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Baucus Unveils
Energy Tax Plan

On Dec. 18, Senate Finance Committee Chairman Max Baucus, D-Mont., proposed a sweeping set of reforms on energy-related tax incentives that would overhaul energy tax breaks offered by the government and consolidate or extend many of the provisions promoting renewable energy that are currently only temporary.

Notably, the plan ensures that all energy tax incentives would be technology-neutral and provide an equal credit to all U.S.-produced resources or technologies based on carbon emission levels.

“Our current energy incentives are overly complex and far less effective than they could be,” writes Baucus. “Today, there are 42 different energy tax incentives.

“More than half are too short-term to effectively stimulate investments. They also provide different subsidies to different technologies with no discernable policy rationale. On top of that, they result in significant revenue loss: If we continue to extend current incentives, they will cost nearly $150 billion over 10 years.”

Ostensibly, there are two credits: one for clean energy and one for transportation.

For clean energy, the Baucus proposal would keep all current incentives, such as the production tax credit (PTC) for wind, in place until 2016. Wind projects placed in service in 2017 and later would be eligible for either a 20% investment tax credit (ITC) – down from the current 30% – or a $0.023/kWh PTC for 10 years, adjusted for inflation.

Additional clean energy tax credit highlights include the following:

Notably, the plan did not address expanding master limited partnerships to renewable energy, nor did it address depreciation. However, in November 2013, the committee addressed the issue.

When reached for comment, industry watchers gave the finance committee high marks for its ingenuity.

“The proposal is innovative in that it’s technology neutral,” explains David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld. “It is the most thoughtful that Congress has been with energy,” he says, adding that the plan’s streamlined approach could be used as a future model when – or if – tax reform talks progress.

“Although the proposals set forth in the plan are a good way to approach energy,” Burton says, “I don’t see tax reform happening.”

John Marciano, a partner at law firm Chadbourne & Parke, agrees. “[The proposal] probably has legs,” he says. “It represents a good starting point for discussions.” Nonetheless, he cautions that he doesn’t expect further action on tax reform to heat up before the 2014 elections.

Akin Gump’s Burton calls Baucus’ rumored departure from chairing the Senate Finance Committee (to become U.S. Ambassador to China) “a setback” that would ensure the status quo remains in place.

The other wild card is the future of Rep. Paul Ryan, R-Wis., a leading candidate to succeed Rep. Dave Camp, R-Mich., as the chair of the House Ways and Means Committee. The House Ways and Means Committee is an equal partner with the Senate Finance Committee in the process to overhaul the tax code.

Ryan reportedly supports the idea of tax reform. However, it is unknown if Ryan supports aspects of the Baucus plan. History shows that the Mitt Romney-Paul Ryan presidential ticket was opposed to all energy tax credits.

 

Congress Examines
Wind Tax Incentives

Congress recently provided the wind industry fodder for speculation regarding the future of renewable energy tax incentives. The following is a discussion of the modified accelerated cost recovery system (MACRS) depreciation news and the possibility of extending master limited partnership (MLP) status to renewable energy projects.

First, Sen. Max Baucus, D-Mont., who chairs the Finance Committee, released his outline of corporate tax reform. His proposal is intended to achieve a lower corporate tax rate (the exact rate remains to be specified) but sacrifice MACRS.

Under the proposal, a wind farm would be depreciated 5% a year using a declining balance calculation, meaning 5% in the first year, 4.75% (i.e., 5% of 95%) in the second and so on.

This is drastically less accelerated than the current depreciation over five years, using a 200% declining balance. Further, as compared to the 50% “bonus” depreciation that is available for projects in service by Dec. 31, 2013, it is a drop in the bucket.

The value of MACRS in a wind tax equity transaction varies between 10% and 30% of the tax equity investor’s economics. (The range is due to the varying cost of funds of different investors and varying tax appetite assumptions.) Sen. Baucus’ proposed depreciation methodology would wipe out that benefit.

The likelihood that the proposal to expand MLP rules to include renewable energy projects as part of tax reform increased when the Joint Committee on Taxation “scored” the proposal in the Master Limited Partnership Parity Act (S.795) as costing a modest $1.3 billion over the 10-year scoring period.

In the context of tax reform, $1.3 billion is a low amount. For instance, replacing MACRS raises an estimated $500 billion. Further, the last time the PTC was extended for just one more year, it was scored as costing $12 billion. Thus, the MLP expansion is little more than a rounding error in tax reform.

The benefit of MLP status is being able to raise equity from the public while only incurring a single layer of tax. That tax is imposed at the unit holder level only. Under current law, MLPs cannot effectively pass-through tax credits or tax deductions (e.g., depreciation) in excess of their income to individual investors, and no proposal has been introduced to modify those limitations.

Therefore, the proposed MLP change does not eliminate the need for tax equity investors or address the shortage thereof. What the MLP change would do is permit “sponsor” equity to be raised from retail investors and create a secondary market for projects that are beyond the tax credit period.

The MLP legislation has bipartisan support. Besides Sen. Chris Coons, D-Del., who reintroduced the bill in April, supporters include Sens. Mary Landrieu, D-La., and Debbie Stabenow, D-Mich. On the Republican side, supporters include Susan Collins, R-Maine, Jerry Moran, R-Kan., and Lisa Murkowski, R-Alaska.

A similar bill was introduced in the House in August by Rep. Mike Thompson, D-Calif., and was co-sponsored by 18 other Democratic House members. In addition, the White House appears to support the proposal.

The MLP expansion also has some odd allies when it comes to trade associations. For example, the proposal has been endorsed by the American Petroleum Institute (API). There are two potential rationales for that support. The first is that the API may believe that the MLP rules are less likely to be a sacrificial lamb in the tax reform process if the renewables industry is also a beneficiary of the rules. The second is that the API may hope to couch the expansion of the MLP rules as a trade for allowing the PTC and ITC to expire.

For that reason, the support from the renewable energy trade associations has been somewhat tepid. They would like to see the MLP rules expanded but not at the expense of tax credits. The financial benefit of the MLP rule expansion is a fraction of the value of the tax credits.

David K. Burton is partner at law firm Akin Gump Strauss Hauer & Feld. He can be reached at (212) 872-1068 or dburton©akingump.com.

 

Proposed Bill Nixes
Domestic Content

Ontario is introducing legislation to eliminate domestic content requirements under its feed-in tariff (FIT) program for future renewable energy projects. If passed, the amendment to Ontario’s Electricity Act would remove the need for projects participating in the program to source up to 50% of content within the province.

The Ministry of Energy says the changes would help ensure Ontario is in line with decisions made by the World Trade Organization, which last year ruled that the FIT’s domestic content mechanism breached international trade laws.

Nonetheless, the ministry maintains that the requirements had been put in place as a temporary measure, and strong growth in the renewables sector means the rules are no longer required.

“Ontario has a strong renewable energy sector, one that has created over 31,000 jobs and now exports goods and services around the world,” comments Energy Minister Bob Chiarelli. “Changes included in this legislation will, if passed, save ratepayers $1.9 billion, making clean energy more affordable than ever.”

To date, the ministry says Ontario has more than 18.5 GW of renewable energy online or announced to be built. As part of its recently updated Long-Term Energy Plan, the province intends to seek 300 MW of wind power this year and 300 MW more in 2015.

“The strength of the sector means here at home, when Ontario’s renewable energy providers make decisions about what products and services they purchase, we’re confident Ontario suppliers will be competitive and the supplier of choice,” Chiarelli adds.

 

Ohio Boosters
Tout Energy Law

Ohio’s Clean Energy Law (S.B.221) continues to spur investments in renewable energy and energy efficiency, according to a new report from the Environment Ohio Research and Policy Center.

Passed in 2008, the Clean Energy Law established benchmarks for Ohio investor-owned utilities to get 12.5% of their electricity from renewable sources and save 22% of their electricity through energy efficiency by 2025, Environment Ohio explains. In addition, at least half of the renewable energy required must be purchased from in-state projects.

“The Clean Energy Law is getting results for the Buckeye State,” says Christian Adams, Environment Ohio state associate. “Four years in, Ohio’s Clean Energy Law is reducing pollution, cutting our dependence on coal and gas, creating jobs and saving Ohioans money.”

The report – “Ohio’s Clean Energy Success Story, Year 4” – finds that between January 2009, when the Clean Energy Law took effect, and December 2012, the law has resulted in 5,000 GWh of cumulative energy savings and reduced peak electricity demand by 1.583 GW. In addition, 313 MW of wind power and 25 MW of solar energy were added in 2012.

“We decided to shift our focus to Ohio from Indiana primarily because of the passage of S.B.221. We knew the law would create a market for clean energy that we could compete for,” comments Dan Litchfield, senior business developer with Iberdrola Renewables. “We are looking forward to further investment in the state and hopefully a higher percentage of Ohio labor now that there are some firms with wind energy construction experience.”

Ohio Environment notes that the report comes as Ohio lawmakers debate a new energy bill. The organization says S.B.58, introduced by Public Utilities Committee Chairman Sen. Bill Seitz, R-Cincinnati, proposes to alter significant portions of the Clean Energy Law, including expanding the ability of large industrial energy users to exempt themselves from the law’s efficiency requirements and eliminating the buy-Ohio component of the renewable energy standard.

Environment Ohio is urging Gov. John Kasich to veto any version of the bill that may cross his desk.

 

Offshore Advocates
Seek Va. Support

Environment Virginia says leaders from the Virginia Offshore Wind Development Authority, the City of Norfolk and the Virginia Ship Repair Association recently joined the group to detail the benefits of offshore wind power and its related supply chain industries, as well as to call on the state’s legislators to support extending federal incentives for wind energy.

Environment Virginia says the potential for Virginia to help lead the offshore wind industry is squarely in view.

In September, a Virginia-based subsidiary of Dominion won the nation’s second offshore wind lease. Dominion was also one of seven national finalists awarded first-round funding for offshore wind project development from the U.S. Department of Energy.

Although the offshore wind industry has moved forward in leaps and bounds, Environment Virginia says there are still challenges ahead for Virginia, such as continued financial support for a sector still in its infancy. The group says the U.S.’ recent progress on wind is largely the result of the ITC and PTC, which were set to expire on Dec. 31, 2013. w

Policy Watch

Baucus Unveils Energy Tax Plan

 

 

 

 

 

 

 

 

 

 

 

 

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