Why Tax Credits Make Lousy Renewable Energy Policy

This is part of a series of posts on distributed renewable energy that will be posted to Renewable Energy World. It originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project.

For two years, solar and wind energy producers seeking federal incentives have been able to take cash grants in lieu of tax credits.  The stimulus act program helped keep the renewable energy industry afloat as the credit crunch and economic downturn dried up the market for reselling tax credits to banks and other investors with large tax bills.

The cash grant program is set to sunset at the end of this year, but solar and wind energy advocates are hoping it will be extended, for good reason:

In fact, the tax credits were always an awkward tool, some argue. Rhone Resch, the head of the Solar Energy Industries Association, said that many of the companies doing the installations were not making a profit either, so these tax credits were sold as “tax equity,” a secondary market, at a loss of 30 to 50 cents on the dollar to the seller. [emphasis added]

The tax credits were worth 30% of a project's value, so the transaction costs of reselling the credits meant that renewable energy projects without sufficient internal tax liability were 13 to 21% more expensive than projects that could use the credits themselves.

This is dumb policy.  Ratepayers pay a higher price for renewable energy because incentives filter through the tax code instead of the general fund.

But the cash grant v. tax credit issue is just one symptom of a larger disease affecting American renewable energy policy.  Transaction costs are increasing the cost of renewable energy in nearly every state with a renewable portfolio standard (RPS).

Under most state RPS policies, utilities put out requests for proposal to acquire renewable energy to meet the state mandates.  These solicitations attract thousands of developers who all have to front their project development costs.  But in California, for example, 90% of projects don't make the utilities' shortlist for the solicitation, stranding over $100 million in development costs.

Some of those projects may eventually get online, but most of that money is flushed because the U.S. prefers to let utilities act as gatekeepers to clean energy rather than open the market to any potential producer. It's not the only way.

There's a renewable energy policy that's responsible for 75% of the world's solar and half its wind power.  It has the lowest transaction costs because there's no fiddling with the tax code and no parasitic costs from auctions or solicitations.  Instead, utilities are required to interconnect and take the power from any developed renewable energy project, and to provide a price sufficient to provide a reasonable return on investment (just like the utilities enjoy in rate regulated states).

The policy is funded entirely through the electricity system, so renewable energy doesn't have to compete with other budget priorities.

It's called a feed-in tariff.

The U.S. can extend the cash grant program, but it merely treats a symptom of the disease.  A better policy awaits.

Contact John Farrell at jfarrell@ilsr.org, find more content at energyselfreliantstates.org or follow @johnffarrell on Twitter

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Power Engineering Names Renewable Project of the Year

Best Renewable/Sustainable Projects

Tekeze Hydropower Project

The Tekeze Hydropower project in Ethiopia, located on the Tekeze River, a tributary of the Nile, is the Project of the Year for renewable/sustainable projects. The $350 million project, funded by the government of Ethiopia and owned by Ethiopian Electric Power Corp., adds 40 percent more electric capacity to the country and was the largest public works project in Ethiopia’s history at the time of construction. Due to the lack of natural resources and the cost of imported fuels, power generation in Ethiopia comes primarily from hydroelectric sources.

The Tekeze Hydropower project is the tallest arch dam in Africa at 188 meters. The 300 MW facility includes a double curvature concrete arch dam, a method of design that minimizes the amount of concrete used. It created a reservoir 70 kilometers in length. An underground powerhouse containing four 75 MW Francis Turbines sits 500 meters downstream of the dam and is fed by a 75-meter-high intake structure connected by a 500-meter-long concrete-lined power tunnel. A 230 kV double-circuit transmission line 105 kilometers long was constructed through mountainous terrain to connect to the Ethiopian national grid.

The project’s beginnings date back to 1995 when the Ethiopian Ministry of Water Resources conducted a study identifying the site as one of two preferred dam sites for hydropower development. MWH joined the project in 1998 and made modifications to an existing design for the dam, powerhouse and tunnel system, resulting in cost savings.

A multi-stage impoundment approach was implemented during construction, which allowed the river diversion to be closed in May 2007, nearly two years prior to dam completion. This allowed for more than 3 billion m3 of water to be retained, advancing generation by more than one full year. The value of the water captured via early impoundment was worth approximately $40 million. In addition to power generation, the Tekeze dam enables regulation of river flow, allowing downstream communities year-round access to the water supply.

A 10-year 2000m3/sec flood on Aug. 9, 2006 was an unexpected test for the dam. The dam proved its ability as a gravity structure and no damage was incurred to any of the permanent structures.

Local community infrastructure was improved as a result of the project, including construction of more than 40 kilometers of roads and installation of the first communications links from the area to the outside world. Also as a result of the project, education was improved in the area as the wife of the MWH chief design engineer spearheaded efforts to build a new school near the village of Seboko. The school was financed by contributions from engineers, contractors and staff working on the project, local residents and a supportive local government.

On-the-job training was also provided to locally-hired employees. Ethiopian Electric Power Corp. implemented programs to provide education and training to local workers. Programs included education to combat AIDS, malaria and other safety, health and welfare issues affecting the local community.

Honorable Mentions

Canoe Creek Hydroelectric Project

Canoe Creek Hydro is a 5.5 MW run-of-river hydroelectric facility on Vancouver Island that provides power to a remote community on the island and helping the island become less reliant on mainland power. The facility is owned and operated by the Tla-o-qui-aht First Nation and located in the heart of the Nation’s Tribal Parkland. The Barkley Project Group Ltd., along with Amnis Engineering and Hazelwood Construction One, worked with Vitaulic, a manufacturer of mechanical pipe joining solutions, to develop Canoe Creek. Construction started in May 2009 and ended in May 2010. The plant went into service in June.

Canoe Creek Hydro operates by diverting stream flow into a penstock at a high elevation – up to 84 percent grade – intake. This made construction a challenge, as did the facility’s location in the Pacific Rim Rainforest, where annual precipitation is amongst the heaviest in the world, particularly in the winter months when construction took place.

Constructing the 4-km-long penstock line in these conditions using welding techniques would have proven difficult. Instead of using mechanical welding on the penstock, the companies used mechanical couplings. In the field, the couplings proved advantageous in many ways. For example, couplings could be installed in any weather condition with no special requirements. Couplings also reduced the amount of excavation, bell holing and dewatering that would be common with welding.

Couplings also improved site safety. As the pipe was already on site, Hazelwood grooved and re-coated the pipe prior to sending it up the single-lane logging road for assembly. In addition, the replacement of welding with mechanical joints allowed for a reduction in the number of laborers required on the job site. Canoe Creek also employed local laborers.

Environmental benefits were also gained by replacing welded joints with mechanical joints. Welding one kilometer of straight-run 36-inch pipe produces about 40,338 kg of CO2 emissions using a diesel-powered machine and 9,463 kg of CO2 emissions using an electric-powered machine. Grooving and coupling that same run of pipe produces 62 kg of CO2 emissions. The use of couplings also reduced the amount of x-raying required on site, reducing radiation emission. PM, CO2 and radiation were reduced, as well as electrical energy use.

Biogas facility owned by PurposeEnergy, Inc.

This biogas facility project at the Magic Hat Brewery in South Burlington, Vt. allows the owner, PurposeEnergy Inc., to use organic waste streams and generate biogas. The biogas is then used by the brewery’s steam boilers and/or PurposeEnergy’s cogeneration plant. In mid-2008, Pizzagalli Construction Co. was selected as the design/build partner for this $3.4 million project at New England’s largest craft brewery. This brewery waste recovery system was developed by CEO and founder of Purpose Energy, Eric Fitch.

Underground process piping, stone aggregate piling for the digester, structural excavation and backfill and all of the concrete work began in December 2009. A 1,600 square foot mechanical building was built and a digester tank was installed. The piping process was completed by May 2010 and the facility began operations in June 2010.

PurposeEnergy’s Biphase Orbicular Biodigester was designed for brewery by-products and enables the conversion of high solids content brewery waste into carbon neutral, renewable biogas. This system is also designed to utilize the waste heat from the generator’s exhaust, coolant and engine oil to heat the digester and preheat the water used in the brewing process.

The PurposeEnergy project has brought many benefits to the facility and environment. By diverting the waste stream created during the brewing process, the brewery’s operating costs have been reduced as Magic Hat Brewery no longer needs to pay for waste treatment surcharges, thereby reducing traffic, noise and air pollution that would result from the transportation of the waste. In addition, the use of this technology creates a clean, carbon neutral energy source that decreases the effects of greenhouse gases on the environment.

To read which coal-fired, gas-fired and nuclear projects of the year Power Engineering named, read the full article here.

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