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US Policy Outlook For Renewable Energy | Norton Rose Fulbrigh
electricity in the United States be generated using renewable energy and take other actions that affect the economics of windpower in the United States. The panelists are Rob Gramlich, senior vice president of public policy for the American Wind Energy Association, Greg Wetstone, vice president for governmental affairs for Terra-Gen Power, and Jon Chase, vice president of government relations at Vestas Americas. The moderator is Keith Martin from the Chadbourne Washington office.
Budget Battles
MR. MARTIN: Rob Gramlich, does the fact that Congress reached a budget deal in April to avert a government shutdown, but only after a tremendous effort to find just $38.5 billion in spending cuts, bode well or ill for the wind industry?
MR. GRAMLICH: The difficulty working out a deal is a sign of how terrible an environment it is to get anything done in Congress. Luckily, the wind industry does not have anything it is waiting on Congress to do in the near term. We are spending the time meeting with members and staff trying to lay a foundation for things we might need in the future.
MR. MARTIN: The shutdown debate was merely a skirmish compared to what will follow when the debt ceiling needs to be increased in May and compared to the 2012 budget debate this summer. For what should wind companies be watching when we get into the larger debt limit and budget debates?
MR. GRAMLICH: I would keep an eye on a couple things.
First, watch for signals about the prospects for an extension of production tax credits beyond 2012 when the credits expire for wind projects. Initial signs are good from the House Republicans with whom we have spoken.
We should be able to keep ourselves out of the line of fire in most of the budget battles this year and next year. However, we have a lot riding on the general direction the budget reduction effort takes. If Congress ends up looking to reduce the deficit not only by cutting spending, but also by increasing revenue, then tax credits could be in trouble. The wind industry is fortunate that support for wind farms is through the tax code rather than direct spending, because direct spending will be the first to go. Even though taxes affect the deficit as much as spending, Republicans have been more interested in continuing to reduce revenue for the government than in increasing it to cover
spending.
The other thing to watch is the general tax reform debate. Both Republicans and Democrats have proposed stripping many tax credits and deductions from the tax code in order to reduce corporate tax rates. The discussions are still at an abstract stage. There is not nearly enough activity currently to see tax reform getting done in this Congress. It looks like something for the next Congress in 2013 to 2014. Even the mortgage interest deduction on which middle class voters rely is not safe if tax reform really gains traction.
MR. MARTIN: So the message is duck — stay out of the line of fire of the budget cutters this spring and summer.
Sticking with tax reform, Republicans are calling for a reduction in the corporate tax rate from 35% to 25%. A study by the Bush Treasury Department suggested that the only way that you can get there is by stripping every tax incentive out of the tax code, including accelerated depreciation, and that would still only get you to a 28% rate. Jon Chase, do you agree with Rob Gramlich that corporate tax reform is unlikely before the November 2012 elections?
MR. CHASE: I agree with Rob. There will be talk about corporate tax reform, but no action until after the next elections. I think we still have a pretty strong case for keeping production tax credits; they promote fuel diversity and clean energy. However, everything will be on the table once we get into that debate.
MR. WETSTONE: That’s three votes. I agree it is an issue for the next Congress. Don’t underestimate the difficulty. For example, various incentives for the oil and gas industry would have to be changed to pay for a pretty substantial chunk of the lowering of the corporate tax rate. Those provisions are very tough to change. Democrats tried in the last Congress when they had more votes than they do now, and they got nowhere. It is hard to see how oil and gas incentives can remain in the tax code without leaving incentives for renewable energy.
MR. MARTIN: What happens to people who already made investments? They are expecting 10 years of production tax credits, or perhaps they are in the process of investing in a deal. The tax law changes. Are they out of luck?
MR. CHASE: Congress usually provides transition rules that let companies that have already committed to investments when the law changes see them through. The investment tax credit was repealed as part of tax reform in 1986. Companies that had signed binding contracts to build projects before the House Ways and Means Committee unveiled its tax reform package were grandfathered. They were given another four years to complete their investments and still claim tax credits.
MR. MARTIN: Let me just finish on the budget with this question. Congressman Paul Ryan, the Republican budget committee chairman in the House, unveiled a budget blueprint this week that would cut $6.2 trillion over the next 10 years. The amount is staggering compared to the $38.5 billion on which President Obama and House Speaker John Boehner agreed to avert a government shutdown. Rob Gramlich, does the Ryan budget have legs, and is there anything in the blueprint that caught your eye?
MR. GRAMLICH: The Ryan proposal is a serious proposal. That said, whether he stretched too far and will be able to bring a lot of people with him is unclear. The proposal has set up a partisan fight. He did not reduce defense spending. He wants to cut taxes further. He went after spending on Medicare and Social Security for the elderly. There is no detail at all in the proposal about taxes, other than that he wants further tax cuts. The details will be left to the tax-writing committees to figure out.
MR. MARTIN: Does it have legs, Greg Wetstone?
MR. WETSTONE: I think it becomes a focal point for debate, but it is not going to be enacted. Unfortunately, like a lot of what we are discussing, most of this is basically framing the debate for the next elections in November 2012.
Treasury Cash Grants
MR. MARTIN: Jon Chase, will the Treasury cash grant
program be extended again by Congress?
MR. CHASE: Ha, I get the easy one. [Laughter] It will be difficult. We had a heck of a fight trying to get it extended last December 17 for another year. Those of us who are in Washington know how close a call we had. There was a four-day period leading up to December 17 when it could have gone either way. The ideological battle lines make it harder to see being extended again in the current Congress. Republicans have more votes in the current Congress. They see the cash grant as a stimulus program. They voted en masse against the stimulus when it passed originally and are not keen to see any parts of it extended.
MR. WETSTONE: It would be very tough to get another extension through the House. The industry is looking hard at other ways like a renewable energy version of the master limited partnership to deal with the problem of scarcity in the tax equity market.
MR. MARTIN: We will come back to renewable energy partnerships. Rob Gramlich, Senator Schumer and others were strong critics last year about stimulus dollars going to support US projects that use Chinese-made equipment. The US has a case pending against China before the World Trade Organization hoping to knock out domestic Chinese subsidies for Chinese manufacturers. Has the anti-China rhetoric subsided on Capitol Hill?
MR. GRAMLICH: It remains a sensitive issue in Congress. The wind industry was dragged into a larger debate. A majority of turbines used in US wind farms were made overseas. That has been changing. We now have a large domestic turbine manufacturing capacity, and it is growing rapidly. We had a 12-fold increase in domestic manufacturing. We have over 400 manufacturing facilities around the country. Perceptions are still hard to change. During the last campaign cycle, the issue of US wind farms using foreign-made equipment was still coming up because it was a great talking point. There were some Republicans who picked it up toward the end of the last campaign, and if you look at the Republican National Committee website today, there is still some of that rhetoric. However, we have a lot of people in both political parties who understand how many jobs the wind industry has created in this country.
I think eventually, we will be fine. We have had a constructive engagement with the steelworkers’ union, Senator Schumer and some of the others who were concerned initially about the issue.
MR. MARTIN: Jon Chase, what is your sense of where this issue stands as the manufacturer on the panel?
MR. CHASE: We think it is still a live issue. If we could develop a longer-term energy policy in this country that promotes renewable energy, the manufacturing base would come. We work every day on increasing our domestic supply chain, and we feel confident that we would meet any domestic content requirement, but we do not think there should be such a requirement because it inhibits trade and causes markets to stagnate. A trade war helps no one.
PTC Extension
MR. MARTIN: All three of you expressed some optimism that production tax credits might be extended. Rob Gramlich, when do you see that happening if it does?
MR. GRAMLICH: The timing is unclear. There is no bill moving currently through Congress that might serve as a vehicle for an extension. Congress has a tendency to wait until the last moment. We will work as hard as we can to get it sooner than the end of next year.
MR. MARTIN: What are you hearing from people on Capitol Hill, particularly Republicans, about the chances of an extension?
MR. GRAMLICH: The House Republican leadership and the leaders of the House Ways and Means have been very understanding and positive, and they understand the need for predictability and stability for business planning. A lot of new House Republicans who were elected last November have business backgrounds. They were not state legislators. They also understand the need for predictability. They have been very receptive. Again, our mission this year is relationship building and making sure they understand the need to provide more certainty to the market, and I think we are in good shape in that regard. That is just the first step. There are more steps in the legislative process, but I think we are looking good in terms of step 1.
MR. MARTIN: So we’re still in the dating phase; no marriage yet.
MR. CHASE: The timing of an extension turns on how the tax process moves forward. Congress has tended to fold everything into a single omnibus tax bill late in the year. That is usually our only vehicle. I have worked on nine of them, and none of them has passed until close to the deadline, if not after.
MR. WETSTONE: I agree with Rob and Jon. The only thing I would add is it is not a great time to be asking for anything from Congress given the singular focus on the budget deficit. Maybe it is just as well that we don’t need this until 2012. I think that is when we will see action. I am optimistic that we will get there, but it will be a bumpy road.
MR. CHASE: The one thing that could give us a shot at earlier action is if there is an energy bill, perhaps driven by voter concern about escalating gasoline prices. Members of Congress go back to their districts and do town halls, and they keep hearing about gas prices going up. Any energy bill would have a tax component. If action on energy were certain, it would have happened earlier, but it is the one thing that might provide us an earlier vehicle for an extension.
MR. MARTIN: The Onion, a satirical newspaper, has a broadcast service. A reporter went up to Capitol Hill a few months ago and interviewed old timers who remember how to pass a bill. [Laughter] It has been so long since anything has been done by Congress that people have forgotten the procedure.
Carbon
MR. MARTIN: The Senate voted this week on four amendments to block the Environmental Protection Agency from regulating carbon. Each of the amendments was defeated. Where do you see this going? Will the Environmental Protection Agency be barred from regulating carbon? Do you see any US effort in the next two years to control carbon?
MR. WETSTONE: You have a Clean Air Act in place and EPA regulations in place to enforce it, and you have an effort in Congress to limit the EPA role. In this case, Congressional inaction leaves the status quo, which means EPA regulation of carbon. Attention is now shifting to the courts.
I can certainly see the possibility of delay or a limit on EPA’s authority to regulate greenhouse gases as part of a deal on a broader energy bill, but I think we saw with the votes this week in the Senate that there is not enough of a consensus to get anything all the way through Congress. Remember, too, that the President would need to sign whatever passes Congress.
Therefore, absent a somewhat surprising change — I don’t want to rule out completely the possibility that the President might cut a deal in the debt limit or budget battles — I think we will continue on the path we are on. We do not have a national energy policy, but we do have this regulatory effort that is focused on some of the larger sources of carbon emissions, and that is now proceeding through the courts.
MR. MARTIN: Jon Chase, Obama has defensive power; he does not have any offensive power. He can block things, but he cannot pass his program. How does that play out in carbon?
MR. CHASE: EPA is playing a lot of defense on Capitol Hill, and I think it will continue to have to do that. There is gridlock in the Senate. The group that wants to limit EPA action needs 60 votes. It has more than 50, but not 60. I do not see action on carbon in the current Congress.
MR. MARTIN: As Greg Wetstone said, that allows EPA to start enforcing its greenhouse gas regulations.
MR. CHASE: It does.
Clean Energy Standard
MR. MARTIN: Rob Gramlich, Obama wants a clean energy standard that would require 80% electricity be generated with clean energy by 2035. Clean energy includes natural gas. What are the odds that this Congress will enact such a standard?
MR. GRAMLICH: We are pleased to see that all of the push to date from the President has been about the need for predictability in the market. We don’t know where the clean energy standard will go, but we plan to keep focusing on the mantra of a more predictable market, particularly to grow manufacturing and bring more investment in this country. It could lead to a clean energy standard or it could lead to something else like a long-term tax credit. Certainly by the end of this Congress, we will need action on something — at least extension of production tax credits.
MR. MARTIN: Jon Chase, how did the nuclear disaster in Japan affect the odds for a clean energy standard?
MR. CHASE: It was not helpful. Most people think a clean energy standard cannot pass the Senate without promoting nuclear. That is not the only reason why a CES could struggle. We have not seen a lot of momentum for it. Most members of Congress are caught up in the budget debate. All other issues are noise at this point.
MR. MARTIN: Greg Wetstone, is a standard that promotes natural gas something that is attractive to the wind industry and, if so, why?
MR. WETSTONE: Any standard that has wind competing directly against natural gas on a one-for-one basis is not good for wind and not very good energy policy either. The utilities will use gas without any encouragement from Congress. Therefore, it is not clear to me why Congress needs to take action to encourage utilities to do what they would do anyway.
In the last Congress, the President identified offshore oil drilling as a key part of US energy strategy. Then we had the Gulf oil spill. Nuclear energy was something else we were going to promote, and you see where we are today. Life is obviously pretty complicated.
We are going to need a change in the current political dynamic to get a clean energy standard enacted.
MR. MARTIN: Just to be fair on the natural gas part, I think Obama is proposing that only half the credits be given to natural gas compared to wind. A clean energy standard will not get through Congress without a broad enough coalition to support it.
Moving to the next subject, there was a lot of talk last year about a clean energy bank or CEDA. We haven’t heard as much talk this year. However, Senators Kerry and Hutchison have introduced a bill for a national infrastructure bank. Rob Gramlich, is CEDA dead or is the infrastructure bank likely to move?
MR. GRAMLICH: CEDA’s timing has been off. The advocates missed the train on the big spending program that was the Recovery Act, also known as the economic stimulus, and trying to find money for it after that train left the station has been difficult.
Master Limited Partnerships
MR. MARTIN: The renewables trade associations have been lining up behind a proposal for a renewable energy partnership. What is it, and what path do you see forward for it?
MR. GRAMLICH: We have had early discussions, probing other options to use tax credits now that the section 1603 Treasury cash grant program is about to expire. We would like to be able to go to Congress and say, “Look, we’re open to a few different options. Which ones might you be willing to work with us on?”
The idea is to allow renewable energy companies to use the same types of master limited partnerships that are used currently by the oil and gas and low-income housing markets to raise capital. The specific policies that would need to be put in place for renewable energy are a little different, and so we are working on that and trying to gauge interest among the industry and the financial community. We think there is a potentially broad pool of investors around America who would love to be able to invest in renewable energy. It would be nice to find something that would allow the public to take more of an ownership stake in America’s clean energy future.
MR. MARTIN: This is an idea for how to tap individual investors as a source of tax equity. Has there been any discussion about how much capital might be raised in the retail market?
MR. GRAMLICH: Discussion, yes; answers, so far, no. But there are early signs that this would be a worthwhile effort.
MR. MARTIN: Has any of you had any feedback from tax committee staffs on Capitol Hill about the proposal?
MR. CHASE: I think we are still at the stage of deciding how to present any proposal. We have talked about master limited partnerships in the past with tax staffs, and there has been some push back. It was one of the options on the table in late 2008 when people were looking for ideas for dealing with the economic crisis. While the tax staffs have had concerns in the past, the economy today is different. We think opening up the investor pool would be a huge opportunity for the industry. At Vestas, we support the proposal.
MR. MARTIN: Denise Bode said last year at an industry outreach effort in London that things might be harder the next two years to promote renewable energy at the federal level and that maybe we need to shift focus back to the states. There has been some good news at the state level, at least in California, in the last two weeks. Greg Wetstone, tell us what happened and whether you see any other chance for progress in other states.
MR. WETSTONE: The California legislature voted to increase the renewable portfolio standard to 33% by 2020. Governor Brown said he will sign the bill. This will provide some stability and assurance of continued market growth in California. It happened more rapidly than many of us anticipated.
MR. MARTIN: Is there something else you guys are working for in another state that also looks promising?
MR. GRAMLICH: After the election last November, there was concern that some states would reverse direction and roll back their renewable portfolio targets. There have been a few efforts to roll back, we have been able to hold the line for the most part. Not all the state legislatures have concluded their sessions. Remember, they have much shorter sessions than Congress, so it is a six-month push.
MR. MARTIN: Last question. Three years ago, I met with the tax committee staffs in a big meeting in the Joint Tax Committee conference room. I was trying to get a change in the production tax credit statute, and I asked which member on each tax committee staff is carrying the water on production tax credit issues. There is usually one member in each of the House and Senate who takes the lead on a particular issue. The staff members just smiled and said, “Everyone thinks he is an advocate for renewable energy.” Has that changed on Capitol Hill? Would I get a different answer today and, if so, why?
MR. GRAMLICH: I don’t think it has changed. We have a lot of support from both political parties. We used the word “duck” earlier to indicate we want to stay out of the middle of the broader ideological and partisan battles that are the main focus currently on Capitol Hill. If we can duck some of that and stay focused on the thing that matters to us and have good relationships with members on both sides of the aisle, then we should be in pretty good shape.
MR. CHASE: It is a constant effort. We are continually seeking champions. We had a huge turnover in the last Congress. A lot of the districts, including the two in Colorado where we have manufacturing facilities, changed. We have Republicans in those districts now, and it is a new opportunity to gain new friends.
MR. WETSTONE: It is a polarized and partisan world we live in. The President has said he really likes renewables and he wants to reduce some of the oil and gas tax incentives. There are many in Congress who may be 180 degrees on the other side from the President when it comes to oil
and gas, and they may be less positive about renewables. We have work to do. I think the wind industry has done a good job reaching out in a bipartisan way to Congress, but there are new cross currents that are making life more complicated than it used to be.
