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Why ‘passive activities’ may be clean energy’s biggest hurdle

Cross-posted from Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

If you care about the future of the American renewable energy industry, you need to learn what the Internal Revenue Service (IRS) calls “passive activities.”  Because these important rules mean that as long as the U.S. relies on the tax code to provide renewable energy incentives, renewable energy can only grow as fast as Wall Street tax equity and it will remain difficult to have locally-owned renewable energy projects.

The “passive activities” issue has to do with an important IRS determination to prevent wealthy people from creating more tax shelters.  The basic idea is that if you earn tax credits from investments that you don’t “materially participate in” (e.g. investing in a wind farm) then you can only use those to offset taxes that you pay on the same kind of income (e.g. renting property).  Both activities are considered “passive,” because the rich person isn’t the wind farm mechanic, nor are they typically the rental property superintendent.

In renewable energy, it means that the two major federal incentives – the Production Tax Credit and the Investment Tax Credit – can only be used to offset passive income tax liability.  And since few Americans own rental property or have other passive income liability, it means few Americans can effectively invest in renewable energy projects.

The rules on passive income taxes and credits can’t be effectively changed because, as tax attorney Greg Jenner puts it, “it would be like pulling on the thread in a sweater.  The passive loss rules are the primary defense in the tax code against tax shelters and once you start to unravel them, there will be no turning back.”

Thus, using the tax code to boost renewable energy creates two major problems: artificially capping the renewable energy market and curtailing local ownership.

I outlined the first issue in December, in Federal Tax Credits Handcuff Clean Energy Development:

Since clean energy projects must rely on a limited set of tax equity partners and a limited-size tax equity market, when tax equity dries up, so do wind and solar projects.  The economic crisis of 2008 made the problem particularly evident, as the tax equity market shrank by 80 percent from 2007 to 2009.  Only the cash grant program saved the wind and solar industries from total collapse in the intervening years (2009-11), and the cash grant will likely expire at the end of 2011.  The following chart from a SEIA presentation illustrates [pdf] the problem, even though it was devised before the 1-year extension of the cash grant in 2010.

The problem of limited tax equity isn’t just short term.  Marshal Salant, managing director of Citigroup Global Markets Inc., said in a recent interview: “There’s more demand for tax equity to finance renewable energy projects than we will ever have in the way of supply.”

Local ownership of renewable energy also suffers when incentives come through the tax code.

The logical entities like cooperatives, schools, or cities are ruled out because federal wind and solar incentives are for taxable entities, not these rooted community organizations. Instead, communities seeking local ownership have to either perform complex legal acrobatics to set up private corporations or sacrifice as much as half of the value of the tax incentives by forming a partnership with a tax equity partner.  When community wind projects succeed, like the South Dakota Wind Partners, organizers admit that repeated the success is unlikely in light of the legal and financial complexities.

It’s understandable in today’s political climate that renewable energy boosters spend more time on keeping existing incentives alive, but if Americans hope to (someday) achieve a 100% clean energy future, they will need energy policy that’s no longer handcuffed to the tax code.

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Building codes: Small rules that help homeowners save big on energy

Building houses according to updated energy conservation codes saves homeowners money. (Photo by 401k.)

Cross-posted from Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

In energy policy, lawmakers often prefer carrots to sticks, because this strategy minimizes the opposition. But mandatory rules, like building energy codes, can save energy and pay back several times over during the useful life of buildings.

The state of Illinois is poised to become a regional leader by adopting the 2012 International Energy Conservation Code (IECC), an example of small-seeming rules with big impact. For example, 40 percent of primary energy consumption in the U.S. is in buildings, along with about 40 percent of greenhouse gas emissions. Thus, adopting the 2012 IECC, with energy efficiency standards 28 percent stronger than the 2006 code, can make a big dent in carbon emissions.

The financial savings can add up, as well. The federal Energy Information Administration estimated in 2005 that homeowners in the Midwest spent an average of $1,800 per year on household energy use. Assuming states had already adopted the 2006 IECC for the previous expenditure figure, the implementation of the 2012 code could save families $500 per year.

Read more: Energy Policy

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Trade in the 20th century electric grid. Don’t trade off local energy

It's sundown for the 20th century electric grid. (Photo by Nayu Kim.)

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

In a New York Times SundayReview piece, "Drawing the Line at Power Lines," Elisabeth Rosenthal suggested that our desire for clean energy will require significant trade-offs:

There are pipelines, trains, trucks and high-voltage transmission lines. None of them are pretty, and all have environmental drawbacks. But if you want to drive your cars, heat your homes and watch TV, you will have to choose among these unpalatable options ...

Perhaps the answer is simply that in an increasingly crowded powered-on world, we’re all going to have to accept that Governor Cuomo’s so-called energy highway is likely to traverse our backyard.

I disagree.

The future of American electricity policy is not about trade-offs, but rather a chance to trade in an obsolete, centralized paradigm for a local, clean energy future. Utilities would have us believe that new high-voltage transmission lines are necessary to get more wind and solar power. But the truth is that the American electricity industry refuses to embrace the fundamentally different nature of renewable energy: Its ubiquity means that Americans can produce energy near where they use it, in an economically competitive manner, and at a community scale.

Read more: Energy Policy

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More evidence of a distributed solar sweet spot

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance.

If the cost of electricity were the only factor in energy discussions, we’d probably have a lot more coal and a lot less renewable energy. But the truth is that renewable energy can compete on cost and distributed renewable energy has a lot more value beyond just electricity, as illustrated in this one facet in this brief examination by the Clean Coalition.

Distributed solar finds a cost sweet spot.

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How EPA helps big corporations greenwash

Walmart may have hybrid trucks, but its efforts at going green are a drop in the bucket considering the company's size. (Photo by Walmart Stores.)

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project.

While I generally have nothing but praise for the Environmental Protection Agency (EPA), its Green Power Partnership program falls short of the agency’s usual standard. In particular, the program, by providing media recognition for participating companies who procure renewable energy, inflates the activities of large companies at the expense of businesses whose clean energy transformation is much more meaningful.

Take Walmart, who appears at No. 3 in the EPA’s Green Power Partner rankings with an annual procurement of 872 million kilowatt-hours (enough to power approximately 87,000 homes per year). The EPA inaccurately credits the super-retailer with getting 28 percent of its electricity from green power, because the partnership program allows Walmart to cherry-pick its only two regional divisions that have made any strides on green energy (California and Texas).

Nationwide, Walmart gets less than 2 percent of its electricity from renewable energy sources.

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How distributed solar can reduce electricity prices

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance’s New Rules Project.

What if installing more solar could reduce electricity prices? It's already happening in Germany, world leader in solar power, and it's likely to happen in the U.S., too.

Right now the idea of solar reducing electricity prices seems silly.  After all, when subsidies aren't factored in, the cost of residential solar will be higher than residential retail electricity prices in all but three states until after 2016. But solar has two key factors in its favor:

Read more: Solar Power

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Solar grid parity 101 — and why you should care

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project. Solar grid parity is considered the tipping point for solar power, when installing solar power will cost less than buying electricity from the grid. It’s also a tipping point for the electricity system, when millions of Americans can choose energy production and self-reliance over dependence on their electric utility. But this simple concept conceals a great deal of complexity. And given the stakes of solar grid parity, it’s worth exploring the details. The cost of solar For starters, what’s the right …

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Gainesville, Fla., becomes a world leader in solar power

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project. You don't have to be big to go big on solar power. That's the lesson from the Gainesville Regional Utilities, the electric utility whose feed-in tariff solar policy has brought over 7 megawatts (MW) of solar to the city's 125,000 residents. The raw number isn't much, but it puts Gainesville among the world leaders in solar installed per capita, beating out Japan, France, and China (and besting California, which has 32 kilowatts (kW) per 1000 residents). The basic premise behind the …

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Federal tax credits may handcuff clean energy development

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project. Clean energy advocates should cast aside their worries about increasing Republican scrutiny of energy subsidies.  The clean energy industry's foolish reliance on tax incentives has already handcuffed its expansion. Unlike the leading nations in the clean energy race, the United States has no coherent energy policy.  Rather, its energy market is balkanized by 50 distinct state policies and overlaid with poorly conceived federal tax incentives.  Federal tax incentives have one redeeming feature.  To get a tax incentive only takes one vote …

Read more: Uncategorized

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Bigger subsidies make bigger solar a bad bet

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance's New Rules Project. Americans seem unable to resist big things, and solar power plants are no exception. There may be no reasoning with an affinity for all things "super sized," but the economics of large scale solar projects (and the unwelcome public scrutiny) should bury the notion that bigger is better for solar. In fact, smaller scale solar and the right solar policy could get more solar for the dollar and more public support for renewable energy. There are three problems with large-scale solar …

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