Acting Up
Critics complain the new Energy Act omits more than it includes.
March 31, 2008 at 08:00 PM
6 minute read
In early February, Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley announced they would set environmental standards that factor in risks posed by carbon emissions when lending to power companies building coal-fired power plants. The move was yet another indication of the speed at which environmental considerations are moving from social concern to financial reality.
Whether Congress is keeping up, however, is open to debate. President Bush signed the Energy Independence and Security Act of 2007 into law Dec. 19, but the year of political horse-trading that preceded the legislation's passage took its toll.
“It would be a misapprehension to conclude that the Energy Act is a significant step on the road to a comprehensive energy policy or energy independence,” says Mark Stermitz, of counsel with Christensen, Glaser, Fink, Jacobs, Weil & Shapiro in Los Angeles. “While it is … the most definitive thing to come out of Washington in quite awhile, its importance is primarily symbolic.”
There's no doubt that the Act includes some measures designed to increase use of alternative fuels. But critics say it is compromised legislation as notable for what it leaves out as for what it mandates.
“The Act as passed eliminated key components that were in the original version,” says Radha Curpen, a partner at Osler Hoskin & Harcourt in New York. “The most important are a rollback of the tax breaks to oil and gas companies, an extension or creation of tax incentives for renewable energy sources and the implementation of a national renewable energy mandate.”
Up for Debate
Understandably, the reaction from the business community has been mixed.
“The big winners were the ethanol and biofuel sectors,” Stermitz says.
Indeed, the total amount of biofuels added to gasoline must increase to 36 billion gallons by 2022 from the current 4.7 billion gallons. A further 16 billion gallons of the 2022 total must come from cellulosic ethanol. Renewable fuel manufactured at new facilities must achieve at least a 20 percent reduction of lifecycle greenhouse gas emissions. The Act also promotes investment in renewable fuels infrastructure and encourages development of new bioenergy sources. Still, major uncertainties remain, especially for investors.
“There are serious concerns about the economic viability of ethanol,” Stermitz says. “And while biofuels can be produced on a smaller scale and therefore more economically, no one's quite sure of the environmental benefits.”
Finally, there's the prospect of an uncertain economy in combination with sky-high commodity prices.
“The current cost of commodities and the cost of steel make it prohibitive for major companies to be investing in projects on a large enough scale to set us on a path to energy independence,” Stermitz says. Adding to the uncertainty for investors is the fact that no one knows what a carbon regulation and emissions trading scheme might eventually look like in the U.S.
Finally, the business community is bitterly divided about the merits of promoting renewables. “Supporters of the Act, like the Renewable Fuels Association, believe that investing revenue in renewable energy sources will foster a new industry, create more jobs and help reduce American dependency on oil imports,” Curpen says. “Opponents, like the Independent Petroleum Association of America, say the legislation will increase our reliance on foreign sources of energy by making new domestic exploration and production more costly, and that it establishes the precedent of funding one energy source at the expense of another.”
And the battle's not over. Despite the bombast surrounding the Act's emphasis on renewable resources, there's a strong argument that legislators' need to compromise left the alternative energy industry twisting in the wind.
Taxing Concerns
Production tax credits (PTCs) for alternative energy projects such as wind and solar projects have been around for at least a decade, more or less on an ad hoc basis. Congress has tended to renew the credits either on the eve of expiration or after expiration with retroactive effect. The difficulty is that existing PTCs expire at the end of 2008, and the Energy Act says nothing about extending them.
“This plays havoc with the industry, which needs up to 18 months to plan a project, get the permits together, get approval from the utilities, order the turbines and put together the necessary debt and equity,” says Clyde Rankin III, partner in Baker & McKenzie's New York office. “Failure to extend the credits creates a stop-and-go effect that hurts the economics of the industry.”
Alternative energy proponents took a stab at extending the credits as part of the economic stimulus bill, but the provision was removed before final passage in February. Still, Rankin is hopeful that all is not lost. “There is support on both sides of the aisle,” he says. “What's holding things up is the desire on the part of some legislators to tax the oil and gas industry in order to fund the alternative energy credits.”
Uncertain Ground
Needless to say, oil and gas interests are fiercely resisting that proposition and so far they've done well. The original version of the Energy Act would have eliminated tax breaks worth $13 billion to the oil and gas industry to fund a $21 billion tax package for alternative energy.
“So the existing tax breaks stay for oil and gas while the uncertainty over the tax incentives will likely make financing more difficult for alternative energy concerns,” Curpen says.
More than likely, actually. Rankin says his clients are already experiencing the effects of the uncertainty. “Clients have been calling to say that they had to break ground in March to get their projects on stream for this calendar year and qualify for the existing credit,” he says. “Otherwise, they'd have to take the chance that the PTCs, which attract investors at the rate of 1.9 cents per kilowatt, won't be extended. That money frees up some loose cash that the developer can use for his next project.”
Without the PTCs, then, cash flow for alternative energy will surely slow down, which hardly comports with the Act's stated purpose of moving the U.S. “toward greater energy independence and security.” Or at least it doesn't move the country there very expeditiously.
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