Will Congress extend the 30% Federal Energy Tax Credit?

July 31, 2008

Meanwhile, the industry holds its breath to see if a deal can be worked out to avoid a big setback

Posted July 28, 2008

Over the past few years, wind energy has experienced a tremendous, if precariously fragile, boom.

Last year alone, wind-power capacity jumped 21 percent in the United States. Wind is now one of the country’s fastest-growing electricity sources, buoyed by strong consumer demand, mounting concerns about fossil fuels, and—perhaps most notable—vital government support.

Wind turbines churn at Invenergy's Buffalo Mountain windfarm near Oak Ridge, TN.

Wind turbines churn at Invenergy’s Buffalo Mountain windfarm near Oak Ridge, TN.
(Charlie Archambault for USN&WR)

Nearly every American-bred source of energy, from coal to nuclear power, gets some sort of federal push, and wind and solar companies receive theirs in the form of tax credits, which enable them to line up investors and overcome enormous start-up costs. (Hundred-foot blades don’t come cheap.)

The credits, which are set to expire at the end of the year, enjoy almost universal support on Capitol Hill. Politicians of both parties routinely champion them.

And yet because of continued bickering, Congress this year has failed to renew them—with potentially drastic consequences.

The mere prospect of these credits expiring, in fact, has already begun to rattle the renewable-energy industries. Some wind developers are putting projects on hold and, in more extreme cases, laying off workers. “We have four projects right now that are what we call construction ready—we could install them and get them up and running by spring 2009,” says Leon Steinberg, CEO of National Wind, one of the nation’s leading wind-energy developers. “But none of our financial institutions will finance these projects with just the hope that the tax credit will be renewed.”

As a result, Steinberg says, construction on these projects has yet to start. The rationale for waiting is simple: The wind-energy tax credit is good for 10 years and pays developers about 2 cents for every kilowatt-hour of electricity they produce, but it must be available on the date that a project comes online. If a new wind farm starts pumping out electricity in January 2009 but the credits haven’t been renewed yet, it loses out.

The solar industry, which gets a 30 percent credit on new investments, is in the midst of a similar shake-up. Some large-scale developers have tabled projects as they await Congress’s decision, while smaller operations are scrambling to get solar installations up and running by December. “With solar, we can put things in place a little more quickly, so you are seeing a tremendous jump in solar installations right now,” says Gilbert Metcalf, a professor of economics at Tufts University and noted tax policy expert. “It is driving up the cost of solar panels and installations.”

If the credits are not renewed, he warns, the solar market could collapse, and solar-technology firms may have to lay off workers. “It will retard the progress we are making,” he says.

The uncertain future, in turn, is sending ripples through the economy, affecting, in particular, the nation’s nascent “green” manufacturing industry, which has quietly emerged in the tow of the renewable-energy market. In the Midwest and other industrial regions, factories that manufacture turbine parts or solar panels are seeing a slowdown in new orders.

New York officials recently warned that the state could lose 7,000 jobs if the tax credits are allowed to expire, and national estimates put the potential losses above 110,000. In the past, green manufacturing in the United States has been somewhat stifled by volatile levels of government support, and industry observers warn that the trend could worsen—with more green jobs and companies going overseas—if Congress refuses to act.

History hints at the possible long-term damage if the credits expire in December—because it has happened before. In 1999, 2001, and 2003, Congress didn’t renew the tax credits, and in each of the following years, wind-power installations fell dramatically, according to the Department of Energy.

In 2000, there was a 93 percent drop in new wind projects; in 2004, a 74 percent drop. “This is not rocket science,” says Greg Wetstone of the American Wind Energy Association. “When the credit is in place, wind energy and renewable energy has grown dramatically. When the credit has lapsed, the level of wind development has fallen dramatically.”

The solar industry suffered a similarly dramatic bust in the early 1980s, when Congress, looking to cut spending, eliminated the solar tax credits and effectively cut the industry in half.

Today, ironically, there is overwhelming bipartisan support for the incentives—even Sen. James Inhofe of Oklahoma, a conservative Republican and vocal global warming skeptic, is a strong proponent. Few consider the tax credits’ estimated price tag of about $8.2 billion a significant drain on the federal budget, especially in light of the measurably larger incentives awarded to oil and coal. In fact, a recent study by General Electric found that the tax credits more than pay for themselves, because they create jobs and profits, resulting in 2007 in a net gain of $250 million for the federal treasury. Also, the American public is behind them: About 94 percent of Americans support government development of solar energy.

It is tempting to think that all this goodwill would have presaged easy passage. But Congress, despite its pledges of support, has lately ground into something of a stalemate, and on multiple occasions in the past few months it has defeated or blocked bills that would have salvaged the credits.

At the moment, the main obstacle to progress seems to be a philosophical one. House Democrats, led by the so-called Blue Dog Democrats, a group of fiscally minded moderates, have insisted that the cost of the credits be offset by savings elsewhere. Their solution, which would raise taxes on offshore companies, has rankled Senate Republicans, who insist that no offsets are needed in the first place. And so a parliamentary standoff has unfolded. Twice the Senate attempted to attach an amendment to the now recently passed housing relief bill that would have renewed the credits; twice it was stripped out by the House. Meanwhile, a House bill with similar aims was defeated last week by a Senate Republican filibuster.

At a breakfast meeting with reporters on Monday, Sen. Jeff Bingaman, chairman of the Senate energy committee, said that passing the tax credits this week is one of the Senate’s top priorities before it adjourns for its August recess.

It remains uncertain how he and his Democratic colleagues intend to reconcile the squabbling over offshore drilling and oil speculation that has tied up most energy legislation this summer.

Industry observers remain optimistic that the credits will get renewed, but they somberly note that each day Congress waits, the greater the financial loss becomes. They add that if Congress were really serious about supporting renewable energy, it would make the credits permanent, just like its support for fossil fuels, which they argue would spur green-collar jobs across the rust belt. But they’ll take what they can get, preferably sooner than later.

Our Perspective:

If Congress really believes there is an energy crisis in the making, they will extend the credit. The states are jumping in and passing provisions to make alternative energy affordable. This along with the Federal tax credits has spurred the growth of the alternative energy market.

If Congress drops the ball or continues to drag its’ heels, we will be right back where we began. We can all look forward to paying higher prices for electricity and face the possibility of rolling brownouts, for our local providers will be unable to meet the growing demand for electricity.

Let us know how you feel? Should you want to know more about solar opportunities email george@hbsadvantage.com

2 Responses to “Will Congress extend the 30% Federal Energy Tax Credit?”

  1. […] Go to the author’s original blog: Will Congress extend the 30% Federal Energy Tax Credit? […]

  2. […] Credit Reference Report wrote an interesting post today onHere’s a quick excerpt Meanwhile, the industry holds its breath to see if a deal can be worked out to avoid a big setback By Kent Garber Posted July 28, 2008 Over the past few years, wind energy has experienced a tremendous, if precariously fragile, boom. Last year alone, wind-power capacity jumped 21 percent in the United States. Wind is now one of the country’s fastest-growing electricity sources, buoyed by strong consumer demand, mounting concerns about fossil fuels, and—perhaps most notable—vital government su […]

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