Tax credit policies

One of the ways the gap between market price and feasible price of renewable energy plants has been bridged is through tax benefits to investors. Just as the oil and gas industries have enjoyed various tax benefits to encourage investment in drilling, exploration, and production facilities, in the last couple decades investors in renewable generators have enjoyed either production or investment tax credits that contribute about 3 cents to the value of a kilowatt hour of renewably generated electricity for the producer. While these subsidies are set to expire at the end of 2008, most plans for new installations of renewable energy generators are contingent upon their renewal.

Tax credit policies have three drawbacks that make them politically vulnerable: they are largely invisible to the public, they are dependent upon the state of the federal budget and Washington politics, and they apply mostly to large corporate entities rather than small investors. A tax credit is paid via drawing tax revenues from other taxpayers and budgets, not necessarily from tax revenues from other parts of the energy sector. These credits have also been terminated a number of times over their checkered history, putting the renewable energy industry on a roller coaster. Finally, they are most attractive to large corporate investment vehicles and do not represent an incentive for small and medium investors to get into the renewable energy game.

Tax credits may have a role in promoting reinvestment in existing infrastructure, for instance by incentivizing the large railway companies to electrify their rights of way, as suggested by Alan Drake.

Renewable energy credits or green tags

Another method for trying to bridge the gap is selling a green power attribute separately from the power itself as a “green tag.” Also called “Green Power Marketing,” the idea is that companies and organizations can buy these tags to green their power mix, even though they are actually using the mix of power available in their area at their facilities. This is the closest one can get to a “free” market in renewable energy (credits) and those who are enamored of unregulated market mechanisms favor this type of approach.

Studies have found that REC schemes only have a mild stimulative effect and are a relatively expensive means of promoting renewable energy; there are suggestions that the traders of these credits are the prime beneficiaries of an REC system. Furthermore, RECs stimulate mostly large onshore wind farms as green power marketers are only looking for a “green” attribute at the lowest cost; to build the renewable electron economy, we will need a more diverse set of renewable generators.

Net metering

For small renewable generators that operate on the premises of a power consumer, power companies allow the customer to “run their meter backwards,” crediting the customer for the full retail cost of the electricity they generate on premises. While this may appear to be simple and fair compensation to the customer/owners of the generator, the (hidden) subsidy for net metering comes from other power users who compensate the power utility for lost profits from the sale of electricity to those self-generating customers. Another limitation of net metering is the loss of revenue for over-sizing the on-site generator and overproducing clean electricity above and beyond usage on-site.

Next: transparent renewable energy promotion policies.