A Look Forward Into 2009

A Look Forward Into 2009

January 01, 2009

A new president and a new Congress will take office in January determined to play an active role in restoring the economy and to push the United States in the direction of “green” energy. Although the United States prides itself on having a market economy, the government is a very important actor in the energy sector. Changes in government policy can be important pivot points for investors.

Four Washington lobbyists talked in mid-December about what to expect from the incoming Obama administration in a webinar organized by Infocast. The four are Jonathan Weisgall, vice president for legislative and regulatory affairs for MidAmerican Energy Holdings Company, the holding company through which Warren Buffet makes energy investments, Joe Mikrut, the tax legislative counsel for the US Treasury Department during the Clinton administration and now a partner with Capitol Tax Partners, Richard Glick, senior policy adviser to the US Secretary of Energy during the Clinton administration and now director for government affairs for Iberdrola Renewables, and Tony Kavanagh, vice president for governmental affairs for the American Electric Power Company, a large midwestern utility. The moderator is Keith Martin with Chadbourne in Washington.

MR. MARTIN: Jon Weisgall, most power industry lobbyists expect three major bills from the next Congress: an economic stimulus bill in January to get the economy moving again, an energy bill sometime later in 2009 and then legislation to control US carbon emissions. What do you think will be the timing?

MR. WEISGALL: Congress will return on January 6. There is some talk of getting the stimulus bill done so that President Obama can sign it on or soon after he takes office on January 20. The Democrats can push the stimulus bill through the House quickly, but I just don’t think it can move that quickly through the Senate. My guess is we will see the stimulus bill enacted sometime between January 20 and mid-February when Congress breaks for the President’s Day recess.

The energy bill will be more policy oriented and tackle such things as a national renewable portfolio standard and transmission reform as well as other policy issues. I don’t see it clearing Congress until the summer.

Climate change is anybody’s bet. The absolute earliest it could get through Congress is next fall. Most likely, the debate will start then with the bill making it to the president sometime in 2010.

MR. MARTIN: Tony Kavanagh, does that timetable sound right to you?

MR. KAVANAGH: It does.

MR. MARTIN: Rich Glick, do you agree?

MR. GLICK: Generally, but I would move up the timing for the energy bill. There is some talk on Capitol Hill of starting to move the energy bill soon after the stimulus passes. The energy committees in the House and Senate may hold hearings and even mark up the bill by March. I think we might see an energy bill completed by the summer, but the initial legislative work might actually begin in the late winter or early spring.

Economic Stimulus

MR. MARTIN: Joe Mikrut, if Congress returns for work on January 6, what is the earliest we will get a look at the contents of the stimulus bill?

MR. MIKRUT: The Senate Finance Committee is considering marking up a bill as early as January 8. If that happens, then the committee chairman would probably have to distribute an outline of the bill, called a “chairman’s mark,” by January 7 at the latest.

MR. MARTIN: Rich Glick, the stimulus bill is expected to include one or more proposals to help revive the tax equity market. Renewable energy projects in the United States rely on tax equity for a large share of their financing. The tax equity market is not as frozen perhaps as the debt market, but it is not much better off. What do you see happening in the stimulus bill on that subject?

MR. GLICK: This is a significant issue for the renewable energy industry. I can tell you from the standpoint of the wind industry alone, the problems associated with the tax equity market have the potential to reduce US wind energy capacity installations in 2009 by about 50% compared to 2008. That is a very big deal.

Renewable energy projects in the US are subsidized through the tax code. Most project developers cannot use the tax subsidies themselves because they don’t have enough taxable income. We are hoping to persuade Congress to take some action that will make it easier to convert the tax subsidies into cash, at least in the short term if not also in the long term.

The industry has been urging Congress to make any tax subsidies that the owner of a project cannot use refundable in cash by the US Treasury. It also wants the option to carry back unused tax benefits up to 10 years and get refunds of taxes paid during that period.

MR. MARTIN: Is the focus just on relief for wind farms, or also solar, geothermal and biomass projects?

MR. GLICK: Wind, geothermal and biomass projects benefit from production tax credits that are tied to electricity output. Solar projects benefit from investment tax credits that are tied to the project cost. The lobbying has focused on trying to make it easier to get value for both types of tax credits as well as the tax depreciation for which these projects benefit. Depreciation amounts to more than half the tax incentive for some projects.

MR. MARTIN: Joe Mikrut, you have been on Capitol Hill working this issue for the American Wind Energy Association. The goal has been to try to secure relief for projects placed in service during a two-year period, right? If so, which two years?

MR. MIKRUT: Tax equity started drying up in 2008. The problem of too little tax equity is expected to stretch into 2009. The wind industry is looking for relief for projects placed in service at least during those two years.

MR. MARTIN: Is there any risk that the two years might be 2009 and 2010 or just 2009, with the result that 2008 is not included?

MR. MIKRUT: Yes. The effective date is usually the last thing the staff decides with respect to any proposal. There is a very good case to be made that certain projects that were put in service in 2008 need help. However, the tendency is usually to limit relief prospectively to future projects.

MR. MARTIN: Just to be clear, a wind farm qualifies for 10 years of production tax credits. When you say you want tax credits on 2008 and 2009 projects to be refundable, you are talking about refunds for the full 10 years of tax credits. Is the wind industry asking for a single refund at inception for the full 10 years of credits or annual refunds over the 10 years?

MR. MIKRUT: Those details have not been worked out yet. There are at least three broad ways to try to help the tax equity markets. One is refundability, which we have just been discussing. Another is tradability, which would allow companies that cannot use tax credits to transfer them to other companies that can use them. The last option that has been on the table is to expand the class of potential tax equity investors by allowing individuals to invest. Individuals would need relief from passive loss and at-risk rules that make it hard currently for them to invest, and they would need a statutory change to allow them to invest through publicly-traded partnerships.

The staff will have to decide first on the general approach and then it can start filling in details. The industry has lined up largely behind refundability.

MR. MARTIN: The other two options are still in play?

MR. MIKRUT: Yes. The other two remain in play because, while it is fairly easy to make a case for refunding tax credits and the proposal is fairly easy to draft, the other significant tax benefit for renewable energy projects is depreciation. Depreciation may be worth anywhere from 40% to 60% of the tax benefits for a project. The problem is that it may be harder to persuade Congress to make depreciation refundable. There is no precedent for refunding depreciation, and many other industry groups would want the same benefit.

If, for whatever reason, Congress balks at refunding depreciation but is fine with refunding tax credits, then we have to think of some other option for the depreciation component. Depreciation and the credits go hand-in-hand. You really need both to put these projects back in the position they were in before the tax equity markets collapsed.

MR. MARTIN: Someone in the audience asked whether municipal utilities and tax-exempt entities would also be able to apply for refunds of unused tax credits?

MR. MIKRUT: That’s something for Congress to decide. Tax-exempt entities could not benefit from the tax subsidies directly before the tax equity market collapsed because they do not pay any taxes. You could make a case that whatever relief Congress grants should apply across the board, but you would have to coordinate it with some of the other benefits that are available today only to municipal utilities and other tax-exempt entities. They have the ability to use tax-exempt financing and to issue clean renewable energy bonds that do not require the issuer to pay interest, but that give the lenders federal tax credits instead. It would be unusual for Congress to provide relief while also leaving these other benefits in place.

MR. MARTIN: Jon Weisgall, renewable energy companies have also been pressing Congress to extend the deadline to place wind, geothermal and biomass projects in service to qualify for production tax credits by another five years through 2014. Is an extension likely to be included in the stimulus bill and, if so, how long?

MR. WEISGALL: There has been talk about an extension of anywhere from three to five years. It would make sense to address it in the stimulus because an extension would provide the certainty developers need to order more parts and turbines, and it would be consistent with the fundamental goal of getting people back to work and getting the economy going again.

MR. MARTIN: Rich Glick, what are you hearing about an extension?

MR. GLICK: I think an extension is likely given the emphasis the Obama administration wants to put in the stimulus bill on creating green jobs. However, I would bet on two to three years rather than five. The American Wind Energy Association just had an independent consultant study how many new jobs would be created with an extension of five years. The answer was another 90,000 jobs in the wind industry alone. If you add that to the new jobs that would be created in other segments of the renewable energy industry, it could make a significant dent toward the 2.5 million jobs that President-elect Obama wants the stimulus to create.

MR. MARTIN: Biomass companies have been asking for parity. Wind and geothermal companies can claim production tax credits of 2.1¢ a kilowatt hour currently on the electricity they produce. Biomass projects qualify for tax credits of only 1¢ a kilowatt hour. Do you see a move to increase the credits on biomass projects?

MR. GLICK: It has certainly been under discussion. What has held it back in the past is the cost to the US Treasury. They are talking about a stimulus on the order of $600 billion to $1 trillion. Certainly, if there has ever been a time to try to reach parity for biomass and some other technologies that qualify for reduced tax credits, this is it. The cost of these proposals would be insignificant when measured against the size of the overall stimulus.

MR. MARTIN: Tony Kavanagh, focusing still on the stimulus, Obama spoke repeatedly on the campaign trail about the need to upgrade the nation’s electricity grid. Do you see anything happening on transmission in the stimulus bill or is that for the energy bill later in the year?

MR. KAVANAGH: There has been discussion about tackling transmission in both the stimulus and the energy bill, but we have been hearing more lately that it is a complicated subject that may be better addressed later in the energy bill.

Rich Glick just mentioned that the stimulus could reach $600 billion to $1 trillion.

The bill will have two parts: it will have investments and it will have a tax piece. In the investment section, they are talking about a green energy bank that would make low-interest loans for energy projects, both renewables and I think also transmission, and they are considering including broadband as part of transmission.

The US transmission grid is badly in need of updating. Bill Richardson called our transmission grid “third world” when he was Secretary of Energy in the Clinton administration. I wouldn’t agree with that description, but it does speak to the fact that we have a long way to go to improve the electricity grid in this country. If nothing else, if we want to rely more heavily on renewables, we need more transmission capacity since renewable energy projects tend to be far away from population centers.

MR. MARTIN: So transmission is probably a subject for the energy bill and not the stimulus bill.

MR. KAVANAGH: If I had my way, it would be in the first one and it would be done quickly, but I think it is complicated. It will probably be in the energy bill.

MR. WEISGALL: I think it is still possible we will get something in the stimulus on transmission even though the broader subject is addressed in the energy bill. One goal of the stimulus bill is to spend money on shovel-ready projects, but projects that are considered shovel ready might take as long as 36 months to get underway.

When people talk about doing something about transmission, they are talking about a series of issues.

One is siting reform: making it easier to get permission to build new transmission lines. Obviously that’s policy. It requires debate. It will probably have to wait for the energy committees to hold hearings. Rich Glick said earlier he thinks the hearings will get underway as early as March. It is not an idea for putting money to work immediately on shovel-ready projects.

A second part of the transmission debate is cost recovery or incentives for more investment. How should the cost of new transmission lines be paid — by utilities and their shareholders, by ratepayers or by developers who need the grid to expand to be able to get their electricity to market? That’s policy as well. It will probably have to wait for the energy bill, but there is a push to address it in the stimulus.

Then there is a third area that lends itself more readily to the stimulus, and that is federal utilities like the Bonneville Power Administration, Western Area Power Administration and Tennessee Valley Authority have shovel-ready upgrades that they can make to their grids.

MR. GLICK: Both the Senate majority leader, Harry Reid, and the House speaker, Nancy Pelosi, have been calling for additional funding for the federal utilities as part of the stimulus to build extra transmission lines and increase the capacity of existing lines. This sort of construction can be done quickly. It gets steel in the ground and adds jobs, especially in the western part of the country where Reid and Pelosi are from.

MR. MARTIN: When the federal government talks about spending on shovel-ready projects, it is talking about giving money to federal utilities and to state and local governments and not to private utilities, like American Electric Power and MidAmerican, right?

MR. KAVANAGH: Partly correct, but there has also been discussion about the federal government making low-interest loans to power companies to get projects underway that can’t be financed in the frozen credit markets.

The bigger problem is regulatory barriers to siting new transmission lines. American Electric Power has a very large 765-kilovolt transmission system. Our last addition was completed in 2006, but it took us 16 years to build. That was 14 years to get the permits and two years to get the project up and electrified. We need regulatory reform before we can even get to the point of needing financing.

MR. WEISGALL: Adding to what Tony said about low-interest loans, you could have the federal government provide funding as a backstop to cover any shortfall in revenue due to unsubscribed capacity on a new transmission line. Obviously, you would need a process. You would need a finding of need by an agency like the Federal Energy Regulatory Commission, but I could see that as a possibility.

I think the vast majority of the dollars in the stimulus will go to federal entities or states. I think we will see most of it go to existing programs. It is hard to establish new programs in the time period Congress has to work on the stimulus. For example, we will see additional spending on state weatherization programs — which already exist — or possibly funding for programs that were authorized in the Energy Policy Act in 2005 but that have yet to be funded.

We may also see additional funding for research and development for such things as carbon capture and sequestration, battery storage and plug-in electric hybrids. Most of it would go to the national laboratories.

MR. MARTIN: Does any of you foresee any special action in the stimulus bill to jump start the credit markets and, if so, what?

MR. KAVANAGH: There has been talk about helping individuals refinance existing adjustable-rate mortgages, perhaps at a 4 1/4% rate. The objective is to keep as many people in their homes as possible.

Turning to businesses, certainly some businesses would be better served if they had the ability to borrow or sell their commercial paper at the Fed window. The federal government already allows certain types of companies to do that. It could expand the class of eligible entities. That would help unfreeze credit.

MR. MARTIN: Let me ask another audience question quickly and get a brief answer, and then let’s move to the energy bill. Several people asked whether you see any special effort to push energy efficiency projects in the stimulus, beyond just funding state weatherization programs.

MR. WEISGALL: Yes. Everyone knows that energy efficiency is the lowest hanging fruit. Look at insulation. Look at what can be done in retrofits. I don’t think they are looking particularly at using the stimulus on energy efficiency for new housing or new buildings, but in the retrofit market, there is a lot to do, and it is good policy to address. There are benefits in terms of reducing greenhouse gas emissions. Retrofits also produce jobs quickly.

MR. MARTIN: What form might it take?

MR. WEISGALL: It goes back to what we were saying earlier. Can you funnel money to the private sector? That’s going to be hard. But I can certainly see full funding for a number of state programs and state energy efficiency offices. Many states run energy efficiency programs through their public utility commissions. Most of the programs are funded currently through special charges on utility bills, but some rely on state appropriations. I could see a whole panoply of energy efficiency programs move forward and contribute quickly to new job growth.

MR. MIKRUT: Although I think it is hard to see the spending side of the stimulus bill being used to help private companies directly, there is more room to help on the tax side of the bill. For example, Congress could extend or amplify two tax provisions that were just enacted as part of the economic bailout bill in early October.

One is a tax deduction for energy efficiency improvements to commercial office buildings. Developers making such improvements can deduct up to $1.80 per square foot of the cost immediately. Congress extended the deduction in October for another five years. It could increase the cap, at least for a short period of time, to stimulate that market. When the deduction was originally proposed, the capÊwas $2.25 a square foot, but the cap was reduced for revenue reasons.

Another place the stimulus might help is with so-called smart meters or the smart grid. The bailout bill last October cut the depreciable life for such property to 10 years. You could go farther and provide an even shorter depreciable life, especially for meters, of perhaps five years.

Energy Bill

MR. MARTIN: So, Congress will be hard at work in January on an economic stimulus bill to send to the president sometime between January 20 and the President’s Day recess in mid-February. If we believe Rich Glick’s timetable, the energy committees might be at work as soon as March on an energy bill that could be on the President’s desk sometime in the summer.

We had a prep call before this session. The main items we thought would be in the energy bill are a national renewable portfolio standard — I’ll come back to that — some action on transmission to make it easier to build transmission lines, possibly a clean energy bank and possibly some action to improve an existing loan guarantee program run through the US Department of Energy.

Let’s talk about the renewable portfolio standard first. Rich Glick, what is a renewable portfolio standard? What targets do you see Congress setting? Is it a foregone conclusion that there will be a national standard by this summer?

MR. GLICK: A renewable portfolio standard is a law requiring utilities to supply a certain percentage of their electricity from renewable sources. Such programs are often administered by requiring utilities to turn in renewable energy credits at the end of each year representing the quantity of renewable electricity that they are required to supply. They can earn credits by generating the electricity themselves or they can buy credits from independent generators who use wind, sunlight or other forms of renewable energy. There are mandatory renewable portfolio standards already in 27 states and the District of Columbia.

Some of the state programs set more aggressive targets than Congress is likely to adopt in any national standard. Some are less aggressive and have a number of loopholes. There is a general belief among renewable energy advocates that a national standard is a good idea, not to replace state standards, but as a way of establishing a national floor. States would still be allowed to set more ambitious targets. A national standard would also create a national market in which to trade renewable energy credits.

President-elect Obama campaigned for a national RPS of 10% renewable energy by 2012 and 25% by 2025.

The US House of Representatives voted for a national RPS in a close vote in 2007 that would have set a target of 15% by 2020. The proposal failed in the Senate. The backers were unable to muster the 60 votes required in the Senate to break a Republican filibuster.

Some observers believe that an RPS stands a better chance of passing the Senate the next time around because the Democrats will hold more seats in the Senate and some of the most vocal opponents of the national RPS were defeated in the last election.

However, it is not as clear that there will be 60 votes in the Senate for the Obama target of 25% by 2025. We are expecting the final target to be somewhere between 15% and the 25% proposed by Obama. My guess is it will be in the 18% to 20% range.

MR. MARTIN: Let me break this down. Is there anyone on this call who thinks a national RPS will not be enacted in 2009?

MR. KAVANAGH: I think there is an opportunity to get a national RPS, but it will be hard for the same reason that the proposal lost in the Senate in 2007. There are regional issues.  Some states — for example in the southeast — will have a harder time reaching any target the federal government sets because they are not as good places to build wind farms. They lack the wind you have out west, in the Great Plains and in Texas. The recession will also make this more difficult. Utilities and their ratepayers will have a harder time bearing the additional costs given the current state of the economy.

Look for the definition of what qualifies as renewable energy to be expanded. For example, utilities might be given more credit in the early years of the program for conservation measures that reduce electricity usage.

MR. WEISGALL: The debate will play out on two giant tectonic plates. One is the economic crisis. The other is the commitment both by President-elect Obama and a much more Democratic Congress to enact what I’ll call broadly climate change-type legislation. Whether it is transmission for green energy, whether it is an RPS, whether it is a longer production tax credit, all of this plays into the climate change debate. Tony is absolutely right, the ground is unsteady. The plates have the potential to crash into one another.

There is one other point. The fact that a majority of states already have their own RPS programs should make this an easier lift politically in the Senate where each of the 50 states has two votes. I agree with Rich Glick that whatever Congress does will probably be a national floor and not a program that preempts the states. A tradable nationwide renewable energy credit would give Wall Street something new to play with.

MR. MARTIN: Jon Weisgall, some projects have made forward sales of renewable energy credits at the state level. Is it your view that we will end up with both state RECs and national RECs? A utility may need both? A national RPS would not alter the value of state credits that may have been sold forward?

MR. WEISGALL: Absolutely correct. I met with a senior staffer on the Senate side about this issue yesterday. I asked about the potential impact on state credits. He said we are going to create federal RECs and there will not be an attempt in any way to interfere with existing state programs.

MR. MARTIN: Rich Glick, do you see any national RPS having a solar set aside? Will it require that a fraction of the percentage come from solar?

MR. GLICK: I don’t. And I want to preface it by saying the Solar Energy Industries Association is working hard for a solar set-aside. It wants to require that 30% of all the renewable energy credits must come from solar energy. The idea does not appear to be gaining much traction yet on Capitol Hill. Solar energy has not yet reached cost parity with other forms of electricity. The solar industry is concerned that any RPS that fails to provide a preference for solar in the early years will end up not providing much of a boost for solar. The industry expects to become competitive with other renewable technologies within five to 10 years. However, these estimates turn in part on more widespread use of solar so that the industry can benefit from economies of scale on the manufacturing end of the supply chain.

The bill that passed the House, but failed in the Senate, in 2007 would have awarded extra renewable energy credits to anyone generating electricity from a distributed generation facility of one megawatt or less in size. This was aimed at small solar installations. Such generators would have been awarded triple credits. The US Energy Information Administration said this triple credit mechanism would have led to solar receiving 20% of all renewable energy credits.

MR. MARTIN: Let’s move to transmission. One of the proposals that has been batted around, but may not be able to get through the Senate, is to give the federal government the same power of eminent domain to push through new transmission lines that it has currently to push through gas pipelines. Tony Kavanagh, do you see any possibility that such a proposal can make it through the Senate?

MR. KAVANAGH: Yes, I do. I participated in a meeting with a member of Congress last week, and we went over this same point. I reminded this member that we both participated in hearings before the House energy committee after the blackout in 2003. Partly because of the blackout, Congress established an office in the Department of Energy in 2005 to identify transmission corridors of national significance and it gave the federal government backup authority to push through needed transmission upgrades. This has not led to much tangible progress. No one wants to sit through another blackout hearing.

MR. MARTIN: Jon Weisgall, do you agree there are 60 votes in the Senate for federal eminent domain power?

MR. WEISGALL: I do not. You are going to have 50 state public utility commissions and the National Association of Regulatory Utility Commissioners saying they don’t want to give up power. It is a turf battle. There may be many state commissions that would be delighted not to have to deal with these siting issues, but there will be significant pushback. I don’t see 60 votes for it.

I do see a possible compromise where the Federal Energy Regulatory Commission might make a finding of need, but then leave the siting with the states. I can also see a move to federalize or at least create a one-stop federal shop for that part of transmission siting that goes across federal lands. Congress tried to do that in 2005 and it made the Department of Energy the lead agency, but DOE became little more than a paper pusher. The Bureau of Land Management, the US Forest Service and Fish and Wildlife all still do their own environment impact statements.

I think the idea of moving federal siting to the Federal Energy Regulatory Commission is gaining traction.

However, Tony Kavanagh is absolutely correct about a larger point. The fact of the matter is you cannot love renewables and hate transmission. Transmission is emerging as probably the biggest impediment to renewable energy development in the long term. He is absolutely right that we need a national policy. The problem is preempting the states on transmission siting is a very heavy and ambitious lift.

MR. GLICK: I think both Jon Weisgall and Tony Kavanagh are right. There is a question whether there are enough votes in the Senate, but there will certainly be an effort to enact some sort of federal siting mechanism.

Even more important is the issue of cost allocation. There is no uniform national policy about who should pay the cost of upgrades to the transmission grid. Sometimes the generator that causes the upgrade to be built has to pay a portion of the cost. Sometimes the utility building the line has to pay the whole cost. Adding additional transmission capacity can get pretty expensive if the costs cannot be spread over a large pool of electricity consumers.

Thus, there is talk about tackling not only transmission siting, but also establishing some sort of mechanism that would allow the cost to be spread over an entire region, especially for new transmission lines and grid improvements that produce some sort of public benefit, like bringing a lot of renewable energy to market. Cost allocation may be an even bigger barrier to new construction at the moment than the difficulties with siting.

MR. MARTIN: Tony Kavanagh, do you see Congress wading into this question of who pays for the upgrades?

MR. KAVANAGH: I think Congress has no choice. There are also the related issues of financing and regulatory lag. If you are going to get the lines built as quickly as we believe is necessary to reach the goals the new administration wants to set for renewable energy, then cost recovery will have to be rapid. Congress will have to decide how costs will be allocated and make sure that utilities that have to bear the costs in the first instance can recover them quickly.

MR. MARTIN: Rich Glick, Jeff Bingaman, the chairman of the Senate energy committee, introduced a bill to create a clean energy bank as a standalone agency that would make loans and loan guarantees to support clean energy. Do you see that going anywhere as part of the energy bill?

MR. GLICK: It could even be part of the stimulus bill in January, but I think there is a fairly good chance it will get into either the stimulus or the energy bill.

On a related subject, almost everyone knows that Congress created a federal loan guarantee program for energy projects in 2005 and directed the Department