RENEWABLE ENERGY INCENTIVES AND THE ROLE OF THE STATE AND FEDERAL GOVERNMENTS

BRETT MCKEON DYLAN MINERT REBECCA ROCKWELL MORGHAN TRANSUE INTRODUCTION

In the wake of energy shortages, growing energy demand, and the effects of fossil fuel pollution and a dependence on foreign supplies, the United States has slowly begun to adopt renewable alternatives. Renewable energies including solar, wind, and biomass can potentially replace large percentages of the country’s fossil energy supplies with sustainable, domestic, and non-polluting alternatives. Unfortunately, renewables do not compete well in current energy markets and require extensive capital investment and support to become competitive. While some favor letting the energy markets dictate when such investment occurs, many feel that disastrous consequences and human suffering will result if the U.S. does not establish an alternative energy infrastructure prior to the energy shortages, price hikes, and resulting hardships probably required before energy markets will favor renewables. This paper takes the survivalist view and assumes that the potential hardships are significant. It will analyze various current state and federal policies and approaches meant to prevent future difficulties by encouraging renewable energy investment and use. The policy brief will demonstrate the need for both state and federal government involvement for a successful transition to sustainable development and renewable energies.

THE ROLE OF THE STATES

The United States contains many diverse geographical, geological, and ecological regions, each with unique characteristics and resources, limiting the effectiveness of some federal policies and regulations. For instance, federal regulations mandating that states support a specific alternative energy would be unproductive. Similarly, it would be equally unrealistic and expensive for the federal government to formulate state or region-specific policies. Each state and/or region possesses specific needs and resources and probably has a deeper understanding of this information than the federal government. Empowering states to make informed decisions Figure 2 about energy use and policies will likely produce regulations that complement each state’s unique circumstances. Consider how southwestern states possess significant solar energy resources but less wind; northern states have more limited solar resources, but more wind and biomass (see figures at right). Giving states the freedom to manage their energy resources allows them to invest heavily in region specific resources fit their specific needs. Such decentralized policy-making introduces flexibility, an essential component to policy durability. With the ability to formulate durable Figure 1 policies that address their needs and complement resources, states can and should play a key role in supporting renewable energies.

STATE BASED SUCCESS

State based energy management looks good in theory, but does it work in practice? While policies depend on each state’s circumstances, success depends on policy combinations. Currently, individuals, firms, and utilities have clear incentives to consume additional fossil fuels, profiting directly while the entire population bears the ensuing detrimental effects. Unfortunately, for the risky and currently unprofitable renewable energy industry, the opposite is true. Incentive programs reduce risk and increase profitability to encourage investment and ultimately increase the competitiveness of energies derived from wind, solar, and other renewables. A multitude of policy options exist for states, each with strengths and weaknesses, unable to provide sufficient incentive on its own. States that link policies where the strengths of one substitute for the weaknesses of another, experience the greatest success. The most successful approaches reduce energy development costs or increase revenue (market-push approaches) and/or create a market for alternatives (market-pull strategies). Market-push approaches reduce energy development costs and/or increase revenue, reducing risks and increasing benefits for investors. To address the renewable energy market’s dubious status, states have effectively employed a variety of incentive approaches. Production incentives reduce costs by compensating producers for energy produced, lowering the energy’s market price. Minnesota, for example, offers payments of 1.5 cents per kilowatt-hour for electricity generated by small-scale wind-energy projects for the first 10 years of operation (Osterberg 5). Other cost offsetting incentives include renewable energy grants, loans, rebates, and buy-downs. Rebates reduce development costs by reimbursing all or part of renewable energy technology costs; buy-downs pay all or part of initial costs (Ramsey 36). New Jersey, for example, paid out more than $26.6 million in solar rebates in 2005 alone in conjunction with a 65% increase in solar installations (NJ Solar Clean Energy Program). Income increasing incentives like tax exemptions and credits for personal, corporate, sales, and property taxes provide monetary incentives for investment by increasing revenue. California, for example, provides property tax credits for solar energy systems in addition to personal and corporate tax credits for solar and wind systems (DSIRE). Net metering, the leading revenue increasing incentive, allows customers to exchange power with electricity sellers by allowing meters to run backwards. Customers buy energy from the grid when necessary, but sell surplus alternative energy to the power grid; utilities compensate producers for their energy, increasing income for alternative producers and creating incentives for investors and producers to enter the market (Hughes 13-14). Interviews conducted with representatives from the wind- energy-industry, the California Energy Commission, and the New Jersey Clean Energy Program all stressed net metering’s importance as an essential renewable energy incentiveabc. While market-push incentives have historically dominated policymaking, policymakers are recognizing market-pull strategies that focus on creating markets for renewable energy as promising options. Renewable Energy Standards (RES), or requirements that electricity sellers obtain certain amounts of renewably produced electricity, provide an excellent example. While an aggressive approach, RES establishes long-term markets for renewable energy. Requiring that utilities obtain energy from renewables forces them to create markets and an infrastructure for alternatives, providing immediate and long-term renewable energy support. In Iowa for example, “RES of 2 percent has helped make Iowa the third-largest producer of wind power” (Osterberg 4). Only California and Texas lead Iowa with California requiring that 20% of all energy come from renewables by 2017 and Texas requiring 3% by 2009. In addition to its success, the RES has the support of the renewable energy industry, making it a prime choice for policymakersad. Successful renewable energy incentive programs appear to involve implementing market-pull programs like RES in conjunction with market-push incentives like production incentives, tax deductions, and net metering. Hypothetically, a state might increase the RES, producing a larger market for renewables. The state would then implement net metering laws, tax incentives, and other cost-reducing or income-increasing programs, making renewable energies less expensive and more appealing to consumers (Rader 137). States that currently employ integrated plans have seen remarkable growth in renewable energy production. California, for example, effectively employed a combination of approaches, including tax credits, resource availability studies, and 30-year power purchase contract with 10 years of fixed energy prices (Hughes 10). California is now the number one alternative energy producing state in the nation.

THE NEED FOR FEDERAL POLICY

With fossil energy supplies approaching depletion and environmental concerns nearing crisis levels, the U.S. risks its economics, national security, and health. As the U.S. draws away from fossil energy dependence, the entire nation must move as one, with each state supporting its energy needs as much as possible. From an efficiency and national security standpoint, allowing certain regions to depend on others for energy imports permits inefficiency and dangerous national security threats. Safe, sustainable energy management must involve consistency among state renewable energy infrastructures while recognizing the benefits of state based management and the need for resource specific policymaking. Despite the necessity, promise, and success of state based incentive programs, great variability currently exists between states and many fall short of the ideal. While states like California have extensive incentive programs and lead national renewable energy output, Alabama lacks net metering, an essential industry incentive. Arkansas has net metering, but only a Small Business Revolving Loan Fund provides market- push incentives (DSIRE). The United States cannot allow such disparities to stand. A state’s ability to pass and uphold incentives depends heavily on its resources. Decision-making processes and program implementation require large quantities of knowledge, political wrangling, and funding. Some states lack one or more of these requirements, making alternative energy policies difficult to realize. Difficulties also arise with lacking civil engagement, interest, and support. Without sufficient public interest, energy issues do not rise in political importance, preventing them from receiving adequate consideration. Effective federal policy can address both concerns. First, the federal government can fill the role of an external supporter. Federal approaches that provide financial or knowledge-based support can level the playing field for states lacking necessary resources. Similar policies that reward performance could provide additional incentive to innovate and exemplify successful strategies for states that excel. Second, federal regulations have the potential to correct the effects of apathetic or hostile populations on policymaking by establishing consequences for noncompliance. As earlier sections noted, blanket regulations may not be effective, but apathy poses a significant obstacle, one that carefully crafted federal regulations can remove. As was the case with integrated state- based policies, a combination of integrated policies from both the federal and state level must exist for increases in renewable energy investment. The federal government currently offers a variety of tax incentives and production incentives to encourage renewable energy development. These incentives focus on increasing income and reducing costs for producers. Industry representatives stressed the importance of federal tax credits for the success of renewable energy ventures, and strongly supported their continuanceabd. One representative expressed frustration however with the tax laws two-year lifetime and the need to re-pass them biannually. She also noted the lack of bills calling for federal Renewable Energy Standardsd. Current federal policy leans heavily on market-push strategies, but interaction with state programs is limited and market-pull strategies remain conspicuously absent. This arrangement falls remarkably short of an integrated state and federal, market-push and market-pull approach that could successfully encourage renewable energy investment.

INTERNATIONAL LESSONS

Observing the slow pace of renewable energy development in the United States, one can justify the need for more effective policy approaches. International examples demonstrate various levels of success when supporting renewable energy growth, and can shed light on different policy approaches and how the US can improve. Australia shares many characteristics with the United States including its physical area, resources, and system of government making it an ideal case study. Australia emits 27% more carbon dioxide the United States, making emission reduction rather than fossil energy replacement its main goal. Low electricity prices, a strong reliance on coal, and a growing population only advance the problem; as the world’s fifth largest coal producer and largest coal exporter, Australia’s growing population has little incentive to abandon its fossil resources. The Australian government has acted however, introducing the Safeguarding the Future measure to develop renewable energy and implementing the mandatory renewable energy target (MRET). MRET acts like a quota system, requiring that large-scale energy producers supply periodically increasing amounts of renewably generated energy. Producers accumulate renewable energy certificates in conjunction with qualifying generation or purchases of energy displacing technologies. Producers can sell surplus credits to underperforming counterparts, providing incentive for continued innovation and development. MRET, a market-pull strategy, overcame hostile political and economic environments to produce moderate improvements with ninety-two percent of liable entities meeting their obligations during the program’s first year. Despite this early achievement, many question MRET’s cost effectiveness and as time passes, it seems unable to produce adequate development increases on its own. Unfortunately, with its emphasis on emission reduction rather than fossil energy replacement, Australia sustains few polices outside of strong federal, market development policies like MRET and renewable energy development funds. Little or no renewable energy support exists at the province level and market-push incentives remain grossly underrepresented (Government Programs). Two potentially beneficial changes can occur, some degree of decentralization to the provinces and an increase in market-push policies. Bureaucratic complexity and inefficiency have hampered MRET thus far. Provence and resource based regulation as discussed earlier sections can simplify complex federal qualifications and produce superior outcomes. By pursuing only top down, market-pull strategies, Australia produces markets but not willing buyers. Cost reducing and income-providing strategies generate willing investors, quickening the pace of development. Working together with MRET, province based and market-push strategies can transform Australia’s energy supply. The United States can learn from Australia’s experience reiterating the need for both market push and market pull regulations on both the state and federal levels. It tells the US that federal policies like RES can significantly increase renewable energy investment when working in conjunction with effective state based and market-push strategies. Germany has seen far greater renewable energy development than Australia or the US and having similar resources to US, can offer some insights. Unlike the United States population, the German people care are very concerned with environmental issues like global warming, and with the 1986 Chernobyl disaster and its impacts still evident, German social norms lean heavily towards renewables. Environmental policies face little opposition and have undergone a gradual progression and learning process over the past several years. At the onset of policy enactment, Parliament instated a Feed-in Law, similar to American production incentives, that requires that energy firms pay renewable energy generators a tariff amounting to about 90% of the average electricity rate. The feed-in law increases income for producers, lowering the market price of renewable energy and giving considerable financial incentives to investors, especially in the wind industry. Renewable energy’s political strength grew as competitive markets grew, and the wind industry became increasingly able to endorse policies favoring wind energy. Even with great success and its ensuing positive feedback, the new law made no provision for an even spread of renewable energy and some areas were at a disadvantage. Wind turbines filled some provinces while others lacking land and wind resources had none. In addition, initial market formation policies had limited effects on the solar industry because of solar power’s higher costs and resulting high rates despite feed-in payments. In response, the government instituted an additional energy eco-tax in another effort to make renewables more competitive. By 2003, the German wind turbine industry had grown to be the second largest in the world and in that year, the German government enacted another policy, the Renewable Energy Sources Act. The act, which forces polluters to pay principle prices, and an additional tariff scheme provide for even lower renewable energy prices and greater security for investors. This hefty combination of market-push incentives allowed solar energy to become a valid investment option and Germany now leads the world in roof integrated solar energy systems. Germany demonstrates how federal market-push schemes like tax incentives can have significant impacts on renewable energy investment. While the Germans chose to address region specific resource issues with addition tax incentives, state based policies may have reduced the number of tax and tariff laws required to obtain the same results. While the U.S. lacks majority government support and the social norms fostering significant renewable energy growth, policymakers can look to Germany’s success to support strong federal policies and justify the need for state based policies.

CONCLUSIONS

Based on an analysis of state, federal, and international incentive strategies, evidence demonstrates that the United States can successfully encouragement renewable energy investment through integrated strategies involving both market-push and market-strategies, implemented at both the state and federal levels. Such strategies that complement one another and region-specific resources can bring sustainable energy to the United States. References

Figures: 1) http://www.eere.energy.gov/consumer/pdfs/130.pdf 2) http://www.nrel.gov/wind/images/wherewind800.jpg

Interviews: a) Copleman, Paul. NewWind Energy® from Community Energy, Inc. telephone interview, 5 April 2006 b) Yen-Nakafuji, Dora. California Energy Commission, telephone interview. 11 April 2006 c) Kling, Cassandra. World Water and Power. telephone interview. 21 March 2006 d) Carpenter, Evelyn. AES Seawest Wind Power, Project Manager. telephone interview 15 April 2006

Works Cited

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“Government Programs” Australian Government: Department of the Environment and Heritage, Australian Greenhouse Office. 18 Dec. 2005 http://www.greenhouse.gov.au/renewable/government.html

Hughes, Tim, Mark Shafer, and Mark Meo, 2000. Review of States’ Policy Incentives for the Development of Wind Energy Facilities.

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Osterberg, D. and Elaine Ditsler, 2003. Wind Power and the Iowa Economy: The Iowa Policy Project.

Rader, Nancy A. and Ryan H. Wiser, 1999. Strategies for Supporting Wind Energy: A Review and Analysis of State Policy Options. Denver, CO: National Conference of State Legislators.

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“Renewable Energy Systems Completed” New Jersey’s Clean Energy Program. 24 March 2006. http://www.njcep.com/html/res-installed/renew_ener_sys_instll.html

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