Renewable Energy After the US Elections

Renewable energy after the US elections

December 15, 2016

Donald Trump said three things during the campaign about energy: he favors an all-of-the-above energy policy, he wants to bring back 30,000 coal jobs, and he favors moving forward with the Keystone oil pipeline. He offered few other specifics.

Five experts in Washington who follow energy and tax policy closely talked barely 36 hours after the polls closed in November about the potential effects of a Trump presidency on the US renewable energy market. More than 2,800 people registered to listen.

The five are Richard Glick, general counsel on the Democratic side of the Senate Committee on Energy and Natural Resources and, before that, head of the Washington office for Iberdrola (now Avangrid) and a former senior policy adviser to the US Secretary of Energy, Mark Menezes, vice president for federal relations for the Berkshire Hathaway Energy Company and former chief counsel on the Republican side of the House Energy and Commerce Committee, Joe Mikrut, a partner with Capitol Tax Partners, a heavyweight lobbying shop in Washington with former high-level tax policy types, both Republican and Democrat, and a former tax legislative counsel at the US Department of the Treasury, Kathy Weiss, vice president for government affairs with First Solar, and Greg Wetstone, president and CEO of the American Council on Renewable Energy and a former head of government and public affairs for the American Wind Energy Association and former chief counsel for environmental issues on the House Energy and Commerce Committee staff. The moderator is Keith Martin with Chadbourne in Washington.

 

MR. MARTIN: Rich Glick, what effect will the Trump win have on the US renewable energy market?

MR. GLICK: I don’t think it will have much of an effect in the short term. The significant growth that has occurred in renewable energy over the last several years is due primarily to technological advances that have reduced costs, to state policies such as restrictions on carbon emissions and state renewable portfolio standards, and to federal tax credits.

I don’t expect any of those three to change as a result of the Trump win. I expect we will talk more later about the Clean Power Plan, which was expected to drive renewable energy in the medium term beyond 2020. At least for the short term, I do not expect there will be much of an impact.

MR. MARTIN: Mark Menezes.

MR. MENEZES: I agree with what Rich Glick said, with one caveat. I would watch for tax reform proposals as part of the first-100-day plan of the Trump administration.

MR. MARTIN: Joe Mikrut.

MR. MIKRUT: Focusing on the tax pieces, I don’t foresee a lot coming up in the near term under the new administration. Energy tax issues really were not a focus of the campaign, so I think the issues for energy are going to be outside the tax world.

MR. MARTIN: Does that mean you do not believe Congress will tackle corporate tax reform in 2017?

MR. MIKRUT: Tax reform is a different issue. We have been talking about tax reform in Washington since at least the Bush administration. The years of talk with no action demonstrate how hard it is to do.

Having both the administration and both houses of Congress under Republican control will make it a little easier. As to what corporate tax reform might look like, a blueprint that the speaker of the House, Paul Ryan, and the chairman of the House tax-writing committee, Kevin Brady, released last June is the probable starting point. Brady’s staff on the House Ways and Means Committee has been working to convert the blueprint into legislative language over the last few months. We will get into more detail in a bit.

MR. MARTIN: Kathy Weiss, what are you telling First Solar will be the effect of the Trump win?

MS. WEISS: Trump called during the campaign for an all-of-the-above energy policy. I think we will have to keep fighting to make sure that there is equal treatment among the market segments. I would caution against overstating our sector’s dependence on government policy to continue making advances.

Although renewable energy remains a relatively small part of the overall energy supply, the transformation has begun. We are moving from a mandate-driven push market to a customer-driven pull market. It is hard to see how that can be reversed. The market dynamics are overtaking government policy as the real driver.

MR. MARTIN: Greg Wetstone.

MR. WETSTONE: I agree with what has been said. I think we are looking at three or four years of solid growth that has already been baked in.

We had $44 billion in combined wind and solar investment last year. The main factors that are driving that investment are falling equipment costs and rising efficiency. Renewable energy is more competitive. There is more demand for renewables among residential and corporate consumers. Aggressive state policies are part of the picture. Federal tax credits remain in place. None of these is likely to change on account of the election.

The real question is what happens once we get past 2020. Will the longer-term drivers like the Paris agreement and the Clean Power Plan remain in place?

Clean Power Plan

MR. MARTIN: That is a good bridge to the next question, which is Trump wants to jettison the Clean Power Plan. For listeners outside the United States, the Clean Power Plan is an effort by the US Environmental Protection Agency, with encouragement from Barack Obama, to reduce greenhouse gas emissions from US power plants.

Greg Wetstone, can Trump simply revoke the Clean Power Plan or is it more complicated than that?

MR. WETSTONE: It is more complicated. The plan is tied up in the federal courts. The US Supreme Court put an unprecedented stay on it before the lower courts had finished hearing the arguments about the plan. It had never intervened in that fashion before. The plan is currently before a US appeals court in Washington. If the appeals court upholds the plan, then it goes to the Supreme Court. The Supreme Court is short one justice. Presumably we would be looking at a 4-4 tie, which would leave the appeals court decision in place, unless Congress clears a new justice, who would be a Trump appointee, before the case is heard by the Supreme Court.

That is a pretty big point of vulnerability, but there is also the reality that if the Supreme Court strikes down the plan, the plan would go back to the Environmental Protection Agency. Under Trump, the agency is more likely to try to kill the plan than to move forward with it. I think you have to say the plan is on life support at this point.

MS. WEISS: There are currently 19 states that are actively planning for compliance with the Clean Power Plan. Those states have invested considerable time looking into the current available technologies for controlling emissions and their costs. They see the potential for new economic development as people invest in clean energy technologies. You have major companies poised to move into states where they can make these investments.

MR. WETSTONE: That is exactly right. The Clean Power Plan might still serve as an important blueprint for states that want to move forward on their own.

MR. MARTIN: This may feel like a return to the Bush administration when the federal government had little appetite for federal action to promote renewable energy and so the action devolved to the states. You get different state approaches. You have nine states in New England and the mid-Atlantic, for example, with a RGGI regime to reduce greenhouse gas emissions, California is moving forward with its own plan, and so on.

Greg Wetstone, correct me if I am wrong: the action by EPA to control greenhouse gases was compelled by a finding of endangerment under the Clean Air Act, so somebody would have to unravel the endangerment finding first to withdraw the Clean Power Plan altogether. Correct?

MR. WETSTONE: It is possible for the plan to be sent back to the agency and then the agency could come up with a new proposal. The question is what such a proposal from the Trump administration would look like and how quickly we would see it.

MR. GLICK: There is also the possibility the Supreme Court might uphold the Clean Power Plan rather than send it back to the agency. A Trump EPA would have to go through a process of initiating a new regulatory process. It might start by revisiting the earlier finding that CO2 is a pollutant that endangers public health and welfare.

Another option is for EPA to keep the endangerment finding, but go through the rulemaking again and come out with a much more limited Clean Power Plan. For instance, a revised plan might only require coal-fired power plants to make changes to their efficiency levels as opposed to going beyond the so-called fence to address renewable energy and energy efficiency. I think that is the more likely scenario with the endangerment finding left in place.

MR. MARTIN: So cripple the plan. The initiative moves to the 19 or so states that are keen to deal with global warming. Greg Wetstone, is Trump expected to roll back other environmental laws and regulations: for example, the Endangered Species Act, federal restrictions on wetlands, and limits on SO2, NOx and mercury emissions from power plants?

MR. WETSTONE: We have not heard any specific plans in these areas, other than an interest possibly in rolling back some rulings under the Clean Water Act. It is important to keep in mind that once a regulation is issued and tested in the inevitable litigation that follows any new environmental regulation, it is difficult to turn back the clock. The Clean Power Plan is different because it has not gone fully through the courts, and implementation was suspended by the Supreme Court. We saw how efforts by the second Bush administration to reverse some Clean Air Act rules and forest protection rules from the Clinton administration ran into difficulty in court.

It takes a pretty exhaustive process to reverse a final rulemaking of any sort.

MR. MARTIN: It is exhausting to put environmental regulations in place. It is exhausting to dismantle them. Mark Menezes, one of the things Trump wants to do is to preserve 30,000 coal mining jobs in the United States. Coal stocks were up yesterday in anticipation. Any idea how he might do this? Is it possible we might see construction of new coal-fired power plants?

MR. MENEZES: I see the potential for a two-pronged approach. One part is an effort to roll back some of the existing air emissions regulations that tend to hit coal-fired power plants. There are regional haze and any number of other rules on which the agency might take a more lax approach to enforcement or reissue the rules as Rich Glick described. That is one way to help the coal industry.

The other way is Trump could resume leasing federal lands for coal mining. The Obama administration made it difficult to extend existing coal leases or enter into new ones.

The Trump administration might also push Congress to provide new incentives to use coal much like we have for renewable energy. There might be ways to encourage carbon capture and sequestration like we have seen in the past.

MR. MARTIN: Your parent company has coal-fired power plants. Do you foresee any new construction?

MR. MENEZES: No.

Tax Changes

MR. MARTIN: Let’s go back to Joe Mikrut. The Trump win and the fact that Republicans are in charge of both houses of Congress make overhaul of the US tax code more likely. How likely is major tax reform? You sounded a somewhat pessimistic note earlier about the prospects. If tax reform does move forward, on what timetable will it move?

MR. MIKRUT: When people talk about a greater likelihood of tax reform under an all-Republican Congress, they are thinking it will be folded into a budget reconciliation bill. Such bills require only 51 votes to pass the Senate. Other bills take 60 votes. It looks like there will be only 52 Republicans in the Senate in the next Congress. That is the reason why people think the odds of moving tax reform have improved after the election.

But even then, a major overhaul of the US tax code is very difficult. There are problems with moving tax reform as part of a reconciliation bill. The most important challenge is such a bill cannot have negative budgetary effects outside a 10-year window. So we could end up enacting a new tax code that would remain in place for nine years and then spring back to the current tax code.

MR. MARTIN: Unless the rewrite of the tax code is revenue neutral?

MR. MIKRUT: Unless it is revenue neutral, but the proposals that are in front of us are certainly not revenue neutral. There are significant procedural and policy challenges with moving tax reform through budget reconciliation.

What is more clear is the direction tax reform may take. If you look at the tax reform blueprint that the speaker of the House, Paul Ryan, and the chairman of the House tax-writing committee, Kevin Brady, released in June, and you look at what the Trump campaign talked about during the run up to the election, there are many similarities.

The process will start in the House. The opening bid will be something similar to what Ryan and Brady released in June.

MR. MARTIN: For anyone interested in the House Republican blueprint, you can find details on the web. A Google search with the terms “blueprint Republican tax plan Chadbourne” will lead you to a short paper on how it would affect renewable energy and the project finance market.

Joe Mikrut, correct me if I am wrong, but most people like you are waiting at this point to see the actual bill language. When do you expect it to be released?

MR. MIKRUT: The Ways and Means Committee staff has been drafting, but the staff is basically taking a 30-page blueprint and trying to write a whole new Internal Revenue Code. It will take time.

The proposed blueprint would make a fundamental change. Most people have focused on the fact that the blueprint calls for significant cuts in US tax rates, both on the individual side and the business side. But on the business side, there are even more fundamental changes. The blueprint would convert our current income tax system into a consumption-based tax.

There would be immediate expensing for all capital expenditures. No interest deductions. We would move to a destination-based tax, meaning the cost of imported goods and services will no longer be deductible, and earnings from US exports will no longer be taxable. When you consider the volume of goods the US imports, this will be a huge, huge change that will affect a lot of firms.

MR. MARTIN: Does that mean, for example, that companies that use imported wind turbines or solar panels in new renewable energy projects would not be able to depreciate the cost?

MR. MIKRUT: Correct. Neither depreciate nor what would happen under the proposal, write off the cost immediately. If you have a domestically-produced turbine, you could deduct the entire cost in year one. If you have a foreign-sourced turbine, you get no cost recovery.

MR. MARTIN: To repeat some of what you said, the Republicans want to move to so-called expensing. Instead of deducting the cost of equipment over time as depreciation, companies would be able to deduct the full cost in the year the equipment is put in service.

MR. MIKRUT: That is correct.

MR. MARTIN: Income from exports would not be taxed at all, so if you have a power plant on the US side of the Mexican border and sell the power across the border, there would be no US tax on the income.

MR. MIKRUT: That is also true.

MR. MARTIN: Trump wants to reduce the corporate tax rate to 15%. How realistic a goal is that?

MR. MIKRUT: It is really hard. Several years ago, the then-Republican chairman of the House Ways and Means Committee, Dave Camp, tried to reduce the rate to 25% on a revenue-neutral basis. He essentially had to eliminate all tax preferences. The House Republican caucus never fully embraced the proposal.

The Trump plan, if it follows the blueprint, would eliminate many tax preferences, but it would also allow expensing, which has a huge cost. It is hard to see how the math works. You do get a dynamic effect from changing into a consumption-based tax, but the plan may not come close to paying for itself. A 15% rate will be difficult to achieve if you want to keep things on a revenue-neutral basis.

ITC and PTC

MR. MARTIN: How likely is it that the solar and wind tax credits will be on the chopping block? A dramatic rate reduction is almost like a hurricane hitting the east coast; it sweeps a lot of things out of the way in order to pay for the rate reduction.

MR. MIKRUT: There are two schools of thought in the blueprint itself. The blueprint would eliminate all the general business credits, except for the low-income housing credit and the research credit. But the blueprint also suggests Congress will be open to transition rules.

One could look at the existing phase-out of the wind and solar credits as a transition rule. Congress could decide to leave them alone.

On the other hand, it is possible that Congress could decide to cut off the remaining tail of wherever you are in the 10-year window for production tax credits, since companies will benefit after tax reform from a lower corporate tax rate.

The outlook is unclear. All tax credits are in the bull’s eye as a possible way to pay for the rate reduction.

MR. MARTIN: The investment tax credit was repealed at the end of 1985, and depreciation was slowed down after 1986, to help pay for the last overhaul of the tax code in 1986, but transition rules allowed anyone who had committed to an investment before the changes to see the investment through and still claim the old tax benefits. There was an outside deadline of three to five years, depending on the assets, to put power projects in service.

If Congress were to sweep away the renewable energy credits to help pay for a corporate rate reduction, isn’t the most likely approach to cut short the remaining construction-start deadlines? And is it fairly certain that if the credit periods are cut short, anyone who already committed to an investment would be allowed to see the investment through with the existing tax credits?

MR. MIKRUT: You would think that would be true based on concepts of fairness and what Congress has done historically when it has pulled away tax benefits. But this is a brave new world. The economists on the Joint Tax Committee staff may think about whether the same approach makes sense when the people who are holding on to grandfathered tax credits are also benefiting from a significant reduction in the corporate tax rate. Everything will be examined. Everything will be on the table.

MR. MARTIN: I have three more quick tax questions. Fuel cell and geothermal heat pump companies, and developers of cogeneration projects and other renewables like biomass, geothermal and landfill gas, are hoping that Congress will give them the same phase down of tax credits that applies for wind or solar. The hope is this will happen in a lame-duck session of Congress that runs from mid-November into December. How do the election results affect the odds of that happening?

MR. MIKRUT: Folks were probably a little more confident a week ago than they are today. The Senate Democratic leader, Harry Reid, has fought hard for these provisions, and he says he has a promise that they will be addressed in the lame-duck session. The Republicans are still trying to determine what to tackle in the lame duck. These credits are on the table. The Senate Republican leader, Mitch McConnell, said so in a press conference yesterday. But the odds of it happening are lower after the election than they were before.

MR. GLICK: You have to separate these provisions into two categories. There is an investment tax credit for fuel cells, CHP projects and geothermal heat pumps that was left off the table, probably by mistake, when the ITC was extended at the end of last year for solar.

Senator Reid is very, very committed to getting that done, and this is his last chance before he retires at the end of this year. He has had a number of discussions not only with the Republican leader, Senator McConnell, but also on the House side. While the election has certainly created more uncertainty, I think when there is a will, there is a way. I remain optimistic that somehow this gets done.

The other category is a phase-out of production tax credits for geothermal, biomass and so on to mirror the phase-out that Congress adopted last year for wind. Given the election results, Congress is less likely to consider a tax extender bill addressing these provisions. The issue still could be addressed in the next Congress.

MR. MARTIN: There is debate about whether there will be much of a lame-duck session. There is a view among Republicans that they should do only what is absolutely necessary in the lame-duck session and kick other issues into 2017 when they will no longer have to negotiate with President Obama.

I have two more quick questions. Energy storage is expected to transform the electricity sector. There is a bipartisan bill to allow a 30% investment tax credit for storage like the current tax credit for solar. The bill has been gradually picking up support. How have its prospects been affected by the election?

MR. MIKRUT: If you look at the themes in the House Republican blueprint for tax reform, these types of tax credits probably do not fare as well as they would have if you were simply trying to rationalize the current income tax system. My guess is that creating a new tax credit like this probably is not in the mix in the lame-duck session.

Maybe something happens early in 2017, but as we go deeper and deeper into tax reform, these sorts of provisions will have a tough time getting traction.

MR. MARTIN: There has been a push by renewable energy companies the last several years to be able to operate as master limited partnerships. The House blueprint and a comprehensive tax reform proposal introduced in 2014 by the House tax committee chairman, Dave Camp, proposed rolling back use of MLPs to a narrower class of companies that were given permission to use them in 1988. The eligible class has expanded a little since 1988.

In which direction do you see this debate moving?

MR. MIKRUT: I think MLPs are in a pretty good spot. Kevin Brady, the current House tax committee chairman, is a big supporter of master limited partnerships. He is from Texas. They are used today mainly by the oil and gas industry. I don’t think he is opposed to other uses.

If you look on the other side of the Capitol, Orrin Hatch, the Senate tax committee chairman, is interested in corporate tax integration. He wants corporate earnings to be taxed only once instead of twice at both the corporate and the shareholder level. MLPs are a way to tax earnings only once.

The theme of having one level of tax plays well. I think the prospects are fairly good of expanding the available types of assets that could be owned by an MLP.

Energy Policy Bill

MR. MARTIN: Rich Glick, a bipartisan energy bill is stuck in conference between the House and Senate. Many people say it is dead. Do you agree?

MR. GLICK: Not necessarily. A significant amount of work has been put into this effort. Both Republicans and Democrats in the Senate worked on a bipartisan basis and got 85 votes. How many times do you see 85% of either house of Congress voting for anything in the current partisan atmosphere?

There is a lot of interest in seeing whether we can still get it done in this Congress. We have had 50 or so meetings between the House and Senate staffs over the last few months to try to resolve the differences in the bill.

Senator Murkowski and Senator Cantwell, the top Republican and Democrat on the Senate Energy Committee, and others put together a list of bipartisan revisions to the bill to try to address some of the concerns that have been raised by the House. That list is pending before the House.

There is more uncertainty about where this is headed in the aftermath of the election, but I think everyone needs to ask whether it will be any easier to get a bill done in the next Congress and, if the answer is no, work as hard as possible to get it done this year.

Even with a new president, you will still need cooperation by both Democrats and Republicans to get anything done in the Senate.

MR. MARTIN: Mark Menezes, let’s say that it becomes too great a challenge to get the energy bill unstuck this year, particularly given that the lame-duck session may be cut short. Do you see a bill along the same lines reemerging in the next Congress and, if so, what if anything in it is likely to have a significant effect on renewable energy?

MR. MENEZES: Excellent question. One consequence of the election is you have a lot of excitement on Capitol Hill and in the incoming administration, with one party in control of both houses of Congress and the White House, about the possibility of getting something done for a change. There is true enthusiasm to get as many things done as possible.

Rich Glick is right. It would be easier to finish the bill this year given how much effort has already been put into it. However, the pattern in the past has been to build on what was started in a previous Congress. You carry forward much of the work that preceded you.

MR. MARTIN: What if anything in the energy bill would have a significant effect on renewable energy?

MR. GLICK: There are a couple of relevant provisions in the bill. None of them is earth shattering. The bill would promote more renewable energy development on public lands. It would help modernize the electricity grid in a manner that would help integrate intermittent resources like wind and solar.

It is too early to predict how the content of the bill might change if the process had to start over again in the next Congress.

PURPA

MR. MARTIN: Let’s move to the next topic. PURPA is a 1978 law that requires utilities to buy electricity from independent generators. The statute was largely emasculated in 2005. It has continuing currency in parts of the United States that lack organized electricity markets.

PURPA has emerged as a new battleground. What are the battle lines and what, if anything, do you see happening?

MS. WEISS: I could see whatever recommendations come out of a technical conference that the Federal Energy Regulatory Commission held this fall on PURPA folded into a comprehensive energy bill if there is such a bill next year.

FERC has not released its recommendations yet. It is wrestling with some contentious issues, including how to determine avoided cost and how to determine whether multiple small projects should be combined with the result that they are too large to be qualifying facilities. The technical conference was a compromise between Republicans, who want to repeal PURPA, and Democrats, who would like to see it expanded.

There is also the potential to make headway on issues around streamlining the siting and permitting of utility projects on public land.

MR. MARTIN: So the issues are how much should utilities pay for electricity from independent generators — utility pay the avoided cost they would have incurred to generate the electricity themselves — and from what types of projects must utilities buy power — there are size limits on qualifying projects — and how to determine whether projects are inside or outside those size limits, since developers sometimes break a single, large project into smaller units to try to qualify. FERC held a technical conference. It will report soon to Congress.

MR. GLICK: A number of issues were raised at the technical conference, and then interested parties had the opportunity to file comments. FERC will decide whether to undertake any initiative, such as revising its regulations, to address some of the concerns that were raised about avoided cost determinations and other issues that have arisen around PURPA. FERC will have to decide first to what extent the issues can be addressed administratively.

There will be some discussion in Congress about what to do. Congress revised the statute in 2005. It is unclear whether there is additional appetite for amending the statute further. The Democrats on the Senate Energy Committee are thinking that maybe some of the issues can be addressed administratively by FERC. They are not necessarily interested in pursuing legislative changes at this point.

Infrastructure Push

MR. MARTIN: Next topic: Trump wants $1 trillion in new spending on infrastructure over the next 10 years. This is supposed to be part of his first-100-day plan. He wants an 82% tax credit to induce more private investment. There is also talk of allowing US companies with earnings parked in offshore holding companies to bring those earnings back to the United States at a reduced tax rate in exchange, presumably, for investing the funds in infrastructure.

How strong a consensus do you see on Capitol Hill for doing something here, and what form do you see any federal push in this area taking?

MR. MIKRUT: Infrastructure spending is probably something on which both parties can agree. Both candidates had it in their plans. The tough issue is how you pay for it.

Chuck Schumer, the incoming Senate Democratic leader, and Paul Ryan, the speaker of the House, had conversations a year ago about using a tax on offshore earnings to fund infrastructure spending. However, the corporate tax reform blueprint that House Republicans released in June would use any revenue collected from repatriating offshore earnings to fund the corporate rate reduction and international tax reform. Unless you double count the revenue, once for infrastructure and again for tax reform, Congress will have to find another way to pay for infrastructure.

Infrastructure may well be part of the 100-day plan, but exactly what form it takes — whether it is tax credits or direct spending — and how it is funded, are significant issues that will have to be ironed out.

MR. MARTIN: Does anyone think that electric transmission lines and gas pipelines are likely to be considered part of infrastructure for this purpose?

MR. GLICK: Both political parties recognize that there has been insufficient infrastructure investment not only in roads, bridges and ports, but also in the energy sector. Electric transmission is a good example. We need significantly more electric transmission in order to reach remotely-located renewable resources.

The issue is to what degree the incoming administration and Congress will want the federal government involved in funding versus merely encouraging private investment. Any federal involvement could take the form of tax credits or other incentives. There is an interest in seeing whether people can use the infrastructure bill to promote additional investment in transmission.

MR. MARTIN: Does anyone foresee any federal action to make it easier to site new transmission lines? Obama was unable to make progress on this. Is it fair to say that Trump will be unable to do so either and he may not have an interest in doing so because of states’ rights issues?

MR. GLICK: I do not think the election results change the fact that both Republicans and Democrats in Congress