2016 tax policies offer clearer path forward for investors in clean energy sector
In December, the wind and solar industries got the gift they had been hoping for all year long. In exchange for Democrats agreeing to lift the crude oil export ban, Republicans in Congress agreed to long-term extensions and phase-downs of the tax credits that support wind and solar power. Bloomberg New Energy Finance (BNEF) has projected that these extensions will spur $73 billion in new, additional, investment in wind and solar in the United States over the next 5-7 years. Valued at about $25 billion over that time, the credit extensions will drive $38 billion of investment in solar and $35 billion in wind through 2021, according to BNEF.
The timing couldn’t be better. The wind credit had recently expired and the credits for solar power were scheduled to expire at the end of 2016. These credits, along with demand drivers from state renewable energy standards and rapidly falling prices have helped the clean energy sector in the United States grow at a dizzying pace.
Including large-scale hydro, the United States in 2014 got 13 percent of its electricity from renewable sources. And globally, BNEF has just announced that 2015 saw the highest amount of global investment in the sector ever, at almost $328 billion – up four percent from last year and beating the previous record by three percent. A major chunk of this investment is occurring in the United States.
And thanks to the deal mentioned earlier, the clean energy sector is set to expand – and perhaps at an even faster pace – through the end of the decade.
No surprises - federal and state policies play a major role in clean energy R&D and deployment, and changes in those policies can affect the decisions that investors make when looking at various energy sectors. With that in mind, let’s survey what the policy landscape looks like for 2016, with a particular eye towards additional developments in the tax world.
2016 is a presidential election year, meaning that it is unlikely anything of consequence will move through Congress. In addition, the large tax credit extension at the end of 2015 dealt with some of the most heavily lobbied issues, meaning that smaller policy changes don’t have a legislative vehicle this year to which they can “hitch their wagon.”
And that’s too bad, because there are some needed policy changes. In particular, when the Production Tax Credit (PTC) for wind and the Investment Tax Credit (ITC) for solar were extended at the end of the year, all of the other technologies that also received those incentives (geothermal, biomass, advanced hydro, ocean thermal, wave and tidal power, fuel cells, and combined heat and power) were not included. These industries were shocked by what some in Congress are now calling a “drafting error” that was the result of late-night and last minute negotiations. And some, like Senate Minority Leader Harry Reid of Nevada, have promised to attach a “technical fix” to any legislation they can that would give these technologies long-term extensions and phase-downs as well.
This effort faces headwinds, however. The Chairman of the House Ways and Means Committee (which is in charge of writing tax bills in the House) has indicated a reluctance to fix the “drafting error.” And when we look at these technologies – some of them are in much greater need of incentives to make them profitable at this time than wind or solar. Ocean and tidal power shows much promise, but the industry is still in its infancy. Biomass power (which is controversial as a renewable technology) can’t seem to find an economic footing, and geothermal has struggled to expand at the rate of wind and solar.
Another important policy change, championed by a group of Republicans and Democrats, would allow renewable energy projects to structure as Master Limited Partnerships (MLPs). MLPs have the advantage of being able to issue public shares (units) while also avoiding corporate-level taxation – making them attractive to individual investors. The underlying projects (such as pipelines) also offer stable, consistent returns. At a high-level, yieldcos seek to mimic the MLP structure, but have important differences in their structure.
Currently only oil and gas projects can structure themselves as MLPs. Opening up the definition to renewable energy projects would both reduce project finance costs and bring untapped pools of investor capital directly into clean energy projects. Unfortunately, despite its bipartisan appeal, Coons’ MLP Parity Act has been left out of several bills that presented the best opportunity for it. While anything is possible, it’s difficult to see a realistic path forward for this policy change in 2016.
Unmentioned in this article, but looming over everything, are the numerous executive actions that President Obama’s administration has taken on climate change. These actions will affect the oil and gas sector, the electricity sector, coal mining, and transportation. But while they are highly consequential, many of their affects will not be felt in the short term. For example, states do not need to begin complying with the Clean Power Plan until 2022.
Federal tax incentives are some of the biggest drivers of short to medium turn shifts in U.S. clean energy markets, and the end of 2015 saw the federal government finally offer long-term certainty to these sectors about their subsidies. And as most investors know, certainty (even as subsidies are phased down) can be much more powerful than subsidies with an uncertain future.
Bottom line for 2016 – small changes, if any, for federal clean energy incentives – but a clearer path going forward that will allow the clean energy sector the chance to eventually step out on its own.
Ryan Martel is a Senior Manager for the Policy Program at Ceres, where he works with the Investor Network on Climate risk on federal, state, and international climate and clean energy policy.