Bingaman: Encouraging Renewable Energy Investment

May 5, 2004
10:34 AM
Sen. Jeff Bingaman today shared his perspective on renewable energy at a high-level seminar for financial professionals. Bingaman’s views were broadcast live by Bloomberg Television, a global business and financial news channel that reaches 81 million households in the U.S. and more than 200 million homes worldwide. Bingaman, the Senate Energy Committee’s top Democrat, is one of Congress’s most consistent and committed advocates for greater use of renewable energy. Today’s seminar, organized by Bloomberg and the British government, was planned to help the financial services industry better understand the renewables market and why investment in it makes financial and commercial sense. Emerging U.S. Policy: Encouraging Renewable Energy Investment Keynote Address by Sen. Jeff Bingaman (Democrat – New Mexico) 'Renewable Energy: Who Profits' Washington, D.C. May 5, 2004 I am pleased to be here today to provide my perspective on emerging policies in the United States to promote renewable energy. I thought that I would try to make three basic points this morning. My first point will be that changes are in prospect to the U.S. tax code that will provide significant new incentives to renewable energy deployment. I will describe some of those changes in greater detail. My second point will be that regulatory actions at the Federal and State level to establish a so-called Renewable Portfolio Standard for electricity will boost these markets for renewable technologies, beyond what tax incentives by themselves will do. My third point will be that there are a number of firms pursuing some very important technological opportunities in renewables that are in the process of raising venture capital. These technology opportunities and these firms are worthy of a closer look by everyone associated with this conference. I will give a few examples of such firms from my own State of New Mexico. Let me start by talking about changes to the U.S. tax code that I believe will likely become law this year. As we are having this conference, the Senate is debating what will likely be the last major tax bill of this Congress. The bill is one we need to pass to make changes to the U.S. tax regime for export sales and extra-territorial income. The World Trade Organization, or WTO, has ruled that our current U.S. laws in these areas constitute an illegal export subsidy under international trade agreements. As a result, the WTO has authorized the European Union to impose up to $4 billion per year in sanctions against U.S. exports. These sanctions started on March 1 of this year at 5 percent of the $4 billion total, and the level of sanctions is increasing by an additional 1 percent each month. That penalty to U.S. business is a strong impetus for us in Congress to pass this bill. This trade and tax bill incorporates several tax incentives that are designed to promote new renewable energy projects across the country. I will describe them in a moment, but first let me underline my belief that these renewable tax incentives will pass this year. They enjoy broad bipartisan support in the Senate, and were incorporated into the present tax bill by unanimous consent by all Democratic and Republican Senators. In my opinion, similar tax incentives are broadly supported in the House of Representatives. These energy tax incentives will likely be part of the final version of this tax bill. So I think there is a good prospect that President will sign them into law this year. Let me describe these tax incentives and the impact I think they will have on renewable energy projects and investments. Up until the beginning of this year, a company could earn an income tax credit for its electricity sales if it placed in service one of the following three kinds of renewable energy facilities: wind power facilities, so-called “closed-loop” biomass facilities, and facilities that converted poultry waste into energy. That credit was worth 1.8 cents per kilowatt-hour in 2003, and was applied to production over a 10-year period after the facility was put in service. This tax credit has temporarily expired -– a renewable energy facility placed in service today would not be eligible for the credit. Under the new tax bill in the Senate, the 1.8 cent per kilowatt-hour tax credit will be fully restored for these renewable energy sources, back-dated to the beginning of this year, and extending to all facilities placed in service before January 1, 2007. This renewal of the production tax credit will have a significant impact on the development of wind energy systems in the United States. According to the Energy Information Administration, or EIA, wind energy is likely to see the greatest increase of all renewable energy technologies as a result of this tax credit. This finding is consistent with the wind energy industry’s own analyses. The American Wind Energy Association estimates that the current levelized cost of wind energy at many larger sites is less than 5 cents per kilowatt-hour. Applying the production tax credit to the first 10 years of operation of a new wind plant can reduce the cost of wind power by about 0.7 cents per kilowatt-hour over the plant’s 30-year lifetime. That puts wind in the same cost range as existing coal and natural gas plants. It makes new investment in wind energy very much worth looking at, and I think we will see continued strong development of wind energy once this provision becomes law. The new tax bill will also create the same 10-year, 1.8 cent per kilowatt-hour tax credit for renewable energy produced from 6 new categories of facilities. These facilities must be placed in service between January 1, 2005 and December 31, 2006. The 6 categories include facilities that produce electricity from: • converting so-called 'open-loop' biomass into energy, • geothermal energy, • solar energy, • small hydroelectric turbines that work on the flow of water through irrigation systems, • converting recycled sludge from commercial, industrial, or municipal wastewater facilities into energy, and • converting pig or cow manure or litter into energy. A seventh new facility category can qualify for the 1.8 cent production tax credit, but only for a period of 5 years – renewable energy facilities that produce energy from municipal solid waste. These new facility categories are a major expansion in the number and character of renewable energy facilities that will have their economics improved significantly by this tax credit. I believe that we will see this effect very significantly for biomass-to-energy facilities. According to the EIA, new biomass plants that use integrated gasification combined-cycle designs are projected to produce electricity at 6 cents per kilowatt-hour in 2010 and 6.2 cents per kilowatt-hour in 2025. Applying the 1.8 cent tax credit means the same decreased cost of production as in the case of wind energy – 0.7 cents, averaged over the 30-year lifetime of the plant. That lower production cost puts biomass plants in the same range as advanced coal-powered plants. According to EIA, advanced coal plants are projected to produce energy at between 4.9 and 5.3 cents per kilowatt-hour in 2010, depending on the specific coal technology used. In essence, then, the 1.8 cent per kilowatt-hour tax credit moves biomass facilities into the zone in which they will be cost-competitive with the next generation of coal-fired plants. In addition to greatly improving the economics of biomass plants, the expanded coverage of the tax credit greatly simplifies the process of building an applicable biomass facility. Right now, the credit only applies to closed-loop facilities, which means facilities that burn biomass that was specifically grown as a crop to be burned. The term open-loop means that the biomass to be converted to energy did not have to be grown specifically for an energy purpose. It could come from a wide variety of forest-related resources, solid-wood waste materials, or agricultural sources. When this expanded renewable production tax credit is signed into law, it will open a major new world of investment in biomass facilities. The renewable energy production tax credit will have a similar beneficial effect on geothermal energy plants – that is, plants that use the natural heat of the subsurface Earth to generate electricity. According to a 2002 analysis from the National Renewable Energy Laboratory, a 1.8 cent production tax credit for geothermal energy could lower the levelized cost of electricity by at least 25 to 30 percent, depending on the technology, with costs winding up anywhere from just over 4 cents per kilowatt-hour down to 2.3 cents per kilowatt-hour. The form of the tax credit analyzed here had an inflation adjustment built in, which the new Senate bill lacks, but you can see that the general cost range is, again, quite cost competitive with current electricity generation. A final feature of the renewable energy tax package in the Senate bill being considered this week is the treatment of tax-exempt organizations that produce significant amounts of electricity in the United States. These include municipal power authorities, rural electric cooperatives, and Federal entities like the Tennessee Valley Authority. These entities can use additional renewable energy generation to earn tradable certificates that they can then sell or trade to other firms. Thus, renewable projects by these entities will similarly have their economics enhanced by the tax credit, and will be worth looking at from an investment standpoint. Let me now turn to my second point, which is that renewable energy will also be greatly promoted by regulatory policy. Renewable energy technologies start off with a regulatory advantage. They have a much smaller environmental impact than competing technologies such as coal and nuclear power. But both States and the Federal government either have adopted, or are in the process of adopting, regulatory measures that will explicitly promote the greater use of renewable energy to generate electricity. In the United States Senate, we have passed, in the past two Congresses, bills that would establish a Federal renewable portfolio standard, or RPS. This Federal RPS would require that all retail sellers of electricity would have to generate or purchase 10 percent of their electricity from renewable sources by the year 2020. Utilities that met the renewable energy targets early, or exceeded the 10 percent target in 2020, could earn credits, based on the extra renewable electricity they generated. They could then sell these credits to other utilities to help those other utilities meet their requirements. I think it is only a matter of time before a Federal RPS becomes a reality. Right now, it is favored by a clear majority in the Senate. A similar proposal has never been voted on in the House of Representatives, so it is hard to gauge the level of support there. But we got very far along in the last Congress in negotiating for an RPS as part of a comprehensive energy bill in a House-Senate conference, so I am optimistic that we can eventually get agreement to put it in the law. A 10 percent Federal RPS would increase demand for renewable electricity generation above the level of demand that would result from the expanded renewable production tax credits. According to an EIA analysis of a 10 percent RPS, it would quadruple the amount of electricity produced from wind energy, compared to the amount that would be produced if the only incentive were production tax credits. An RPS would also significantly increase electricity generation from biomass and landfill gas. By 2025, the proposed Federal RPS would result in a national energy mix in the United States in which non-hydroelectric renewables would collectively provide as much electricity as is projected for hydropower in 2025, and half as much generation as is projected in 2025 for nuclear power. At those levels, renewable electricity would play an important role in our generation mix, compared to the niche role that it now plays. The additional renewable investment engendered by a national RPS would also result in a variety of environmental and other consumer benefits. The cost of sulfur dioxide allowances are expected to be 32 percent lower in 2025 with an RPS than without an RPS. The national RPS would result in a reduction in carbon dioxide emissions of 2.3 percent by 2025. And a national 10 percent RPS would reduce natural gas prices by 1.5 percent. Support for a national RPS is mirrored in the States by State and local portfolio standards favoring renewables. Many of these standards are much more aggressive than the Federal RPS that I have been proposing. • My own State of New Mexico has adopted a 10 percent renewable portfolio standard that has to be achieved by 2011, compared to the 2020 date in the proposed Federal standard. • Nevada has a 15 percent RPS that has to be achieved by 2013. • California has a requirement to reach 20 percent renewable electricity by 2017. • Other States with renewable portfolio standards include Massachusetts, Connecticut, New Jersey, Pennsylvania, Illinois, Wisconsin, and Texas. These existing renewable portfolio standards will also drive the market for renewable energy technologies over the next two decades, and are a potent signal that these markets will grow and are worth investing in. Let me shift gears now from a discussion of governmental policies to pull more renewables into the market to private-sector efforts to develop and promote new renewable technologies. I will put these efforts into two broad categories that I think deserve your attention, and mention some of the exemplary firms in New Mexico that are leading the charge in each category. The first category of private-sector efforts to push renewable technologies forward consists of firms that are inventing and commercializing breakthrough technologies. A good example of such a firm would be Advent Solar, Inc., a start-up headquartered in Albuquerque, New Mexico. Earlier in this presentation, I did not say much about the effect of various tax and regulatory incentives on solar energy. That is because solar energy technologies are sufficiently high-cost that they are not projected to be helped a great deal by fiscal or regulatory incentives. Firms like Advent, though, hold the potential of completely changing this equation. Advent Solar is in the process of commercializing solar photovoltaic technology that was first invented at Sandia National Laboratories, a multi-billion-dollar Department of Energy laboratory in Albuquerque. This technology allows all of the electrical contacts in a solar cell to be on the back of the cell, as opposed to having electrical contacts on both front and back surfaces. The result is that solar energy conversion is boosted, material consumption is lowered, ultra-thin semiconductor wafers can be used, and subsequent assembly steps to make a photovoltaic device are simplified. The cost savings in the manufacture of these new photovoltaic devices are significant. Advent Solar will be able to manufacture photovoltaic cells and modules at about half the cost of conventional technology today. Cutting manufacturing costs in half is a “game-changing” play for solar energy. If these cost savings are proved out as Advent builds its pilot production lines, it could help make photovoltaic power competitive with retail utility rates in many regions of the United States. Advent right now is raising funding for these pilot production lines. It has a strong and experienced management team. Another New Mexico start-up company that is commercializing a breakthrough technology related to renewables is MesoFuel, Inc. MesoFuel is developing low-cost, highly flexible hydrogen generation technology. This technology will find use in fueling portable fuel cells or fuel cells in highly distributed settings, such as residential homes or remote facilities. MesoFuel has demonstrated hydrogen generation from a variety of conventional fuels, such as methane, propane, and ammonia, and is working on hydrogen generation from renewable fuels such as soybean-based diesel. MesoFuel’s technology operates at low temperatures, with low environmental impacts, using a reactor with very small channels (on the order of 400 microns across), combined with a proprietary hydrogen filter. The promise of this technology for marrying up biomass energy sources with hydrogen fuel cells could open new opportunities to introduce fuel cells for energy generation in remote areas and developing countries. This company also has a very strong management team. In addition to the class of private-sector firms that are trying to commercialize a breakthrough technology, there is another class of firms that need to be nurtured in order for the United States to realize the promise of renewable energy. These firms are the system integrators – firms that take existing, already-commercial technologies and components and design new, value-added renewable energy products and services. A good example of this sort of firm in New Mexico is a Native American-owned firm called Sacred Power Corporation. This firm is targeting products based on distributed generation. One example is a so-called “grid-tie” system. This is an integrated system consisting of photovoltaic solar panels, an inverter to convert the power to AC electricity, and a tie to the local utility grid. A home equipped with a grid-tie system can produce its own solar power by day, even selling some of the excess to the grid, and then rely on the local power grid at night. Another product designed by this company is a combination of a solar panel system with a small propane generator. This combination power unit can produce 2.5 kilowatts per hour, enough to power a remote home or piece of equipment. It is an attractive product for remote areas off the electrical grid, such as on the Navajo Reservation in New Mexico. Sacred Power also manufactures solar-powered shelters for housing and protecting remote telecommunications equipment, as well as solar carports that both protect automobiles from the sun and generate electricity that can be sent into the grid. The founder of Sacred Power, Dave Melton, was named Entrepreneur of the Year by the University of New Mexico Business School last year. In sum, I believe that renewable energy will provide substantial investment opportunities in the next few years. A strong set of policies and fiscal incentives to spur the advancement of renewable energy is nearing completion in Congress. The new fiscal incentives will change the playing field for renewables, making them competitive with the next generation of conventional energy technology. Regulatory initiatives at the State and Federal levels, such as renewable portfolio standards, will further spur the creation of strong markets for renewable technologies. And, finally, the development and commercialization of breakthrough technologies promise to further drive down the cost of renewable electricity generation technologies, and lead to further market penetration. This is a positive environment for greater focus and investment. I hope this conference gives greater visibility to these opportunities, and succeeds in spurring additional investment in renewable energy. Thank you. # # #