Fixing America's Failed Energy Policy

Thursday, January 1, 2009 - 01:00

There is wide recognition that America needs energy independence - and needs it now. Where energy independence was once the passion of a few, it has become a cause célèbre, enjoying unparalleled moral, political and economic support. Social mores have shifted public opinion; where once we were content with gas guzzling, green business and alternative energy are now preferred.

However, a serious issue remains: energy from traditional fossil fuel is still less expensive than solar, wind, geo-thermal or biofuels.

How can we reduce the cost spread between traditional fossil fuel and alternative energies? We can start by rejecting the current system, which confuses investors, distorts incentives, and pushes us deeper into the oil barrel.

The current federal system promotes a disjointed conglomeration of direct and indirect subsidies that fails utterly to wean us from fossil fuel. The federal tax code is a treasure trove of insufficient and ineffective indirect subsidies. Most recently, Congress passed the Energy Improvement and Extension Act of 2008 (the "Energy Improvement Act") as part of the bailout plan. The Energy Improvement Act contains $17 billion in tax incentives for clean energy services, extending and modifying various credits and deductions. While $17 billion sounds like a big number, it isn't. Most, if not all, of the incentives lapse by 2016, with the lion's share scheduled to expire in just 12 to 24 months. These timeframes are woefully inadequate to support the ongoing development of alternative energy. Short-term tax incentives have the unintended consequence of hampering, rather than advancing, our goal for energy independence.

Even though tax incentives are intended to subsidize private investment in innovative new technologies, sunset provisions deny the private sector the certainty it craves. The renewable energy production tax credit ("PTC"), for example, provides tax credits for renewable energy production for the first 10 years of operation. The PTC is of critical importance for renewable energy facilities. Since 1999, however, Congress has allowed the PTC to lapse three times and renewed it twice shortly before lapsing. The PTC, which was set to expire at the end of this year, was recently extended again in the Energy Improvement Act - but by just 12 months. It's no wonder investors demand more collateral and a higher return on investment when it comes to renewable energy production facilities - the PTC could disappear at any minute.

The PTC is only one example of tax incentive mismanagement. It is not difficult to understand why development and adoption of alternative energies has stalled during the last 30 years. Chronic unreliability has increased the cost of capital and depressed enterprise values upon exit.

It isn't just the federal government botching the job. Slow federal action has fueled fierce interstate competition. Virtually unchecked by federal supervision, states compete with varying regulations and standards, as well as varying incentives for solar, wind and geothermal energy. High-impact and low-visibility programs vary widely, breeding confusion in the investment market. Such programs include residential and commercial recycling incentives, ride-share programs, commercial energy efficiency standards and environmental regulation of advanced materials and chemicals (such as nano-composites used in new insulation products).

In some cases, federal uncertainty creates a race to the top of the green heap. Massachusetts, where state and public support have been aggressive, has been out front on many initiatives. The Massachusetts Technology Collaborative ("MTC") is offering financial assistance in the form of loans, ranging from $500,000 to $3 million, to support certain renewable energy companies. In 1992, California, another proactive state, adopted an aggressive Renewable Portfolio Standard. Governor Arnold Schwarzenegger mandated that California's investor-owned utilities, energy service providers, and community choice aggregators source 20 percent of the power they purchase from qualified renewable sources by 2010, with a longer-term goal of 33 percent by the end of the following decade. The law has spurred solar adoption and installation in the state.

At the same time, however, there has been a massive race to the bottom, driving down standards and resulting in a hodgepodge of incentives. Passivity on the federal level equates to no regulation. There is a benefit to having a national standard for lower-emission vehicles in order to help combat climate change. By failing to meaningfully regulate emissions nationally, individual states are left to compete for business, choosing to tolerate higher emissions than other states. This action hurts all states - except for the "defector" state. Other states recognize this imbalance - and they follow suit by lowering their own standards. By failing to legislate at the federal level, the U.S. has dirtier emissions than most industrialized nations.

It gets even worse. A smorgasbord of programs and incentives now are offered on a zip code by zip code basis. Instead of a cohesive set of long- and short-term regulations and incentives, the landscape resembles the unplanned urban sprawl of Los Angeles. The U.S. Department of Energy itself is sprinting to keep track of this unwieldy and growing litany of state incentives, outsourcing the job to The Database of State Incentives for Renewables & Efficiency (www.dsireusa.org). The web of similar but different state programs has resulted in open forum shopping by businesses and entrepreneurs.

State competition can offer significant immediate benefits, most importantly providing cash and caché to green business and alternative energy projects. Those with the resources to understand the different programs can aggregate benefits by moving to the most financially advantageous location. But state-by-state competition will not create green jobs for those who do not have the resources to "forum shop," and those people are the most hard-hit by the current financial meltdown.

To move ahead, we will need bipartisan support for energy independence and its near-term financial cost to the taxpayers. After compiling a comprehensive database of all initiatives, the new energy policy must reform and coordinate the disparate programs and set us on a long-term and disciplined approach to independence. This will require the federal government to pressure states to buy in to the program: "defectors" must be punished.

Reforming and coordinating random local, state and federal programs gives Congress an opportunity to review the value of transparency. Direct subsidies (affirmative cash payments) may be more effective than indirect subsidies through the tax code. Transparency may also be the clearest way to incentivize business relocation in the areas most in need of new job creation.

President-elect Barack Obama has made clear his determination to create green jobs, which will demand employees of all skill levels, from minimum wage earners to highly educated professionals. These jobs potentially have the added, long-term advantage of job stability - skilled green jobs are not as easily outsourced. A comprehensive federal energy policy that integrates and coordinates local and state programs can incentivize business co-location in communities most in need of the jobs.

America recognizes that green jobs are a solution to both our current economic crisis and dependence on foreign oil. In order to create them, the federal government will have to create a better system - a system that values transparency, consistency, and predictability. That system is within our reach. We need the collective will to make it happen. So far, that lack of will has been America's greatest challenge to energy independence.

Rachael Simonoff Wexler is a Partner at Goodwin Procter LLP in Los Angeles. Goodwin Procter Associate Courtney A. DeWolf also contributed to this article.

Please email the author at rwexler@goodwinprocter.comwith questions about this article.