the installation of solar panels on 1 million California homes and businesses. Bill Richardson, freshman Democratic governor and former secretary of energy, has been equally aggressive, designating New Mexico the "Clean Energy State," and challenging the Western states to adopt targets of 20 percent increases in both renewable energy and energy efficiency by 2020. Democratic Arizona Gov. Janet Napolitano has said her state could be the "Persian Gulf" of solar power. Republican Gov. George Pataki has committed New York "to promoting advanced technologies such as fuel cells, microturbines, and clean generators because they help to protect our environment, improve our energy security, and produce positive benefits for our economy." Connecticut has a stated goal of becoming "the fuel cell capital of the world" and Democratic Gov. Ed Rendell has declared Pennsylvania "open for business in advanced energy development." More impressive than this rhetoric, however, is the action actually being taken.

Across the country, states have promoted new energy technologies and renewable energy by: (1) implementing renewable portfolio standards; (2) adopting tax incentives and rebates; (3) forming state-funded venture capital funds; (4) directing investment dollars to clean technology; (5) purchasing renewable energy for government facilities; (6) providing loan supports; (7) easing interconnection requirements and allowing net metering; and (8) funding R&D and public outreach programs.

The following is a brief summary of some of the state programs adopted across the country and how these programs promote energy technology and renewable energy.1

Renewable Portfolio Standards and Tax Incentives

In 1999, Texas, under then Gov. George W. Bush, adopted a renewable portfolio standard (RPS) in connection with the restructuring of the state electricity market. An RPS requires that utilities produce some portion of their electricity from clean energy sources such as wind, solar, or biomass. The Texas standard required the installation of 2,000 MW of new renewable capacity by 2009. The RPS led to a "Texas Wind Rush" that produced 10 new wind projects totaling 930 MW of power in 2001 alone.2 In 2002, California passed an RPS requiring utilities to buy or produce 20 percent of their power from renewable sources by 2020. (Schwarzenegger has proposed accelerating the deadline to 2010.) Recently, Rendell announced his support for an RPS which would require that in 10 years, 10 percent of the electricity generated in Pennsylvania come from renewable resources. Pataki proposed, and the New York Public Service Commission enacted, a 25 percent RPS by 2012, which could result in 3,700 MW of new renewable energy. In March 2004, New Mexico adopted a 10 percent RPS to be met by 2011. In total, it is estimated that there are now at least 19 states that have programs encouraging the use of renewable energy for electricity generation3, and compliance with these RPS programs could result in $10 billion of spending on renewable energy by 2010.

Moreover, states have promoted clean energy and renewable energy through traditional tax policy and rebates. For example, Connecticut has established a $1.8 million clean energy incentive program that provides rebates of up to $25,000 for a solar power system. New Mexico provides an exemption from state excise taxes for consumers who purchase hybrid vehicles. Arizona has a $2,000/kW rebate for solar and a tax credit against personal income in the amount of 25 percent of the cost of a solar or wind energy device. But perhaps the most powerful tax incentive/rebate program has been adopted in California. Through its Emerging Renewable Program (ERP), the California Energy Commission offers a $3.00/watt rebate for solar and $0.90/watt to $1.90/watt for wind, and there is a phased Solar Income Tax Credit for residential and commercial customers purchasing onsite solar systems up to 200 kW in size. California's solar initiative has had powerful results: the ERP has supported an estimated 9,600 photovoltaic (PV) installations and, at one point, almost 80 percent of U.S. solar business was conducted in the state. California, however, has a formidable solar competitor on the East Coast. New Jersey has an RPS calling for 90 MW of solar power by 2008 (the nation's most aggressive RPS for solar power) and offers a Clean Energy Rebate of 70 percent of the cost of a solar system or $5.50/watt, whichever is less. The effect of these programs is stunning: Since January 2002, solar power in New Jersey has grown 550 percent, from less than 1 MW to 6 MW.

State-Backed Venture Funds

While tax credits and rebates are traditional public policy tools, a dozen states have taken particularly innovative action, promoting energy technology and renewable energy by forming government-backed venture funds. The two best-known examples of these are the Connecticut Clean Energy Fund and the Massachusetts Renewable Energy Trust. The Connecticut Clean Energy Fund (CCEF) began operating in January 2000 as a part of legislation deregulating the state's electric utility industry and is funded from a surcharge on ratepayers. This surcharge is expected to generate $100 million over the next five years. CCEF is engaged in a long-term effort to foster the production and use of energy from clean and renewable sources in Connecticut. CCEF has invested in biomass gasification projects, fuel cell companies, and ocean wave technologies.

The Massachusetts Renewable Energy Trust (RET) was created in 1993 as part of the restructuring of the commonwealth's electric utility industry. The RET is funded with approximately $27 million annually through a surcharge on utility bills. The RET has invested in Massachusetts-based PV manufacturers Evergreen Solar and Konarka Technologies, and fuel cell companies Accumetrics and Nuvera Fuel Cells. The RET also has provided $54 million for a waste-to-energy program affecting 138 communities, and it recently funded the $15 million Massachusetts Green Energy Fund, used to invest in Massachusetts-based renewable energy businesses.

In addition to Massachusetts and Connecticut, there are at least 10 other states with clean-energy funds. In 2002, 17 clean-energy funds from 12 states4 formed the Clean Energy States Alliance (CESA) to serve and coordinate the common goals of the participating clean-energy funds. CESA estimates that its members have invested $1.5 billion over the last five years and will invest approximately $2.5 billion over the next 10 years.

Direct Investment Dollars

Earlier this year, California made a dramatic announcement that shook the world of energy technology investing. Instead of levying a surcharge on ratepayers to provide capital for a state-backed venture capital fund, California's treasurer directed state pension funds to focus a portion of their investing in clean energy. On Feb. 3, 2004, state treasurer Phil Angelides launched the California Green Wave Initiative. The initiative calls on the state's two large public pension funds (with combined assets of $250 billion)-the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement Systems (CalSTERS)-to invest $1.5 billion in cutting-edge technologies and environmentally responsible companies. The goal of the Green Wave Initiative is to improve long-term financial returns through investments in the environmental technology sector, while also reducing the risks to the pension funds posed by corporate environmental liabilities. The initiative calls on CalPERS and CalSTERS to: (1) invest a combined $500 million in private-equity investments, venture capital, and project financing to develop clean technologies that provide positive, long-term returns, and create jobs and economic growth in California; (2) invest a combined $1 billion of their stock portfolios into environmentally screened funds managed by public-equity investment managers with proven track records; and (3) undertake a comprehensive audit of their respective real-estate investments to determine whether the investments are maximizing their opportunities to use clean energy, energy efficiency, and green building standards. If other states follow California's lead, the capital available for clean energy companies will increase enormously.

Clean Energy Purchases and Loan Support

Another innovative approach adopted by some states is the promotion of renewable energy by requiring that all, or a portion, of a state's energy come from clean sources. Pennsylvania-the first state in the nation to buy green power to meet its own energy needs-began purchasing 5 percent of its electricity from advanced energy resources in 2000. Beginning last July 1, that amount increased by 10 percent, and the commonwealth plans to move to a 20 percent requirement shortly. Earlier this year, Gov. Donald Carcieri announced that Rhode Island would purchase (using renewable energy certificates) 100 percent of the electricity used at the state house for five years from clean sources; and, recently, Gov. Jim Doyle set a goal that Wisconsin purchase 20 percent of its electricity usage by 2010 from renewable sources.

In addition to investment dollars and renewable purchases, states promote renewable energy by providing loan supports. The Ohio Energy Loan Fund, for example, provides reduced interest rates on standard bank loans for Ohio residents who borrow money to implement energy efficiency or renewable energy projects. The program is financed through the sale of state general obligation bonds. The program has loaned approximately $300 million over its 20-year life. The Iowa Energy Bank, a similar program, has funded $138 million in improvements. The Pennsylvania Energy Development Authority can provide approximately $1 billion in tax-free bond financing for clean energy projects.

Net Metering and Interconnection Standards

Many renewable energy sources and new energy technologies focus on producing energy not at a centralized location, such as a power plant, but in a distributed manner, on-site-where the energy is used. Distributed generation creates two issues: how the energy source can be connected to the grid (and what will be the charges for both interconnection) and how such energy can be sold.

Interconnection raises safety issues for incumbent utilities, but many believe it has been used to prevent the adoption of new energy sources. California, Connecticut, and other states have adopted programs to promote certain renewable energy sources by exempting them from interconnection charges. The issue of selling distributed power is often addressed with so-called net-metering rules. States such as California, New York, and a dozen others allow customers to receive a credit on their bills for excess electricity they generate from renewable energy sources (net metering), thereby providing an incentive to invest in solar, wind, and the like.

States have taken other actions as well. The California Public Interest Energy Research (PIER) program supports research and development with research grants totaling up to $62 million annually. Massachusetts has launched an initiative to provide teachers with teaching materials and financial support so that they can strengthen the teaching of energy concepts, renewable energy, green building, and climate change. California has passed a law limiting the aesthetic restrictions local authorities can impose on solar projects. (The law is designed to address the refusal of Los Gatos, Calif., to approve a solar facility in 2002-2003 because the solar panels were visible from the street.) A bill in the California Assembly would allow hybrid cars, regardless of the number of passengers, to use freeway HOV lanes. These actions, and the ones detailed above, lead one to ask what is driving the huge amount of bipartisan state action promoting energy technology.

The Political Drivers for Energy Tech

Schwarzenegger has said that "every megawatt of energy Californians procure from renewable resources like the sun reduces our dependence on other sources." In 2001, Iowa Gov. Thomas Vilsack's Energy Task Force supported an RPS to "establish a responsible level of energy security, economic stability, and environmental sustainability." Massachusetts' energy officials have argued that renewable energy investments make sense "from an economic and environmental perspective and have the added benefit of reducing our dependence on foreign energy suppliers." Romney believes that the Massachusetts' Renewable Energy Trust Fund "can become a major economic springboard … by focusing on job creation." In New York, Public Service Commission Chairman William M. Flynn supported the state RPS, noting "not only will it help us meet our growing demand for electricity, but it also will provide additional benefits by increasing fuel diversity from our state's generation portfolio, reducing our exposure to fossil fuel price spikes and supply interruptions, increasing economic development activity from a growing renewable energy industry, and improving our environment." On Sept. 23, 2004, Rendell announced that the Spanish wind energy company Gamesa Corp. agreed to base its U.S. headquarters and East Coast development offices in Philadelphia and to open an advanced technology manufacturing facility for wind turbine generator blades in Pennsylvania. Together with the construction, operation, and maintenance of its wind farms, Gamesa's two offices and factory are expected to create as many as 1,000 jobs in the commonwealth over the next five years. Rendell explains:

 

 

 

As Rendell's remarks, and the official announcements quoted above make clear, there is a combination of powerful forces driving bipartisan action on clean energy and energy technology. Republican and Democratic governors are concerned about the environment, dependence on foreign oil, energy costs, homeland security, blackouts, and job creation. Promoting clean energy and new energy technologies address all these issues. It is a course of action that is both a good solution for a host of real world problems and is also very good politics. That is a combination that neither Democrat nor Republican can resist.

Implications for the Future

The success and popularity of the programs described above will no doubt spur increased activity at both the state and federal level. More and more states will adopt programs to promote energy technology and renewables, each building on the successes of others. Eventually, the federal government may adopt an RPS or create an energy fund similar to those created by the states. (Both the CIA and Army have created government-funded venture capital funds).5 Ultimately, one may see states competing with each other for dominance in one technology or the other; Connecticut's fuel cell companies may compete with Pennsylvania wind companies, while New Mexico may compete with Arizona to house new solar technologies. So, too, states may team together to focus even more dollars on promoting various energy technologies. No matter what their ultimate form, the actions by the state governments are good for the country and have profound implications for the future of energy technology and renewable energy.


Endnotes

 

    1. For a detailed description of programs by state, see the following Web sites:

 

 

    2. Creating the California Cleantech Cluster: How Innovation and Investment Can Promote Job Growth and a Healthy Environment, Natural Resources Defense Council/Environmental Entrepreneurs (Sept. 2004) at 42.

 

 

    3. To date, all renewable standards have been adopted by state legislatures. On Nov. 2, Colorado voters passed a statewide initiative requiring that state electricity providers derive 3 percent of their energy from renewable reserves by 2007 (10 percent by 2015).

 

 

    4. These 12 states are California, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, and Wisconsin.

 

 

    5. The Central Intelligence Agency's fund is In-Q-Tel. The Army fund is called OnPoint Ventures.

 

 

 

 

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