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Renewables industry cheers production tax credit extensions

It’s Economics 101 that incentives stimulate investment by decreasing risk and improving profitability, so it is no wonder that the passage of two long-awaited bills in fall 2004 sent a charge of optimism through the renewable energy industry.

H.R. 4520 hit most of the renewable technologies, said Karl Gawell, executive director of the Geothermal Energy Association. “All the major groups feel that the No. 1 thing Congress could do for renewable energy was to expand the production tax credit,” he noted.

The other bill was a $140 billion corporate tax bill intended to eliminate the now-12 percent tariffs on U.S. goods exported to Europe. Included in the legislation were tax breaks ranging from extension of the wind and renewable energy production tax credit to a break for utilities forming transmission companies.

U.S. wind development poised for record year
In its quarterly U.S. market report, the American Wind Energy Association predicted that wind energy PTC extension would make 2005 a banner year for new wind power installations.

Many industry participants expect installations to exceed 2,500 MW in the next year as developers move forward with projects that stalled after the expiration of the PTC one year ago. The previous record for new capacity installations in one year was 1,696 MW in 2001.

“We will see what the U.S. industry can do at a full-speed run for the next 14 months,” AWEA Executive Director Randall Swisher stated.

Wind power project developers and wind turbine and component manufacturers are now racing to lock up supply contracts for the coming year.

Swisher went on to note that the continued volatility of natural gas prices makes wind power an increasingly attractive way to diversify a utility's power mix. The combined generation of wind farms already in place and those installed to take advantage of the PTC will save more than 0.5 billion cubic feet of natural gas per day in 2006, he added.

Credit helps geothermal rebound
The expansion of Section 45 of H.R. 4520 to include the first five years of operation for a new geothermal facility is expected to give a similar boost to that industry. “The PTC is the right incentive to bring in new investors,” Gawell declared. “It’s a signal that the Federal government has renewed its support for geothermal development.”

Investors already appear to be responding to the PTC of 1.8¢/kWh (1.5¢/kWh adjusted for inflation). Gawell has received inquiries about developments in Alaska, California, Idaho, Montana, New Mexico, Oregon, Utah and Washington. “Between the need for new power in the West and state renewable portfolio standards, the market is there,” he said. “This is the right time to get the industry back on track.”

When wholesale power prices dropped in the ‘90s, geothermal development languished. The industry has recently showed signs of bouncing back, however, and observers agree the new tax credit should help restore domestic markets. “The U.S. has always been the leader in geothermal technology, but that lead slipped in the last decade,” explained Gawell. “You need funding to stay ahead in research and development.”

The first hurdle was getting geothermal recognized in Sec. 45, Gawell said. “The next goal is to get the credit extended. If it could be sustained over five years, that would give the industry the stability to develop momentum.”

Biodiesel provisions benefit producers, infrastructure
The bill also contains a new tax credit for biodiesel and provisions that target the ethanol industry.

Biodiesel made from virgin oils derived from agricultural products and animal fats is eligible for a $1-per-gallon incentive. Fuel from agricultural products and animal fats get a $.50-per-gallon credit. The biodiesel tax credit will be paid out of the General Fund rather than the Highway Trust Fund.

The Volumetric Ethanol Excise Tax Credit extends the ethanol tax incentive to 2010 and eliminates any impact of the ethanol program on the HTF. By simplifying the user excise tax collection system and remitting the full amount to the HTF, the bill benefits transportation infrastructure.

Modifications to the Small Ethanol Producer Tax Credit give agricultural cooperatives the option of bypassing the complicated Dividend Allocation Rule. Bypassing the rule gives the cooperative membership greater control over the management of its program.

“It was important for Congress to finish work on this bill and they should be commended,” stated Renewable Fuels Association President Bob Dinneen. “This hallmark legislation is key to continuing the rapid expansion of the ethanol and biodiesel industries.”

More incentives sought for consumer-owned utilities
The production tax credit offers a variety of incentives for private industry to invest in renewable energy. The renewable energy production incentive targets tax-exempt entities like municipal utilities and electric cooperatives.

For FY 2005, Congress appropriated $5 million for REPI in the Energy and Water Development Appropriations bill, a $1 million increase over the DOE’s request. That was a positive development given that the program has expired and there were tremendous budgetary restraints on discretionary spending in the FY 2005 appropriations cycle.

Still, REPI funding is far from comparable to the PTC, something that the American Public Power Association would like to see changed. “Private investors have a lot of funding options, but REPI is the only program available to publicly owned utilities,” said APPA Senior Policy Advisor Rebecca Blood.

She added that the 25 percent increase over the administration’s request indicates that Congress recognizes the need for targeted funding to stimulate renewable energy development in the public sector. APPA is urging the 109th Congress to allocate at least $13 million for REPI in the FY 2006 budget. The association will also continue to advocate for REPI’s reauthorization and reform, either as a stand-alone bill or as part of a new energy bill.