Green Bailout

Deck: 

Congress pours tax benefits into efficiency and renewables.

Fortnightly Magazine - November 2008

When Congress enacted the Emergency Economic Stabilization Act—popularly known as the bailout bill—in early October, lawmakers included more than 300 pages of provisions that were completely unrelated to mortgages, banks or Wall Street. Many of these provisions represent classic pork-barrel politics—i.e., tax incentives for mine-rescue team training; tax exemptions for certain wooden arrows made for children; and a rebate of federal taxes collected on rum from Puerto Rico and the U.S. Virgin Islands.

Of course, the difference between good policy and bad pork depends on one’s perspective. Coal miners undoubtedly will appreciate having well-trained rescue crews. Wooden arrow makers everywhere are rejoicing over their reduced tax burden. And I personally raise my glass to Congress for keeping the Bacardi flowing.

Not surprisingly, the bailout bill also included many titles of interest to energy companies, and almost all of them create incentives to invest in green energy alternatives. While they might represent political pork for sellers of wind turbines, solar panels and conservation-related products and services, they also reflect America’s increasing focus on efficiency and sustainability in energy policies.

A Round on the House

Of the many provisions in the bailout bill, few of them actually establish new federal policy. Instead, most just continue existing provisions that already were set to expire, and probably would have been enacted in some form—if not this session, then next session. The rum tax provision is one example; it’s been around for decades, and Congress routinely extends it as part of the islands’ special status.

Another example is the federal renewable energy production tax credit. Congress extended, through the end of 2009, the wind energy production credit that was scheduled to expire at the end of this year. Also it extended tax credits through 2010 for other types of renewable power production—for the first time including wave-power projects in the definition of “renewable.” The law also extends investment tax credits for solar energy, fuel cell and microturbine equipment through 2016; and expands and extends credits for carbon-sequestering coal-gasification projects.

Such extensions and expansions didn’t change U.S. policy in any significant way. Rather they provided political cover for legislators who were campaigning for re-election. For example, in an October 14 debate with Democratic challenger Al Franken, Sen. Norm Coleman (R-Minn.) asserted that his vote for the bailout bill helped ensure renewable production tax credits wouldn’t expire. “That was the only shot to get it done,” Coleman said. “Mr. Franken said he would’ve voted against a bill that contained those credits.”

But in addition to such politically convenient, status-quo tax provisions, Congress did stake out some new policy territory in the energy titles of the bailout bill.

For example, it makes utility companies eligible for investment tax credits—eliminating a barrier to direct utility ownership of solar, fuel cell and microturbine projects. This could turn out to be a big deal for solar in particular, as utilities now will consider solar electric projects to be rate-base investment opportunities and valuable tax shelters, rather than just compliance costs and operational hassles. And to the degree this policy shift spurs major investments in solar capacity, it might prompt Congress to make utilities eligible for the broader renewable production tax credits—which conceivably could change the green-energy game in a fundamental way.

Additionally, the bailout bill creates a new carbon-sequestration tax credit, to the tune of $20 a ton for “secure geologic storage” and $10 a ton for enhanced oil and gas recovery. Because it only covers the first 75 million tons of CO2 sequestered, the approximately $1.5 billion tax credit isn’t enough to build a carbon-sequestration industry. But it is a significant beginning, especially when combined with other DOE programs. And the provision might kick-start the regulatory process, by forcing DOE and EPA to define what “secure geologic storage” means for tax purposes.

Finally, Congress buried language in the bailout bill (Title III, Section 306) that might seem innocuous, but arguably makes smart meters and TOU rates the only defensible choices for U.S. utility companies.

Accelerated Conservation

Congress has been pushing time-of-use (TOU) pricing for decades (See “PURPA Redirected,” Fortnightly, February 2008). In 2005, EPAct required states and utilities to consider implementing TOU pricing, and last year the Energy Independence and Security Act directed state regulators to consider ways to align utility rate structures with efficiency and conservation goals. While they didn’t actually require the states to change their policies, these federal statutes added significant momentum to the smart-metering and smart-pricing trend (See “Putting Efficiency First”).

Now, in the bailout bill, Congress is pressing the issue even further—this time encouraging investments by providing accelerated depreciation (10 years instead of 20 years) for smart-metering and smart-grid systems.

While accelerated depreciation might seem like a roundabout approach, the Section 306 provision directs utilities’ investment plans in a forceful way. Utilities can take advantage of the bailout bill’s sigzficant tax advantages only by installing meters and T&D systems that meet the law’s definition of “smart” equipment. In the case of meters, the statute says they must be capable of:

• Recording interval data at least 24 times a day;
• Communicating with suppliers to support dynamic pricing and demand response;
• Providing data to support electronic energy management capabilities; and
• Allowing net metering.

Similar to earlier policies, the Section 306 language doesn’t require utilities to change their services or pricing structures; it only says meters must possess the defined features to qualify for the tax benefits. The law leaves the retail rate-making authority where it belongs—with state regulators who are responsible for judging whether utilities’ investment plans are prudent, and whether their pricing structures serve their states’ policy goals.

To the degree accelerated depreciation improves the business case for smart metering, utilities will find it increasingly difficult to invest in any other type of meter. And given the rising status of efficiency and conservation in America’s policymaking arena today, smart utility pricing and rate structures seem sure to follow those metering investments.

As District of Columbia Public Service Commissioner Rick Morgan told Fortnightly in this month’s cover story, “There’s no point in having smart meters if you’re still going to have dumb rates.”

 

Corrections

Two errors occurred in Fortnightly’s October 2008 issue. In “Fixing Depreciation Accounting” by John S. Ferguson, the content on pages 18 and 19 were inadvertently switched. And in “The Path Forward,” by Michael T. Burr, four words were omitted. The last sentence on page 46 should read, “However, as long as financial markets continue functioning, most utilities won’t scrap their cap-ex plans—especially for investments required to satisfy regulatory obligations.” We apologize for the confusion these errors caused. Corrected versions of these articles are available at Fortnightly.com.