How the Renewable Energy Sector Will Grow Despite Waning Tax Credits

This article was originally posted on Windpower Engineering & Development.

Federal tax credits for renewable energy are waning.

For example, the federal renewable electricity production tax credit (PTC)—which applied to the entire sector—was supposed to end in 2019. However, Congress passed extensions of the PTC in December 2019 for projects beginning construction before December 31, 2020.

Specific sectors, like the solar industry, saw the incentive tax credit (ITC) drop from 30% to 26% in 2020 for residential properties, and it will no longer apply as of 2022. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act—a $2 trillion stimulus plan signed into law on March 27, 2020—won’t extend tax credits or offer direct pay provisions for solar and wind projects.

This trend is set to continue and it’s impacted the way renewable energy companies do business. 

Below we’ll explore how state-level mandates and declining generation costs are opening up opportunities for the renewable energy sector in the absence of federal credits. We’ll also look at some challenges the industry’s continued to face and the impact of corporate sustainability.

State-Level Mandates

The federal government could see the states weren’t paying attention to the effects of greenhouse gas; very little money was being spent on renewable energy sources and states commissions weren’t encouraging renewables.

The Production Tax Credit (PTC) was created by the Energy Policy Act of 1992 as a means of incentivizing renewable energy contracts and the number of credits continued to grow from that point.

Examples

As attention to the climate crisis became more widespread, scientific evidence mounted, and the public’s sense of social responsibility grew, states began to step in and draft their own legislation.

Hawaii signed House Bill 623 and pledged to reach the goal of 100% renewable electricity sources in 2015.

California signed Senate Bill 100 in 2018, which upped the ante and set a goal of zero-emissions sources by 2045. The state had already increased its use of renewables by 18% throughout the decade prior to the bill signing.

New Mexico passed the Energy Transition Act in March 2019. The bill set a statewide renewable energy standard of 50% by 2030 with the goal of zero carbon resources by 2050. It includes both investor-owned utilities and rural electric cooperatives.

Oregon set voluntary renewable gas goals in July 2019 with Senate Bill 98; it proposed targets of 15% by 2030, 20% by 2035, and 30% by 2050. Further legislation is expected in the state as of March 2020; Governor Kate Brown has pledged to take executive action to institute a cap-and-trade system.

These are just a few examples of laws that states have been passed.

Impact of Corporate Influx

The renewable energy industry has been forced to pivot their business model away from tax benefits. In the past, companies could sell megawatts at a cheap rate and still make a decent profit because of the federal production tax credits.

Now, renewable energy companies are finding secure funding for the lifespan of their assets without the federal government’s assistance or a heavily reduced level of assistance.

When selling into a long-term purchase power agreement, beneficial contracts are easier to find because the power companies’ portfolios often require a percentage of renewable energy and an ever increasing percentage of renewables must be part of their overall load.

States need the megawatts created by renewable energy sources to fulfill the carbon goals set forth in their legislation, which has attracted the attention of investors and private equity firms.

More purchase power agreements with multiple entities are being created, diversifying and decreasing the business risk.

Corporate Sustainability & Social Responsibility

With the state mandated changes, particularly over the last 10 years, corporate sustainability has become a hot topic.

Google is a great example of a corporation that took it upon themselves to push renewable energy. It started buying long-term wind energy in 2010 and declared the company  100% reliable on renewable energy sources for global operations in 2017.

Google also signed a wind and solar investment deal worth up to $2 billion in 2019 to continue to provide its campuses with electricity from renewable resources. The deal grew its green energy portfolio by 40%.

The concept of corporate sustainability is not driven entirely from a pricing standpoint; in many cases, companies continue to pay a higher price for renewable energy. They must have the desire to do their part and reduce their use of fossil fuels.

It’s more of a socioeconomic decision driven from an investor standpoint. Like Google, corporations want to be viewed as leaders that drive environmental awareness.

To read more about the impact of social responsibility, please see Top 5 Renewable Energy Trends for 2020.

Decreasing Generation Costs

Corporations have been motivated to enter the renewable energy space because it’s seen as a new profit area.

Since the reduction of renewable costs, markets are equalizing, and renewable energy has become more competitive with fossil fuels primarily due to the decreasing costs of utility-grade renewable energy generation. Price decreases come from a combination of scale in production and improvements in technology.

Wind and solar have lower or comparable total cost of generation than the majority of conventional generation sources.

Solar has seen greater improvements in the manufacturing process and the technology; the end product is more efficient. Lazard’s latest annual Levelized Cost of Energy Analysis (LCOE 13.0) shows the cost of renewable energy continues to decline.

Certain technologies—such as onshore wind and utility-scale solar—became cost-competitive with conventional generation several years ago on a new-build basis, and continue to maintain competitiveness with the marginal cost of existing conventional generation technologies.

Remaining Challenges

Though the renewable energy industry is stabilizing in many ways, generation demands, cost of manufacturing, and state requirements are a complex, ever-moving target, and new changes to the industry arrive each day.

While opportunities evolve in this sector, the industry will continue to struggle with some significant challenges.

Storage

Major questions remain about the direction of renewable energy when we look at the United States as a whole. The sector is still working to tackle the issue of cost-efficient energy storage.

While the use of fossil fuels  decreases, the general public still expects energy to be available whenever they want to use it. Everyone expects to be able to open their refrigerator and have their food safe to eat no matter the time of day.

Most energy storage is approximately 40% to 50% efficient; the remainder of that energy is consumed during the storage process.

While a continued decline of fossil fuels is expected, without efficient storage solutions, it’s unlikely that the use of fossil fuels will discontinue. If a cost-efficient energy storage solution is found and manufactured, it will be a significant game changer for the renewable energy industry.

Insufficient Infrastructure

As plans for coal and less efficient generation term out or are retired, there’s a need for additional power generation. This raises the questions—where is it going to be generated, and is there sufficient transmission infrastructure in place to deliver the energy to the markets where it’s needed?

With the combination of renewable energy mandates and trends  toward corporate sustainability, utilities are looking to fill the gap with renewable energy sources—if the utility already has a strong base load component.

However, renewable energy tends to be generated further away from where it’s needed, especially when the production is large scale. For instance, wind power is often generated out in the desert in areas like Palm Springs or West Texas where there’s lots of space but a low population.

You need a reliable transmission system that has capacity to get the power where it needs to go. This continues to be a challenge across the United States.

Capacity

The system also needs to be designed to sustain peak periods.

Wind and solar are intermittent power sources. The greatest amount of wind generation isn’t necessarily generated during times of peak demand, so until reliant and efficient energy storage is created, we need more of it. A 100 megawatts of wind power will only run at 25%-37% capacity.

Solar does line up better with time of day when people need power, but it has similar intermittency issues.

Peaking Distributed Generation

Smart grid solutions have been introduced to the market with technology that has the capacity to help manage existing electricity in your grid.

Technology like this will continue to become more important when intermittent sources like renewables become more incorporated into power grids; it will be needed to manage the energy load—distributed generation—to ensure there’s not frequent brown or black outs.

Liquidated Damages

Renewable energy companies enter into long-term power purchase agreements (PPAs) with power and utility companies to finance their projects. Utilities and corporations buy the power generation coming off the facility, but if they don’t perform on that contract, liquidated and other types of damages could go into effect.

For example, a renewable energy company might sell a certain amount of wind power to a utility company for $75 per megawatt-hour for an agreed upon number of years. If the utility company fails to manage its facilities correctly and isn’t able to use the full amount of wind power in the contract, the renewable energy company could turn to the open market to sell the power. If it’s sold at $15 per megawatt-hour on the open market, the utility company could be responsible for the remaining $60 of the original cost in the contract.  

The city of Georgetown, Texas experienced this issue in 2018 when they purchased 100,000 megawatt-hours, but their customers used less than 77,000.

Also, if a renewable facility doesn’t meet its minimum megawatt-hour requirements, it could be required to make the counterparty financially whole.

Looking Ahead 

Moving forward, the renewable energy industry will continue to increase production and its business model will become more valid without federal tax credits.

Next Steps

Corporations are focused on reliability and keeping costs contained.

Renewable energy companies will need to understand what’s driving other corporations to seek out renewables. The renewable energy market is unique and the needs of a car company are very different than those of a technology company.

Are they looking to achieve a balanced portfolio? Do they want more diversification of risk?  Below are some steps renewable energy companies can take as they look to the future:

  • Watch contract language carefully to protect against industry changes that could have a detrimental impact on their business.
  • Model scenarios that don’t involve federal tax credits.
  • Gain a greater understanding of energy markets and the volatility in those markets.
  • Seek better means of energy storage to increase industry demand.

We’re Here to Help

To learn more about how waning federal credits could affect your renewable energy company, please contact your Moss Adams professional.