Navigant Research Blog

Momentum Builds for Reinstatement of Wind Tax Credits

— July 24, 2015

The legislative effort to renew the expired wind energy tax credits took a big step this week in Congress as supporters of wind energy secured a 2-year extension of the wind credits. The Senate Finance Committee voted 23 to 3 to extend roughly $95 billion in 52 tax breaks for various industries and interests, including wind.

The Production Tax Credit (PTC) provides $0.023/kWh in tax credits for a 10-year duration to wind plant owners. A 30% Investment Tax Credit (ITC) is also included as an alternative. Both are comparable in value, offsetting around 30% of the installed cost of a wind plant.

The package also includes a 2-year extension of the 50% bonus depreciation, which allows an owner in a new wind plant to deduct 50% of the tax basis in wind turbine capital costs and depreciate the other 50% over the normal depreciation period. The PTC/ITC extension also includes geothermal, biomass, landfill gas, and ocean energy projects. Notably, solar energy was excluded from the package, but intense lobbying is underway from that industry to get it included.

The tax credits for wind, which expired in 2014, must be renewed to prevent the U.S. wind market from collapsing as it does from time to time when Congress fails to renew them. The wind industry is currently in a build cycle, with over 8,600 MW expected to be brought online this year of more than 13,600 MW under construction. This momentum, however, is riding on special start construction and other safe-harbor regulations provided by the Internal Revenue Service (IRS) that allows wind plants to qualify for the tax credits if construction is finished by the end of 2016.

The new 2-year extension would re-enact the PTC and ITC for a 2-year period through the end of 2016, and wind projects would have to begin construction during this 2-year window to be eligible. IRS guidance to the wind industry in recent years has allowed a 2-year window for wind plants to be built, and this is expected to be applied to this new extension. In practice, new wind plants that meet IRS guidelines for either starting construction or meeting other safe-harbor regulations will have 2 years to finalize construction. The ultimate result would be securing stable wind turbine installations in the United States from now through 2018.

Promising but Uncertain

The path forward for these tax extenders to be signed into law is promising but uncertain. It is promising because the wind industry tax credits on their own could be a hard sell in today’s polarized Congress, but when rolled into a larger package that appeases broad industry interests, Congress is more likely to approve the package. Also, the well-known but not well publicized reality in the wind industry is that most U.S. wind plants are majority owned by so-called tax equity financial firms, usually large banks, all of whom have the large tax bills necessary to fully monetize the tax credits. These companies have enormous lobbying power that can help get their interests over the finishing line.

Passage by the full Senate is required, plus a reconciliation with a House version of the bill that has yet to emerge. Importantly, lawmakers are moving ahead with this extenders package now instead of the end of the year when a last minute rush can doom even the most straight-forward and uncontentious legislation. Allowing the extender effort to fall into next year would be even worse, as the effort would become entangled and politicized by the 2016 presidential and congressional elections. All eyes in the wind industry will be on this effort going forward.

 

Compliance Strategies for Satisfying Clean Power Plan Requirements

— July 23, 2015

Next month, the U.S. Environmental Protection Agency (EPA) is expected to release the final Clean Power Plan (CPP) rule, which regulates carbon dioxide emissions from existing power plants. While states may comply independently or work together to achieve CPP goals, Navigant Consulting has found that states can substantially reduce compliance costs by banding into trading blocs, and we have focused on regional trading in our modeling. The proposed rule is modeled in Navigant Consulting’s recent white paper,  Anticipating Compliance: Strategies and Forecasts for Satisfying Clean Power Plan Requirements, and highlights our finding that focusing on energy efficiency (EE), coal retirements, and targeted renewable expansion represents the least-cost compliance option.

Energy Efficiency

EE represents the lowest-cost compliance option in almost all areas, but it cannot single-handedly achieve compliance.  Expanding EE programs also helps ease interim compliance targets because EE can be rolled out more rapidly than new generators, reducing the near-term need to build large amounts of new low-carbon capacity. Navigant Consulting found that the expansion of EE programs in response to the CPP can save nearly $250 billion above business-as-usual EE through 2030.

Coal Retirements

The Northeastern, Southeastern, and Midwestern United States are expected to rely heavily on coal retirements for compliance. Since EE and renewables are less carbon-intensive than gas generation, higher penetration of these technologies helps keep more coal generators online.

Regional Least-Cost Compliance Options

(Source: Navigant Consulting)

Natural Gas

New gas generation plays an important role in compliance, and it is necessary to help maintain capacity and energy resource adequacy after coal retirements.  The Northeast and Southeast, in particular, will likely rely heavily on new natural gas combined-cycle plants to supplement EE in replacing retiring coal plants, and building these plants will be a large portion of their compliance costs.  The central and western United States will also rely heavily on gas to maintain capacity margins, but will likely see more simple-cycle peaking gas plants than the Northeast and Southeast due to a high rate of renewable expansion as well as EE growth.

Renewables

Adding renewables is a cost-effective compliance option where renewable potential is high, especially in the central and western United States.  Navigant found wind expansion to be economic throughout the western and central United States, and it plays a particularly important role in compliance in Texas, the Southwest Power Pool (SPP), and Midcontinent Independent System Operator (MISO).  California, which has little coal left to retire, has to rely on EE and renewable resources almost exclusively for compliance. Solar and wind both play critical roles in ensuring low-emission generation in California.  Navigant Consulting found that areas that rely more heavily on renewables tend to need to spend less on replacing capacity than other areas, but also tend to see higher carbon allowance prices (which help make large-scale renewable buildout economic).

Glide Path

Many commenters to the EPA focused on the difficulty of meeting near-term interim targets.  Navigant Consulting’s analysis has shown that the implementation of a glide path with less stringent initial targets results in savings of over $200 billion when compared to a non-glide path scenario.

 

The Future of U.S. Solar Energy Companies – Part 4

— July 22, 2015

Note:  This blog is the fourth in a four-part series examining the evolution of U.S. solar companies.

In the final part of my series focused on the future of U.S. solar companies, I will cover yieldcos and community solar.

Yieldcos

The solar market has seen a dramatic increase in the number of yieldcos during the past 2 years. My colleague, Roberto Rodriguez Labastida, recently blogged on the topic, explaining that the idea behind yieldcos involves the creation of a company to buy and retain operational infrastructure projects and pass the majority of cash flows from those assets to investors in the form of dividends. Structurally, yieldcos are similar to real estate investment trusts. They are also almost ideal for renewable energy projects, including wind farms.

In July 2014, SunEdison established a yieldco, called TerraForm Power Inc., which raised approximately $500 million through a successful initial public offering. In March 2014, First Solar and SunPower combined forces to offer a joint yieldco called 8point3, the amount of time, in minutes, it takes for light to travel from the sun to earth. The joint yieldco will include 87% utility-scale power plants and 13% rooftop, with installations in the United States, Chile, and Japan. There are also more than 15 other yieldcos from other large renewable energy providers, including NRG Yield, NextEra Energy Partners, Abengoa Yield, Pattern Energy Group, and Transalta Renewables.

Community Solar

To facilitate the roll-out of community solar, U.S. states are expanding policies for virtual net metering, allowing multiple customers to participate in the same metering system and share the output from a single solar facility. Whether or not they are required to be physically connected to the system varies by policy. Here is a selection of historical and current shared solar programs:

  • California: Virtual net metering for multi-tenant buildings is required for investor-owned utilities (IOUs), and Senate Bill 43: Green Tariff Shared Renewables Program established a future clean electricity rate for all customers.
  • Colorado: Through the Community Solar Gardens Act, IOUs were required to accept 6 MW per year from community solar gardens for 2011 through 2013 (2 MW project limit, minimum of 10 participants, restricted to same municipality or county as the garden).
  • Delaware: Through community net metering, full retail credit is given for participants on the same distribution feeder as the community energy facility (subject to a net energy metering cap, minimum of two participants).
  • Minnesota: Through the solar Energy Jobs Act, Xcel Energy is required to credit community solar gardens at the retail rate (1 MW size limit, at least five participants, subscriptions for 25 years). The Minnesota Public Utility Commission recently provided further clarification that expanded the system size limit to 5 MW alternating current (AC).

Pure-play community solar companies, such as Clean Energy Collective and SunShare, are now being joined by major players, including SunRun and SolarCity. SolarCity stated that it will partner with Minnesota-based developer Sunrise Energy Ventures to develop up to 100 1 MW (AC) community solar installations. While this market is expected to require time to develop, as each public utility commission sets the rules in each state, the opportunities and pipelines of projects are growing.

Looking back, and ahead, at the trends covered in this four-part blog series, U.S. solar PV companies have done a remarkable job adapting to the changing landscape. Moving beyond the expiration of the 30% Investment Tax Credit at the end of 2016, is just another one of those evolutions.

 

EIA’s Assessment of Coal-Fired Generation Plant Retirements Keeps Going Up

— July 16, 2015

The U.S. Energy Information Administration (EIA) continues to track the ongoing saga of coal-fired generation plant retirements within the electric power industry.  In March, the organization forecasted that up to 13 GW of coal-fired generation would be retired this year, due to both aging infrastructure and environmental mandates.  The total of scheduled coal-fired generating capacity retirements is split between 10.2 GW of bituminous coal and 2.8 GW of subbituminous coal. Most of this retiring coal capacity is found in the Appalachian region: slightly more than 8 GW combined in Ohio, West Virginia, Kentucky, Virginia, and Indiana. There are also plants in Alabama and in Midwestern states expected to be retired.

In June, the EIA released its analysis of the Environmental Protection Agency’s (EPA’S) proposed Clean Power Plan (CPP). The report looks at both capacity additions and plant retirements over the 2010-2040 timeframe. It illustrates how renewables play a critical role with different market conditions and policy assumptions. Key differences in scenarios analyzed involve the timing and the extent that wind and solar electric generating capacity additions occur, as well as retirements of some generation capacity, mainly coal-fired units and relatively inefficient power plants that use natural gas or oil-fired boilers to run steam turbines.

Electric Capacity Additions and Retirements, United States: 2014-2040

EIA Chart

(Source: U.S. Energy Information Administration)

Interestingly enough, even without the proposed CPP, 40 GW of existing coal-fired capacity and 46 GW of existing natural gas/oil-fired capacity are expected to be retired by 2040 in the forecast reference case. Cases that implement the proposed CPP more than double these retirements, particularly for coal. In the base policy case, 90 GW of coal-fired capacity and 62 GW of natural gas/oil-fired capacity is expected to be retired by 2040. In the policy extension case, as emission rates continue declining after 2030, over 100 GW of coal-fired generating capacity and 74 GW of natural gas/oil-fired generating capacity is expected to be retired by 2040.

All About Timing

When coal retirements happen is influenced by implementation of these environmental rules that may require power plant operators to either retrofit power plants or receive less revenue because of lower levels of operation. As a result, many coal retirements are expected to occur during the implementation of the EPA’s Mercury and Air Toxics rule (in both the reference case and base policy case).

Whether one takes a conservative reference case view or an aggressive growth position, in our lifetimes, we will enjoy cleaner power provided by natural gas, wind, and solar generation, as well as blue skies. Though the U.S. Supreme Court has recently ruled against the CPP, which may throw some of the retirement schedule to the wind,  with the coal generation fleet rapidly aging, the future still looks very bright.

 

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