The renewable energy industry is riding a strong wave of momentum going into 2016 due to major policy developments implemented in late 2015. The multi-year extension of federal tax credits, the enactment of a substantially higher renewable portfolio standard (RPS) in California, the Paris climate accord, and the final rules of the Environmental Protection Agency's Clean Power Plan all bode well for the sector.
Congress provided a multi-year extension for the business and residential investment tax credits (ITC) for solar technologies and wind. Wind can opt for the ITC in lieu of the also extended production tax credit (PTC). The 30 percent ITC for solar originally was set to decline to 10 percent at the end of 2016, but the full credit is now provided through 2019, with a ramp down to 10 percent in 2022.
The production tax credit for wind is currently valued at $23 per megawatt hour generated. It was extended through 2019 with a ramp down after 2016. Other renewable energy technologies, such as biomass and geothermal, were provided a one-year extension for the PTC. Projects generally need to “begin construction” as defined by the IRS by the specified date to qualify for the credit.
The unsubsidized viability of solar and wind projects depends on the quality of the resource and the competitive resources in an area. The tax credits allow solar and wind to be more competitive in larger areas of the country. Renewables could still be competitive without the credits in some areas, but the market would likely consist more of niche developments rather than widespread deployment.
Solar had started to overtake wind in terms of market share with the expiration of the PTC and the looming expiration of the ITC. Also, solar was becoming more competitive as costs came down. With the renewal of the credits, wind’s share is expected to pick up for the next few years.
Renewables Mandate
The Clean Power Plan, designed to substantially cut power plant carbon emissions by 2030, and Paris agreement both provide longer-term momentum that could afford the renewables industry with a favorable policy framework. Parts of the Clean Power Plan that incentivize early action on renewables development, along with the tax breaks, are expected to inspire more utility consideration of renewables over the next five years.
California increased its RPS to 50 percent by 2030; the previous law was 33 percent by 2020. The requirement is likely achievable. California solar is at a point where the primary constraints on growth are the size of the energy market and the capacity of the electric system to reliably integrate the variable resource. The risk of curtailment of renewable and non-renewable generation is a growing concern. The risk increases with the rising RPS percentage.
Utility Pushback on Net Metering
At the same time, rooftop solar is under pressure from utilities that advocate a reining in of the generous net energy metering tariffs that compensate homeowners for excess power that they generate and pump back into the grid. Recently revised rules in California still allow for full retail credit for excess generation, while at the other end of the scale, the Nevada Public Utilities Commission sharply cut the amount that customers can get paid. At least two solar energy providers announced they are pulling out of Nevada. Most other states’ policies fall somewhere in between.
Competitive Gas
Low natural gas prices are counterbalancing renewables growth to a certain extent. As coal capacity is replaced, current and projected pricing makes gas an easier decision for some utilities, even though the fuel does emit greenhouse gases. But natural gas and renewables serve different market sectors. Natural gas is moving more toward baseload while the intermittency of solar and wind can be limiting factors in some regions.
Subject Matter Expert
Ryan Pletka: PletkaRJ@bv.com
