Ask a Clean Energy Leader: Impacts of 2016 Omnibus

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Question: What do you think of Congress’ decision to extend renewable energy tax credits in exchange for lifting the 40-year ban on oil exports?

Background: Last week, U.S. lawmakers in the House and Senate passed a spending package that includes multi-year extensions for solar and wind power in exchange for lifting the 40-year-old crude oil export ban. Under the legislation, the 30% Investment Tax Credit (ITC) for solar is extended for an additional three years, after which it will incrementally decrease through 2020, and then remain at 10% permanently starting in 2022. The $23-per-MWh Production Tax Credit (PTC) for wind will also be extended through 2016, as well as retroactively for 2015. The PTC will drop 20% each year from 2017 through 2020.

Renewable energy advocates view this as a huge win for the industry, securing market certainty for an industry that badly needs it. Some climate advocates view the extension as the bridge we need to ramp up clean energy before the Clean Power Plan takes effect, but other climate advocates worry that U.S. oil production will get a big boost from lifting the exports ban.

Drawing on the expertise within the CELI community, we present the various perspectives on this issue from our Fellows who are working on all sides of the issue. The points of view below come from CELI Fellows who are financing solar projects, who are developing policies that regulate responsible energy development, and who worked on this legislation in Congress.

Please note that these views represent those of the authors and may not represent those of their sponsoring institutions.

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[su_spoiler title="Why the Omnibus Bill Isn’t Just Big for Solar – It’s HYUUUUGE " anchor="Robbins"]

[author] [author_image timthumb='on']http://www.cleanenergyleaders.org/wp-content/uploads/2014/12/Jessica-Robbins.png[/author_image] [author_info]Jessie Robbins | Senior Associate for Tax Equity, Sol Systems | Fall 2014 Fellow[/author_info] [/author]

 

You know that feeling when a quagmired, bureaucratic, Kafka-esque legislative process neatly delivers the perfectly crafted measure needed by your industry? Needed not just to avoid certain turmoil, but rather to flourish and prosper? Last week, folks in the U.S. solar industry got to know that feeling well.

Proponents of the ITC hoped for, at the most, an extension of the 30% tax credit for another year. The more realistic among us hoped for “commence construction” language, and at the very worst, companies braced for a jolting drop to 10% beginning January 1,2017.

Imagine the glee, then, when solar patriots across the nation opened their browsers last Wednesday morning (or late, late Tuesday night on Twitter) to discover a full three-year extension at 30% was included in the pending omnibus bill , a gentle two-year step down with 10% enshrined thereafter, and commence construction language all the way through. Bewilderment and glee.

The horse trade that occurred for this miraculous victory was a deal with the oil industry. The omnibus bill also lifts the crude oil export ban, permanently, allowing oil companies to peddle their wares at higher prices abroad. It’s a nice Christmas present for them – I hear their calfskin wallets have been getting pretty thin.

Some in the solar industry are chafing at the notion that oil companies get an estimated $30 billion windfall while we’re still scraping together deals and tax credits in the corner. But context is important – the solar industry is still dwarfed by big oil. The market caps of oil companies range into the hundreds of billions, while the largest solar companies top out at a few billion. To get both interests to the table, it’s reasonable that the carrots are somewhat disproportionate.

After some back-of-the-envelope math, solar’s haul doesn’t look too shabby either. In a September Bloomberg New Energy Finance whitepaper, a full five-year extension plus commence construction language was estimated to result in an additional 22MW of solar capacity build out during the extension period. At a wholly unscientific estimated basis of $2.50/W (substitute your own expected cost figure for DIY analysis), the value to the solar industry comes to $16.5 billion – just about half what the gargantuan oil industry is taking home. Not bad, solar lobbyists.

Another way to measure the value of each “give” is the effect it will have on each industry. Lifting the crude oil export ban is a nice year-end bonus, to be sure, but not a matter of life or death for the oil industry. (And to be frank, if the oil industry really needed the restriction gone, wouldn’t they have lobbied their way there sometime in the last 40 years?)

The extension of the solar ITC, on the other hand, prevents what could have been a massive plunge in the industry at a critical juncture. Estimates for 2017, without an extension, show solar installations dropping by as much as a half to three-quarters. I’m not saying solar was doomed without the ITC extension, but I will say I’ll be a lot more comfortable resigning the lease on my apartment this year.

To be clear, this is not a handout to the solar industry. This is smart policy guiding a recently-nascent-and-still-somewhat-juvenile-but-going-to-college-soon industry to a future as a pillar of the U.S.’s clean energy economy, with co-parenting support provided by the Clean Power Plan.

The industry needs a stable investment climate for sustained growth in 2017 and beyond. Christmas came early, because that’s exactly what we’re getting. If you need me this holiday season, I’ll be on a beach somewhere working out my new identity crisis, now that our underdog status looks to be on the way out – #ThanksCongress.[/su_spoiler]

[su_spoiler title="Crude Oil and Clean Energy: A Missed Opportunity in the FY16 Omnibus" anchor="Ward"][author] [author_image timthumb='on']http://www.cleanenergyleaders.org/wp-content/uploads/2014/12/Becca-Ward.png[/author_image] [author_info]Becca Ward | Legislative Assistant, U.S. Senate | CELI Leadership Team Managing Director, Leadership Development | Fall 2014 Fellow [/author_info] [/author]

As an ardent supporter of clean energy, it’s nearly impossible to look at the multi-year extension of the Investment Tax Credit (ITC) and Production Tax Credit (PTC) and see a loss for the sector. But unfortunately this policy cannot be viewed in isolation. In order to temporarily extend these renewable energy tax incentives, Congress gave away one of the last true bargaining chips with oil companies: the crude oil export ban.

With this trade off, the $1.8 trillion omnibus spending bill and tax package further perpetuated gross inequalities in the treatment between fossil fuels and clean energy. Instead of moving towards tax parity and expediting the transition to a clean energy economy, the deal codified a permanent capitulation to oil companies in exchange for transient incentives for clean energy development.

We cannot continue to accept perpetual perks for carbon-intensive industries and expect to transition to a low-carbon economy with the urgency needed to avert the worst impacts of climate change.

According to the latest report from the Intergovernmental Panel on Climate Change (IPCC), without drastically altering global emission trends, we are set to surpass 2 degrees Celsius of warming within the next 25 years. Given the urgency of keeping these fossil fuels in the ground, it’s difficult to accept a permanent policy that will stimulate and further incentivize domestic oil production by 1.2 million barrels a day in exchange for one that offers less than a five-year extension of renewable tax credits.

According to data from the Energy Information Administration, lifting the crude oil export ban could result in $30 billion a year of additional income for U.S. crude oil producers. With wind and solar energy predominantly offsetting coal production, not oil, offering a renewable energy tax extension is placation, not an actual compromise.

Again, this deal still represents significant progress for the wind and solar industries, and I’m excited to see the progress the renewable energy sector can make in the next five years. But let’s not pretend this wasn’t also a resounding victory for big oil. While it is hard to predict the exact impact on carbon emissions from this trade off, we should have done better.

When we can put an expiration date on the billions of dollars in annual fossil fuel subsidies, institute a comprehensive Social Cost of Carbon or carbon pricing structure, increase supply-side restrictions, or give enduring incentives to transition toward a clean energy economy, then we can consider it a win for climate progress, not just for wind and solar.[/su_spoiler]

[su_spoiler title="Budget Deal Shines Light on the Need to Modernize Energy Development on Public Lands " anchor="Kordick"]

[author] [author_image timthumb='on']http://www.cleanenergyleaders.org/wp-content/uploads/2014/11/5b88f0_e68c03093cb64d5e8a70ff51a83af5e8.png_srz_p_127_179_75_22_0.50_1.20_0.00_png_srz.png[/author_image] [author_info]Jenny Kordick | Renewable Energy Campaign Manager, Wilderness Society | Spring 2014 Fellow[/author_info] [/author]

The extension of renewable energy tax credits breathes new life into the Obama Administration’s efforts to expand renewable energy on public lands, where new project applications have recently stalled. Some of the largest solar projects in the world exist on public lands in the United States thanks in part to the certainty that tax credits have given companies in the past. This trend can continue, but the Bureau of Land Management (BLM) must be prepared to accommodate additional renewable energy at the appropriate scale and urgency needed to tackle climate change.

As a country, we can move beyond the slow permitting and environmental conflicts that have plagued past development and move toward a smarter approach that facilitates efficient development in the best places—while safeguarding wildlife, wildlands and recreational opportunities. BLM can provide its own time and cost certainty to permitting projects by finalizing its proposed wind and solar leasing rulemaking. Congress can play an important role as well, by passing the bipartisan Public Land Renewable Energy Development Act (H.R. 2663/S.1407), which would direct BLM to identify land for future wind, solar and geothermal development and commit resources to permitting projects.

But advancing renewable energy alone isn’t enough—we must account for the carbon consequences of fossil fuel development and ultimately reduce drilling. The recent repeal of the crude oil export ban will do nothing to diminish the industry’s thirst for drilling on America’s public lands, which already account for an estimated one-fifth or more of all U.S. climate change-causing emissions. This publicly owned oil and natural gas is developed far below market rates, making it a raw deal for the climate and for American taxpayers. As the United States looks for ways to reduce the pollution that fuels climate change, we must ensure public lands are a cornerstone in our nation’s climate strategy—not part of the problem.

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[su_spoiler title="Lifting Bans and Dampening Spirits: How Bad is This Deal for Environmentalists?" anchor="Thadani"] [author] [author_image timthumb='on']http://www.cleanenergyleaders.org/wp-content/uploads/2015/10/Mish-headshot.jpg[/author_image] [author_info]Mishal Thadani | Operations Business Analyst, Direct Energy Solar | Fall 2015 Fellow[/author_info] [/author] Warning: The following contains numerous “back-of-the-napkin” calculations.

Let’s take a look at this issue in the view of a simple question: Should environmentalists be celebrating, or sobbing? First we must understand that this bill brings about two overarching and, from an environmental perspective, opposing modifications to our energy economy: Lifting the oil exports ban likely means increased U.S. oil production, and the extension of the ITC and PTC creates the financial environment necessary to add clean energy capacity over the next 5 years. Increased oil production surely increases the risk of harming our water and land resources via spills and leaks, but assessing our air and climate change impacts is a bit trickier. Conversely, the addition to our solar and wind capacity engendered by the ITC extension is guaranteed to offset dirtier sources of power generation not only for the period of the credit extension, but for the lifetime of the assets.

Oil

Many environmentalists are naturally perturbed when they see the headline “U.S. Bill Ends 40-Year Oil Exports Ban”, and rightfully so. This is a permanent end to a policy that was focused on minimizing foreign oil and maximizing our domestic energy economy. Especially in an era when we’re finding unconventional oil resources, the last thing naturists want is another justification for pulling more shale out of the ground or drilling deeper in our oceans.

It might not be as bad as it sounds. It’s important to recognize that we certainly export refined oil and oil products, so crude is our only concern. Consider that in the global energy economy there are three widely used spot prices that global players and stakeholders use to buy and sell crude– Brent (North Sea), West Texas Intermediate (Oklahoma), and Dubai/Oman. In the competitive market, however, it’s more accurate to pit Brent and WTI against each other given their similar properties (density and sulfur content), as refiners tend to be partial toward buying crude of a specific “lightness” and “sweetness.” Two very important factors here:

1. The spot price of both benchmarks – If this were 2011, we might see a heavier push toward exporting crude (Brent ≈$125, WTI ≈$105) given the disparity of prices. Essentially, there would be a demand for cheap U.S. crude. Today, however, they are almost at parity (Brent ≈36.51, WTI ≈$36.31). Admittedly, the disparity could increase at any time due geopolitics, demand shifts, technology, and other factors.

2. The Logistics – WTI crude is located in landlocked Oklahoma, where it’s easy to transport to U.S. refineries through pipelines, but not exactly in a prime location for exporting. On the flip side, Brent crude is collected and exported from the North Sea, rendering it thoroughly accessible to the global market (it would require savvy supply chain tactics for a foreign refiner to cheaply switch to WTI). We can anticipate U.S. operations in the Gulf of Mexico to mimic this model by pivoting away from sending crude to U.S. refineries and sending it abroad. Crude in Alaska is typically refined in-state where the resulting products are then exported, so there is potential for an export crude market to Eastern countries here as well.

The U.S. domestic price of crude will certainly rise, but by how much? This will largely be based on what happens to future Brent prices. The EIA published “Effects of Removing Restrictions on U.S. Crude Oil Exports” (September 2015) which states that in their most realistic scenario (combination of their Low Oil Price and High Oil and Gas Resources cases), we will produce 380,000 barrels of oil per day more than if we didn’t lift the ban. In 2013, the U.S. had 7,662 spills, blowouts, and leaks that added up to 26 million gallons of oil. In 2013, the U.S. produced 2.72 billion barrels of oil. At the going 1% rate of gallons spilled per gallons produced, we can expect and additional 1.3 million gallons of spilled oil (391 spills) per year.

From an optimistic environmental perspective, higher domestic oil prices will lead to higher prices at the pump (eventually), applying pressure to reduce the number of cars on the road and lower our CO2 emissions.

ITC

According to the SEIA Solar ITC Impact Analysis, the extension of the ITC will fuel the solar industry to install 22GW more capacity than if it were to expire at the end of 2016, enough to shut down 15 coal plants. Or, using the full displacement methodology of offsetting carbon emissions based on the emissions factor for the U.S., producing 771TW-hrs of solar power (20 year lifetime of 22GW of solar with a 20% capacity factor) would offset 520 million tonnes of carbon, or taking 7 million cars off the road for that same 20 year period.

PTC

Bloomberg New Energy Finance conducted an analysis showing that the latest extension of the Production Tax Credit is expected to add 19GW of wind development in itself. Using the same methodology, this is the equivalent of shutting down 13 coal plants or offsetting 673 million tonnes of carbon (998 TW-hrs at 20 year lifetime of 19GW of wind with a 30% capacity factor).

GHGs aren’t the only emissions being offset either. The replacement of traditional fossil fuel plants will also lead to a reduction of nitrous oxides, sulfur dioxide, volatile organic compounds (VOCs) and particulate matter, all of which have harmful effects to our environment.

While environmentalists around the country are relishing the positive step forward for financing our clean energy economy, reducing our carbon footprint, and breathing cleaner air, it comes at the cost of giving the oil industry the freedom to explore new avenues that would increase domestic oil production to unknown extents for the unforeseeable future. However, given the present market conditions and relatively unfavorable export outlook, the danger posed to our environment seems limited.

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[su_spoiler title="The Omnibus Bill is a Clean Energy win, Not a Climate Strategy" anchor="Vogel"] [author] [author_image timthumb='on']http://www.cleanenergyleaders.org/wp-content/uploads/2015/02/Jesse-Vogel.jpg[/author_image] [author_info]Jesse Vogel | Tax Equity Advisors | Spring 2015 Fellow[/author_info] [/author]

The energy deal in last week’s spending bill is further proof of the clean energy industry’s maturation. The renewable energy tax credit extension will spur big investment – an additional $40 billion between 2016 and 2022, GTM projects – but the gradual tax credit decrease in the deal is just as crucial of a component. That’s because opening up financing for clean energy still takes investor outreach and education. A planned tax credit draw down, by providing a clear policy roadmap, makes that education easier. It will help expand the pool of tax equity investors beyond the handful currently in the market, and will help<href="#axzz3uyujYejI" > traditional investors plan their entry while mitigating political risk.

The deal is also a good one for the climate. The end to the oil export ban, according to several economic analyses, is unlikely to increase annual greenhouse gas emissions by much, particularly in the short term, while the decrease in GHGs resulting from large-scale clean energy deployment spurred by the ITC & PTC extensions will make a sizable impact.

The longer-term outlook, of course, is less certain. Oil Change International has called the deal a win for fossil fuels, given that it trades a permanent end to the oil export ban for short-term extensions to renewable incentives. But that argument underestimates investors’ distaste for political uncertainty (note here the boom and busts caused by last minute extensions of the PTC) as well as the winning economics of clean energy (low to no operating costs). Given those factors, this move in the direction of market neutrality should be a win for clean energy.

It’s true that this deal does not set us on a certain path to long-term decarbonization. But it does seem to cement the foundation of our clean economy – and that will have long-term impacts. For true long-term decarbonization, we’ll need something else: a comprehensive climate strategy that puts a price on carbon. But for now, late in the year, with our Congress antsy for holiday recess, the spending bill we got looks to be an outsized win for clean energy.

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