United States: With Proper Policies, A $12.1 Trillion Investment Opportunity For Renewable Energy Can Be Realized

Despite the currently low prices of oil and natural gas, renewable electric power generation is poised for rapid growth. Based on a "business-as-usual" scenario, Bloomberg New Energy Finance's New Energy Outlook, June 2015 predicted a $6.9 trillion investment in new renewable electric power generation over the next 25 years. A newly published report by Ceres, Bloomberg New Energy Finance, and Ken Locklin, Managing Director for Impax Asset Management LLC, predicts a much greater opportunity for private sector companies and commercial financiers to invest in new renewable energy.

Mapping the Gap- the Road from Paris

Mapping the Gap: The Road from Paris concludes that achieving a temperature change goal of 2ºC or below, as outlined in the recent climate accord reached in Paris at the United Nations Framework Convention on Climate Change's (UNFCCC) twenty-first session of the Conference of the Parties (COP 21), is now a $12.1 trillion investment opportunity. (This is in addition to a predicted $20 trillion investment in legacy low-carbon electric power generating sources such as large-scale hydro and nuclear.) Thus, the current investment trajectory of $6.9 trillion in a "business-as-usual" scenario leaves a massive gap of $5.2 trillion needed to reach international goals. Financial markets have the capability to close this gap, especially given the dropping price of renewables, a maturing market offering lower-cost capital deployment, an expanding need for global energy, and the ability of this level of investment to drive local jobs and economic growth.

United Nations Policy Analyst and Global Strategy Advisor of the Citizens Climate Lobby, Sarabeth Brockley, agrees. According to Ms. Brockley, who witnessed first-hand the participation at the conference by the private sector, particularly large power purchasers such as Google and Facebook could provide the catalyst for energy investments in renewables and drive the future direction of the global energy economy. Ms. Brockley notes that with the accord in place and with an increased push to decarbonize, the private sector recognizes that energy investments in zero- and low-carbon emitting resources are the planet's future while the unknowns surrounding the future of fossil fuels make them a riskier proposition.

New Policies Are Needed to Bridge the Investment Gap

Some investment opportunities are available today under existing policy frameworks and market conditions; however, new policies will need to be deployed to assist in this endeavor. "There is huge opportunity for expanded clean energy investments today. But to fully bridge the investment gap, policymakers worldwide need to provide stable, long-lasting policies that will unleash far bigger capital flows. The Paris agreement sent a powerful signal, creating tremendous momentum for policymakers and investors to take actions to accelerate renewable energy growth at the levels needed" says Sue Reid, Vice-President of Climate & Clean Energy at Ceres, a nonprofit organization promoting corporate responsibility and environmental stewardship.

This article explores which incentives, policies, and approaches may be on the horizon for U.S. energy market participants – both generators and consumers – as the global energy mix moves towards carbon consciousness.

Carbon Pricing

As the world looks ahead to the twenty-second Conference of the Parties (COP 22) in Marrakesh, Morocco, Ms. Brockley believes that carbon pricing will certainly be on the agenda. Pricing carbon emissions will help create incentives to develop new, cleaner energy technologies and to encourage demand reduction.

One way to price carbon is by placing a tax on harmful emissions. A carbon tax places a price on emissions and allows the market to determine the quantity of emission reductions. An alternative way to price carbon is through a cap-and-trade program. Here, the program sets the quantity of emissions reductions while giving market participants the opportunity to determine price and trade credits to meet overall emissions reduction goals which are lowered over time to reduce the amount of pollutants released.

Some countries are moving ahead with plans to implement carbon pricing. For example, in September 2015, President Xi Jinping of China made a landmark commitment to start a national program in 2017 that will limit and price greenhouse gas emissions in the country. Other countries are implementing similar measures based on discussions at COP 21. The United States, however, has a long road ahead. Congress came close to a greenhouse gas cap-and-trade system in 2010 with the Waxman-Markey Climate Bill; however, the legislature ultimately balked at passing the bill and discussions involving climate change on Capitol Hill have been somewhat toxic ever since.

Moreover, any type of binding international agreement on a price for carbon will be difficult to adopt given the aggressive opposition towards President Obama's Clean Power Plan (CPP). The CPP is currently facing attack by Congressional Republicans and an omnibus litigation brought by twenty-seven states and an amalgam of private actors. The Supreme Court recently granted a delay for implementation of the CPP, leaving the policy strategy to lower carbon emissions in jeopardy.

Meanwhile, states and private companies in the U.S. are starting to act. California's state-wide, expanded cap-and-trade program is off to the races and is being intently watched as a potential model that could be replicated in other states or regions. Amongst the private sector, Microsoft is leading the way by already accounting for the price of carbon internally, which industry leaders believe is both changing internal behaviors and saving the company more than $10 million annually. Additionally, many traditional fossil companies are pricing carbon. ExxonMobil is assuming a cost of $60 per metric ton by 2030, BP currently uses $40 per metric ton, and Royal Dutch Shell uses a price of $40 per ton.

Tax Incentives

Tax incentives use the U.S. tax code to subsidize the development of renewable energy. These incentives include accelerated depreciation for investment in renewable power-generating plants or manufacturing facilities and tax credits tied to a renewable power project's output or overall capital expenditures. Conversely, there is increasing interest in phasing out traditional fossil fuel subsidies, long deployed in support of high carbon emitting resources.

The driving incentives behind renewable energy in the United States are the federal Production Tax Credit (PTC) and the Investment Tax Credit (ITC). The PTC has been the largest driver of the wind energy industry as it provides 2.3 cents per kilowatt-hour generated. The ITC, which has been the major driver of solar energy and also has served as a potential alternative credit for wind energy, provides a credit for 30% of the development costs of a renewable energy project. The credit is applied as a reduction to the income taxes for that person or company claiming the credit.

The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016. However, Congress authorized the extension of both the PTC and ITC at the end of 2015. The ITC will now be in place for an additional five years, including three years at the current value followed by graduated step-downs. The impact of the tax incentives extensions are set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation, and ensure that the renewables sector remains poised for an upward growth trajectory.

Renewable Energy Targets

Governments can set renewable energy targets to drive lower carbon emissions. Also known as Renewable Portfolio Standards (RPS), these targets generally requires local utilities to generate electricity through renewable energy sources or purchase Renewable Energy Credits (REC) that represent essentially the environmental benefit of the zero-carbon power system. Typically, these involve annual goals which increase over time.

In the aftermath of the defeat of the Waxman Markey Climate Bill, many renewable energy friendly states such as Massachusetts, New York, and California, enacted RPS frameworks. This approach has been successful in lowering carbon emissions, but remains a patchwork method that has no national systemization. There have been calls to create a national RPS, all of which have been soundly defeated in Congress to date.

Net Energy Metering

Net energy metering (NEM) programs allow renewable energy system owners, such as homeowners with photovoltaic solar systems, to sell their excess power back to the electric grid. NEM has been enacted domestically on the state level and is only available in certain jurisdictions, such as Maryland, California, Massachusetts and the District of Columbia. Although studies have found that NEM has greatly contributed to the adoption of rooftop solar generation, there are battles being waged around the country between utilities and distributed generation advocates about the future of the incentive.

For example, the Nevada Public Utilities Commission (NPUC) voted recently to cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Additionally, the NPUC is applying these changes retroactively, which distinguishes actions in Nevada from those in other states that have altered their net metering. This means that these new prices will apply not only to new solar customers, but to existing customers as well. The result has been that many prominent rooftop solar companies have exited the market, and some solar customers have joined a class action law suit against the NPUC and their local utility, NV Energy.

On the other hand, some jurisdictions like New York are seeking to incorporate more distributed generation into their electricity grid systems and reevaluating NEM as an efficient mode of compensation to the non-utility generator. New York is trying to create an interactive distributed generation marketplace where generators sell their power not only to the electric grid, but also to neighboring energy customers. New York is exploring whether or not a fixed NEM charge is the best way to handle marketplace transactions, or if determining the value of distributed generation to the electric grid is more efficacious. If successful, New York's model could become the template for growth in other states.

Feed-in-Tariffs

Feed-in-tariffs (FIT) enable renewable power generators to sell their electricity at a premium above typical market rates. Historically, FITs have been utilized in Germany and the rest of Europe, where the government mandates that utilities enter into long-term contracts with renewable generators at specified rates; typically well above the retail price of electricity.

On the federal level in the United States, regulators have chosen to enable tax credits versus utilizing the FIT approach. However, there is a recent example of a FIT from 2013 in Virginia where Dominion Virginia Power allowed a voluntary FIT for residential and commercial solar photovoltaic (PV) generators. Participants received 15 cents/kilowatt-hour (kWh) for a contract term of five years for all PV-generated electricity provided to the electric grid, and will continue to pay the retail rate for all electricity that they consume. In 2012, the average retail electricity price was 10.5 cents/kWh for residential customers and 7.8 cents/kWh for commercial customers.

Conclusion

The United States is already experimenting with many of the above incentives and approaches, but more work will be required on the policy side to meet the investment target projected by the Ceres-BNEF report.

While the scale of this new investment opportunity is massive, the report finds that it is dwarfed by the capacity of global financial markets to unleash the needed investment capital. In the United States alone, consumers borrowed $542 billion over the past year to purchase cars, and assumed $1.4 trillion in new mortgage debt. Clearly, the financial markets have the capacity to absorb the financing "gap" between "business-as-usual" and the 2ºC goal outlined at COP 21. Thus, Ceres remains optimistic about the investment opportunities. "Renewable energy investment volume needs to more than double in the next five years," noted Ms. Reid. "With the tailwind of the Paris Climate Agreement, buttressed by advancements around the world such as the US renewable energy tax extenders, there is tremendous opportunity ahead for clean energy investors."

Although our markets have the capability of achieving the COP 21 pledge, those looking to capitalize on this unprecedented opportunity should understand the policies on the horizon that could promote safe returns on their investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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