Yet again, Congress has been working furiously to pass a year-end version of the "Tax Extenders" bill, something that has become an annual ritual to forestall the executioner on a variety of wide-ranging temporary tax incentives. Meanwhile, those with a vested interest in the U.S. renewable energy market wait with bated breath. The bill includes provisions to extend the Production Tax Credit (PTC) and Investment Tax Credit (ITC), two powerful economic subsidies for continued renewable energy expansion.
Arguably, this year's Tax Extender legislation stands to affect no group of interested parties more than corporate or institutional (C&I) buyers of long-term renewable energy. It has been a record-setting year for corporate purchasing of large-scale wind and solar energy through power purchase agreements (PPAs). The attractiveness of PPA deals, combined with a growing sense of corporate responsibility surrounding COP21 in Paris, has spurred a recent eruption of C&I renewable energy commitments, such as the RE100 list, WWF’s Buyers Principles, and public carbon reduction goals like the White House’s American Business Act on Climate Pledge. Plus, more and more companies are taking concrete action to meet those goals, targets, and commitments, as evidenced by the strong growth of RMI's Business Renewables Center, whose publicly traded member companies now have a collective market cap of more than $2.1 trillion.
Cumulative PPA Purchases, Courtesy of Renewable Choice Energy (current as of 12.9.15) View Larger
The Value of the PTC/ITC
With possible extensions to the PTC and ITC on the line, many questions now loom large for corporate renewable energy buyers, including: What will happen to PPA prices? What other renewable energy options will remain viable? What should/could companies do now, or later, or at all? And what happens if the PTC and ITC do indeed expire and step down, respectively?
It’s an unfortunate time for legislative support of these renewable energy tax subsidies to wane. While many utility green power purchases are mandated by law (such as through a state's renewable portfolio standard (RPS)), corporate buyers are making a voluntary investment decision based purely on the economic and environmental benefits of renewable energy projects. While technology has improved and costs have declined drastically over the past decade, the PTC/ITC remains an important element in making new renewable energy financially viable in the U.S.
The PTC, favored by the wind power industry, offers a tax break of approximately $23/MWh of new renewable energy production, while the ITC, favored by the solar industry, offers a tax break equal to 30 percent of the total system cost. The financial benefit of the PTC/ITC is a key part of what makes PPA deals so appealing to C&I buyers.
If history gives any indication, however, it’s unlikely that a decision to extend these credits will be announced before the end of the month.
Now is the Time to Act
Luckily, with or without the PTC/ITC, there are compelling reasons for C&I buyers to develop, launch, and act upon a renewable energy strategy now. As laid out in a recent Greenbiz article there are a variety of ways a company can invest in renewable energy, but not all options are immediately viable, at least financially, without the tax incentives. While PPAs make the most sense in a PTC/ITC environment, there are ways to keep moving towards the achievement of renewable energy goals even in their absence. Simply sitting back in a paralyzing "wait and see" posture isn't necessary. Here are seven ways a company can maintain optimism—and momentum—toward meeting renewable energy and climate/carbon targets.
- There’s a chance the PTC/ITC will be extended. When the PTC was retroactively extended for 2014, it was an eleventh-hour decision made by Congress in late December. This year promises to be no different. However, there is compelling evidence that the tax credits will be renewed, including the Senate finance committee’s vote of confidence earlier this year. If, and hopefully when, the tax credits are renewed, we will see a rush of buyers looking to sign PPAs with the best renewable energy projects, meaning that the next few weeks are a perfect time to begin building support for a PPA within an organization.
- There’s still a 10-percent credit on the ITC beyond 2016. Although the subsidy drops from a hefty 30 percent, 10 percent on a multi-million dollar deal is still a compelling reason to look at solar. The 10-percent credit, combined with improved technology and financing structures, means that large-scale solar projects in 2018 and 2019 could compare to today’s prices—even without the ITC.
- PPAs will still be available from existing projects. Although the additionality of a new wind project is one of its attractions for C&I buyers, there will still be middle- and long-term PPAs available post-PTC from existing wind and solar projects. These opportunities are not as economically advantaged as today’s new-build PPAs, as there is not a large incentive for a project owner to sell power at below-market rates once the project has been funded and built. There are advantages to buying a PPA from an existing facility however, namely more flexibility in length of PPA term, elimination of project execution risk, and a better-established production profile. There can also be an additionality claim made, albeit a weaker one, to the extent that the owner of the existing wind farm borrows against the PPA and uses the funds to develop new projects.
- There may be opportunities available through local utilities. At the behest of large energy users (and spearheaded by WWF), utilities are beginning to create special tariff structures for C&I buyers (such as Duke Energy's Green Source Rider). Recent announcements from Apple, Becton Dickinson, and Google point to these new opportunities. These deals generally don’t save buyers money, and may look even worse in the absence of the PTC/ITC, but it is a growing space as savvy utilities realize that they must react to meet their customers’ demands for clean energy.
- There is a growing international market for PPAs. Changes in policy and economic factors in countries like India, Chile, South Africa, Brazil, Mexico, and Ireland make international PPAs an emerging and viable option for C&I buyers, especially for multinational companies with global operations. (Witness General Motors' 34 MW wind deal in Mexico.)
- There are other behind-the-meter solutions. While the off-site PPA is among the most attractive long-term acquisition structures, there are numerous smaller-scale opportunities to explore, such as on-site solar PV (such as General Motors' significant ground- and roof-mounted solar arrays in Ohio). Community solar and virtual net metering are on the rise, too; consider Bloomberg’s recent announcement about its New York data center. The economics of these deals can be compelling, even without the PTC/ITC. The challenge is using behind-the-meter solutions to meet large renewable energy or carbon reduction goals, as these projects are, by their nature, small in scale.
- Tried and true RECs are still abundantly available. RECs (renewable energy credits) have been—and remain—the way most organizations in North America use green power. They remain a viable option. RECs are flexible, coming either bundled with electricity or unbundled in deregulated markets, and can be matched to a company's renewable energy goals and desired claims (e.g., sourcing clean electricity). RECs can offer a good starting point for companies just beginning their clean energy journey and are often the best green power option for many smaller organizations. RECs can also be used to fill in the gaps around a PPA or onsite installation, or to hit goals in the interim while a project is being built.
Regardless of what happens in the coming weeks with the PTC/ITC, now is still the time for companies to make progress towards their renewable energy goals. The complexity of these deals means that they take time to execute; by maintaining momentum rather than succumbing to paralysis in the face of uncertainty, a company can act quickly in the event that the subsidies are extended. And if they aren’t, there are still plenty of compelling reasons to buy renewables. Climate change isn’t waiting on an act of Congress and neither should corporate America.
John Powers leads the Renewable Energy Advisory Services Division at Renewable Choice Energy and has helped corporate and institutional clients achieve their renewable energy goals for over 12 years. Renewable Choice Energy is the leading supplier of renewable energy solutions to commercial, higher education, and municipal clients in North America, acting as a buyer’s agent on over 1 GW of long-term PPAs and supplying millions of MWh of RECs. The company is the 2012, 2014, and 2015 EPA Green Power Supplier of the Year and a founding sponsor of RMI's Business Renewables Center. Learn more at www.renewablechoice.com.
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