704

# State and Federal Policies for Renewable Energy

Authored by: Christopher Namovicz

# Energy Efficiency And Renewable Energy Handbook

Print publication date:  September  2015
Online publication date:  September  2015

Print ISBN: 9781466585089
eBook ISBN: 9781466585096

10.1201/b18947-5

#### Abstract

Tax incentives have provided a key form of direct subsidy to renewable energy and energy efficiency in the United States at both the state and federal levels. These incentives can take several forms, including deductions from taxable income or a credit against tax liability. In addition, tax credits can be applied to the initial purchase or investment in a particular technology, or to the ongoing utilization of a technology or production of a covered commodity. In some cases, lower efficiency investments can be subject to additional taxes.

#### 3.1  Tax Incentives

Tax incentives have provided a key form of direct subsidy to renewable energy and energy efficiency in the United States at both the state and federal levels. These incentives can take several forms, including deductions from taxable income or a credit against tax liability. In addition, tax credits can be applied to the initial purchase or investment in a particular technology, or to the ongoing utilization of a technology or production of a covered commodity. In some cases, lower efficiency investments can be subject to additional taxes.

#### 3.1.1  Investment

Renewable energy and energy efficient technologies are typically characterized by higher upfront costs resulting in significantly reduced fuel and/or operating costs (although not all technologies fit this characterization, e.g., biomass energy can involve substantial ongoing costs for fuel and operations). Many early policy incentives at both the Federal and state levels were intended to reduce the acquisition cost of these technologies, frequently through the use of tax credits proportional to capital investment costs. In some cases, such as some of the early deployment of wind generating technology in California during 1980s, it was believed that investment incentives provided insufficient incentive for high-quality technology or projects that would continue to operate once the initial incentive had been fully realized by the project owner. Such failures, however, may also be attributed to insufficient technology qualification measures, such as technology criteria or screening.1 Despite the apparent shortcomings of investment incentives in the early U.S. wind industry, these continue to see widespread use in both federal and state policies for other renewable energy and energy efficiency technologies.

Federal tax incentives proportional to the investment in renewable energy technologies played a significant role in the early adoption of these technologies during the 1980s. Originally adopted as part of the Energy Tax Act of 1978, permanently set at 10% for solar and geothermal facilities by the Energy Policy Act of 1992 (EPACT 92), and currently 30% for solar facilities through 2016, the investment tax credit directly offsets federal corporate income tax liability in proportion to the initial investment cost of the covered technology.2 Current federal law also allows technologies eligible to receive the production tax credit (PTC) (see the following section) to instead receive a 30% investment tax credit. In addition, most renewable electricity generating technologies are also able to benefit from preferential federal tax depreciation allowance schedules. The Modified Accelerated Cost Recovery Schedule allows much faster depreciation of renewable generation investment costs than is allowed for other generation technologies, using a 5-year schedule rather than a 15- or 20-year schedule for combustion turbines or other thermal plants.3

Some states also have or have had tax incentives on the investment in renewable energy or energy efficiency. Additional investment tax credits in California during the 1980s, along with other policies such as the Public Utilities Regulatory Policy Act discussed in Section 3.2.2, helped spur the early adoption of wind and solar thermal generating capacity in that state.4 Several states currently offer substantial investment tax credits to preferred renewable energy technologies, such as photovoltaic (PV) systems.5 These credits, however, are not uniformly offered, vary significantly among states that do offer them, and may apply to electric generating technologies or to facilities that produce renewable fuels, such as ethanol. Rebates or exemptions from state-imposed sales taxes on both renewable technologies and energy-efficient appliances and equipment also offer a mechanism to reduce the first-cost of adopting these technologies by the end-user. Availability of such programs varies significantly among states, as do the sales-tax rates and the value and timing of a rebate or exemption where offered.5 Sales-tax rebates may also, or instead, apply to a renewable fuel, such as biofuel. In this context, such a program may have an effect closer to that of a production incentive rather than an investment incentive. Certain vehicles with low gas mileage will incur a “gas guzzler” tax, which acts as a disincentive for low-efficiency technology investment.

#### 3.1.2  Production/Utilization

Production-based tax incentives provide a tax credit proportional to the quantity of commodity, such as electric generation, produced or sold in a given year. Since production-based incentives reward project performance, they should tend to transfer project performance risk to the project owner, rather than the taxing authority, and without the need for extensive qualification criteria or screening of each project or technology. However, technologies that do not produce easily marketable (and hence taxable) output, such as most energy efficiency technologies, or where the output is generally consumed on-site (without a third-party transaction), such as on-site PV, may be not be amenable to a production-based incentive. In these cases, there may not be a sufficiently auditable record of production or the establishment of such an auditable record (such as internal metering of PV output) may add unwanted cost to a project.

The PTC for renewable electricity, Section 45 of the U.S. Internal Revenue Code, established by EPACT 92 and subsequently modified, provides an inflation-adjusted payment, 2.3¢/kW h in 2013, for the third-party electricity sales from the plant during the first 10-years of operation. The range of technologies eligible for the tax credit has been expanded since its inception, and now includes wind, several types of biomass resources, geothermal, and landfill-gas. However, some technologies do not receive the full credit amount or the same 10-year claim period.6 The PTC has generally been credited with contributing to the significant growth in U.S. wind power since 1998. Having been allowed to expire and subsequently extended several times, the credit expired for projects starting development after December 31, 2013.7 A number of states also offer tax credits on the production of preferred renewable energy sources.5

A tax credit of $1.00/gal for biodiesel and$0.50/gal for other qualified alternative fuels, including certain biomass-derived fuels, expired at the end of 2013.8 A number of states also have tax credits for the production of ethanol or other renewable fuels. These credits may reduce income tax liability or, like the federal credit, be applied to a motor fuels tax (in effect, a sales-tax rebate). State programs vary by credit amount as well as by restrictions on local origin of the fuel.5

#### 3.2  Regulatory

Regulatory mechanisms generally establish restrictions on market activity that are intended to result in increased adoption of policy-preferred technologies or limitation on policy-undesired technologies. Costs are typically borne directly by market participants, or by either energy producers, consumers, or both. Although regulatory policy may affect markets in many ways, this section will examine three major types of regulatory intervention: target-based standards, market facilitation or limitation policies, and technology specification standards.

#### 3.2.1  Target-Based Standards

Target-based standards establish a target metric of renewable energy or energy efficiency achievement and require regulated industry to achieve the goal. The most important types of goal-based standards in U.S. energy policy are renewable electricity targets established by the various states, the Renewable Fuels Standard (RFS) for transportation fuels, and automotive fuel efficiency standards established by the federal government.

Renewable electricity targets can take the form of absolute levels of capacity (or generation) or of a specified fraction of some future level of total generation (or capacity). Generally called renewable portfolio standards (RPS), these targets can be targeted for a single future year or can be based on a gradually increasing compliance schedule. Renewable energy goals—found in a few states—can mimic RPS programs, but generally lack enforceability provisions, and thus cannot be considered as regulatory policy.9 RPS policies can require absolute compliance by affected utilities, or, as frequently occurs, can allow the accumulation of “renewable energy credits” (RECs) that can facilitate either inter-temporal compliance “banking” (i.e., using RECs earned in 1 year to meet compliance targets in another year) and/or inter-utility or inter-state credit trading (whereby a utility that over-complies may sell RECs to a utility that cannot meet targets with native resources). Most states with RPS policies limit the geographic source of compliance to in-state resources, resources within the electric power pool(s) that service the state, or resources that can be “delivered” to the state or state power pool. The prevailing selling price of RECs may also be used to calibrate a penalty or alternative compliance payment, typically in the form of a price ceiling at which the state will provide RECs (without actual renewable capacity or generation) or otherwise waive actual compliance. Such “safety-valve” prices are generally intended to provide a clear maximum impact on general electricity prices. Other states may have a “safety valve” that explicitly limits compliance based on realized electricity rate impacts, and in some states compliance may also be waived or delayed for other, statutorily sanctioned reasons, such as protecting the financial solvency of affected utilities. Policies among states also show signifi-cant variation in resource eligibility, “grandfathering” of existing capacity, and mechanisms to show preferences among eligible technologies, such as awarding “bonus” credits or having differentiated targets for preferred technologies.5,12

The federal RFS was established by the Energy Policy Act of 2005 and the Energy Independence and Security Act of 2007. It establishes volume-based targets for ethanol and advanced biofuels, increasing each year through 2022. By this year, the RFS will require the use of 36 billion gal of renewable fuel. The law ensures the use of a variety of fuel types by limiting the amount of conventional ethanol (ethanol derived from corn) to be used for compliance and setting volumetric targets for various advanced biofuels. Advanced bio-fuels include fuels derived from “cellulosic” feedstocks and can include ethanol, biodiesel, “drop-in” fuels, and other qualifying formulations. Compliance is tracked through the use of Renewable Identification Numbers (RINs) assigned to each batch of qualifying fuel entering the market. RINs can be banked or traded to facilitate compliance.10

In 1975, the federal government established a target of doubling the fuel efficiency of the automobile fleet within 10 years. To implement this target, the aggregate sales of each manufacturer selling cars in the U.S. market had to achieve a set schedule for Corporate Average Fuel Economy (CAFE). In 2007, the law was updated, and, in 2012, regulations were issued to establish a target of over 40 miles/gal for passenger cars and light duty trucks by 2021 on a gasoline energy equivalent basis, potentially increasing to over 49 miles/gal by 2025.11 With the current regulation, compliance for any given manufacturer is facilitated through credit banking and trading provisions. That is, excess credits earned in 1 year may be used to cover a shortfall in another year, or may be traded to another manufacturer to help cover their shortfall. Provisions to support the adoption of electric drive train vehicles may be adopted outside of the construct of the CAFÉ program.

#### 3.2.2  Market Facilitation or Restriction

Regulatory policy can also be used to facilitate or hinder a preferred or undesirable renewable energy or energy efficiency technology from participating in the market. Facilitation can take many forms, including the target-based and technology-specification approaches discussed in Sections 3.2.1 and 3.2.3. Other types of market facilitation can require nondiscriminatory or even preferential market treatment of preferred technologies. Such policies operating at the federal or state level can include “feed-in tariff” (FIT) laws, net metering requirements, and interconnection standards.

In 1978, the Congress passed the Public Utilities Regulatory Policy Act (PURPA), which established the requirement that electric utilities must interconnect (i.e., accept generation feed from) small qualifying facilities that either co-generate process heat and electricity (combined heat and power or CHP) or utilize certain renewable resources.12 Furthermore, PURPA established a price floor for the power, known as “avoided cost,” subsequently defined to mean the cost of electricity that the utility otherwise would have purchased. PURPA, in theory, established a non-discriminatory framework for adoption of efficient industrial CHP and renewable electricity, established by the federal government, but largely implemented by state regulatory authorities. Some of the non-discriminatory market features that PURPA specifically applied to renewable and CHP facilities were subsequently applied to the broad class of all power generation technologies as federal electricity policy moved toward deregulation of the wholesale power market.13

Many states have adopted regulations at the retail/distribution level to require the acceptance of some renewable electricity feeds at an established price floor.5 Such net-metering laws typically require load serving utilities to facilitate end-user connection of renewable distributed generation technologies (especially solar, but sometimes wind or other renewable or non-renewable technologies) on the customer side of the meter. When instantaneous generation from the local resource exceeds instantaneous customer demand, the meter is allowed to “run backward,” effectively causing the utility to purchase the excess generation at the prevailing retail rate. Most states limit the size of the distributed resource, sometimes by customer class, and may also provide limits on the total generation off-set allowed (e.g., the monthly or net annual bill may not be less than zero). Some states have also established limits on the number of customers or level of installed distributed capacity that may participate in net-metering.

More recently, a number of states, localities, and utilities have adopted FITs more similar to those found in Europe.5 In the FIT model, the utility accepts the renewable feed, as with net metering, but also offers a premium payment over the consumer’s retail value of the generation. In some cases, these FIT programs are established by a state or local government, but in other cases, the programs are voluntarily established by the utility itself, and thus may not be, strictly speaking, regulatory policy.

#### 3.2.3  Technology Specification Standards

Another common form of regulatory intervention for renewable and energy efficient technologies is the establishment of minimum product specifications, either as voluntary targets or mandatory limits on product performance. Such standards are seen as an effective approach to improving energy efficiency among individual consumers. Commercial and industrial consumers presumably have significant incentive to optimize energy efficiency for their operations to maintain or improve profitability. However, individuals, while still sensitive to energy prices, may have less motivation to seek out products with higher upfront costs to achieve lower ongoing energy costs. In some cases, market structures may affect consumer decision-making with respect to energy efficiency.

The federal Energy Star program allows qualifying products—ranging from computer equipment to household appliances, to commercial building equipment—to display the “Energy Star” logo on product advertising and packaging.14 This serves as a proxy for disclosure, in that the consumer is thus aware that the product is “best-in-class” for energy efficiency (although for products not displaying the logo, the consumer cannot tell if this is because the product did not meet the specification or because the manufacturer did not participate in the program). Through the Energy Policy and Conservation Act and its various amendments, the federal government also establishes mandatory energy effi-ciency specifications, such as minimum levels of energy efficiency, for a wide array of consumer appliances, such as furnaces, air conditioners, light bulbs and fixtures, and kitchen appliances.15 At the state and local levels, energy efficiency standards may also be incorporated into building codes.

There are both federal and state regulations regarding transportation fuel composition that either directly or indirectly provide incentive for renewable fuels. In addition, the Clean Air Act Amendments of 1990 established a number of fuel specifications, including oxygenation, that vary by region and/or season.16 Ethanol has emerged as a preferred oxygenate, especially in states with additional ethanol incentives or that have restricted the used of alternatives such as MTBE, but is also incentivized by the RFS. Restrictions on the sulfur content in diesel fuels may also encourage the use of “biodiesel” fuels derived from plant oils, if such fuels can be economically produced.

#### 3.3  Research and Development

Government research and development (R&D) funding for renewable and energy effi-ciency technologies can support the adoption of these technologies by facilitating cost reductions, higher efficiency, and improved utilization. R&D funding may occur at all stages of the technology development cycle, including basic science, bench-scale technology development, proof-of-concept demonstration, and pilot applications.17 Government funds may be directed toward government-owned research laboratories, academic institutions, or industry participants. For many projects, especially those developing technologies closer to commercialization, the government will leverage its contributions by requiring substantial cost-sharing (either financial or in-kind) with industry participants.

#### 3.4  Financing

Government-assisted financing has also been used to support renewable energy and energy efficiency, both at the project level and at the manufacturing level. In particular, Section 1703 of the Energy Policy Act of 2005 and Section 1705 of the American Recovery and Reinvestment Act of 2009 established loan guarantee programs,18 whereby the federal government would act as a third-party guarantor for qualified borrowers using the proceeds for allowed purposes, such as new project development or development of technology manufacturing capability. While no new loans may be authorized under Section 1705 authority, loans for advanced energy technologies (which may include some renewable technologies) may still be authorized under older Section 1703 authority.

The federal government has also provided financial assistance to publicly owned utilities and other governmental entities in the form of a tax-advantage bonding authority.5 With such bonds, the government may borrow money, repaying only the principal to the bond holders. The bond holder receives interest payments in the form of income tax credits. Programs have been offered for Clean and Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs). The CREB program had limited funding and is no longer accepting new project applications.

Several states also offer assistance with project or technology loans. A number of states and localities have also started financing distributed renewable energy projects (such as roof-top PV) using “Property Assessed Clean Energy” (PACE) financing. In PACE financing, the local government (typically) acts as the lender, allowing the project owner to repay the loan through an assessment attached to a property tax bill.

#### 3.5  Other Direct Policy

Other common programs at the state and federal levels include direct payments (such as through grants or awards) and government purchase of these technologies. These mechanisms generally require continuing budgetary support, which may be provided from a dedicated revenue source, or may require periodic affirmation in appropriations process.

A number of states have established system benefit funds dedicated to supporting renewable energy and energy efficiency projects and technologies. Although varying greatly by state, these programs are typically structured to collect revenue based on an additional fee on retail generation or billing, commonly referred to as a systems benefit charge or public benefit fund.5 As a result of EPACT and subsequent presidential orders, the various agencies of the federal government are required to obtain a share of their energy from renewable sources and reduce their consumption of energy per square foot of facility.19 Finally, the federal-owned fleet of cars and other vehicles is required to meet requirements for both fuel economy and use of alternative fuels. Several local state governments have also established similar purchase or efficiency requirements for electricity or motor fuels.5

#### 3.6  Indirect Policy

Numerous other policies at the state and federal levels, while not designed specifically to address renewable energy and energy efficiency markets, may have a significant or notable impact on these markets. Perhaps most significant among this broad category are efforts to regulate energy or other markets, manage government—or privately—owned lands, and protect the environment.

Efforts at the federal level to introduce competition in wholesale electricity generation markets, as well as in a number of states to introduce competitive retail electricity supply, have created the opportunity for electricity suppliers to sell “green” power—typically electricity produced from renewable, low-emission, or high efficiency technologies.20 Such programs include competitive supply of clean or renewable power, special pricing for green power by regulated utilities, or the sale of the environmental attributes of renewable power apart from sale of electricity. In addition, the specific design of competitive wholesale markets for generation and transmission can impact the competitiveness of some renewable, especially intermittent resources such as wind.

Environmental regulation at the federal or state level, for air quality, water quality, solid waste disposal, land use, greenhouse gas emissions, and other pollution problems, can have substantial impact on both the cost and value of renewable energy and energy efficiency. The Clean Air Act Amendments of 1990 (CAA) provides the foundation for cap-and-trade regulation of sulfur dioxide, and for emission limits on other pollutants.21 While these programs do not always directly address the use of renewables or efficiency as a pollution avoidance mechanism, they do not necessarily preclude their use to reduce overall emissions. Other CAA impacts on renewable energy and energy efficiency include reformulated gasoline requirements discussed earlier, which have interacted with state-level groundwater protection efforts to provide a preference (in some states) for ethanol as a preferred fuel additive for CAA compliance. More recently, EPA has begun to use authorities in the CAA to regulate greenhouse gas emissions, which may have a more pronounced, if still indirect, impact on renewable generation resources. As a result of the Resource Conservation and Recovery Act, some landfill operations have been required to install collection and flaring systems to prevent the dangerous build-up of methane-rich gas that results from the decomposition of organic matter in the landfills.22 These systems have significantly reduced the cost of deploying small generators fueled by this off-gas. Impacts of land management policy at both the Federal and state levels can be significant factors in renewable energy policy, either to encourage or preclude its development on government owned land.

At the state level, a number of states, either working alone or in cooperation with other states, have established policies to control the emissions of greenhouse gases. For example, the California law known as AB32 (for Assembly Bill number 32, its ascension number in the legislative session) implements a number of policies to control or limit carbon emissions.23 Some of these policies, such as a modification of the state’s RPS or the low carbon fuel standard, directly address renewable energy or energy efficiency, while other policies, such as the cap on greenhouse gas emissions, may serve to encourage additional adoption of renewable energy resources and increased energy efficiency. The Regional Greenhouse Gas Initiative is a cooperative agreement among several states in the Northeast to limit greenhouse gas emissions, which may also incentivize renewable generation resources.

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