If America Wants Energy Innovation, It Will Have to Help Fund It

Nancy Pfund Makes the Case for Energy Innovation Subsidies

Renewableenergy.com
February 13, 2013

DBL Part­ners’ Man­ag­ing Part­ner, Nancy Pfund and co-​​author Katie Plichta landed in today’s Renew​ableEn​ergy​.com with a timely byline in sup­port of clean-​​energy sub­si­dies.  Energy ini­tia­tives have been a sta­ple in our country’s growth for more than 200 years.  It’s time to extend think­ing along con­ven­tional lines like coal and nat­ural gas to renew­ables.  This is some­thing both Democ­rats AND Repub­li­cans have got­ten behind, and the good clean energy projects does for the coun­try is too sig­nif­i­cant to ignore.  The orig­i­nal arti­cle can be found here.

Despite over­whelm­ing evi­dence that the growth of the clean tech indus­try ben­e­fits work­ers in red and blue states alike — Texas alone employs more clean tech work­ers than there are coal work­ers in the entire coun­try — some in Wash­ing­ton still argue that clean tech sub­si­dies are a mar­ket dis­tor­tion that Amer­ica can­not afford.

Such oppo­nents for­get that America’s sup­port for energy inno­va­tion has helped drive our country’s growth for more than 200 years. A recent report I co-​​authored with Ben Healey — “What Would Jef­fer­son Do?” —  shows how cur­rent renew­able energy sub­si­dies com­pare to the his­tor­i­cal norm for emerg­ing sources of energy:

  • As a per­cent­age of inflation-​​adjusted fed­eral spend­ing, nuclear sub­si­dies accounted for more than 1 per­cent of the fed­eral bud­get over their first 15 years. Oil and gas sub­si­dies made up 0.5 per­cent of the total bud­get. Renew­able sub­si­dies, in con­trast, have con­sti­tuted only about 0.1 percent.
  • In inflation-​​adjusted dol­lars, nuclear spend­ing aver­aged $3.3 bil­lion over the first 15 years of sub­sidy life. O&G sub­si­dies aver­aged $1.8 bil­lion. Renew­ables aver­aged less than $0.4 billion.

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Rec­og­niz­ing the power of energy inno­va­tion to cre­ate high qual­ity jobs, promi­nent Repub­li­can gov­er­nors have pushed pol­i­tics aside to cham­pion clean tech.  For­mer Gov­er­nor Haley Bar­bour of Mis­sis­sippi, for exam­ple, was called by the New York Times “the dri­ving force” behind Mississippi’s endeav­ors to become a clean tech leader. Repub­li­can Gov­er­nor Chris Christie of New Jer­sey not only man­dated solar pur­chases by state util­i­ties, but he also signed a law call­ing for the per­cent­age of power derived from solar in the state to dou­ble. At the time of sign­ing he said “Hav­ing renew­able energy in our state, hav­ing it be a larger part of our port­fo­lio, cre­at­ing jobs, is not a Repub­li­can issue or Demo­c­ra­tic issue. It’s an issue that the peo­ple of our state demand we work on together.”

Clean tech inno­va­tion ben­e­fits every­one, but for clean tech to sur­vive, cer­tain poli­cies sup­port­ing long-​​term invest­ment in clean tech must be imple­mented at both the fed­eral and state levels:

  • The Solar Invest­ment Tax Credit (ITC) must remain in place or be phased out grad­u­ally, rather than drop­ping off a cliff in 2016.

As a 30 per­cent tax credit on solar sys­tems for both com­mer­cial and res­i­den­tial prop­er­ties, the ITC has greatly con­tributed to the 76 per­cent growth rate the solar indus­try has expe­ri­enced since 2006. Despite its impor­tance, the ITC faces auto­matic reduc­tion to 10% at the end of 2016. Such a steep and sud­den drop would dis­rupt the solar industry’s steadily improv­ing eco­nom­ics rel­a­tive to other, also sub­si­dized, energy sources.

  • Tax leg­is­la­tion should be redrafted to per­mit clean tech-​​related Mas­ter Lim­ited Part­ner­ships and solar REITs, to level the play­ing field with oil, gas and coal investments.

The tax code should per­mit the for­ma­tion of Mas­ter Lim­ited Part­ner­ships (MLPs) — a pub­licly traded cor­po­rate struc­ture that is taxed like a part­ner­ship — for energy port­fo­lios own­ing and financ­ing renew­able energy and bio­fuel projects. MLPs are already per­mit­ted for port­fo­lios con­sist­ing of oil, gas and coal invest­ments, so it’s time to level the play­ing field and lower the cost of financ­ing clean energy projects. The pro­posed solu­tion, the “MLP Par­ity Act” (S.3275), died in com­mit­tee last year, but it is likely to be rein­tro­duced. Sim­i­larly, an expan­sion of the def­i­n­i­tion of Real Estate Invest­ment Trusts (REITs) to include solar instal­la­tions as a form of real prop­erty would greatly expand the pool of cap­i­tal avail­able for solar projects.

  • The Pro­duc­tion Tax Credit should be extended on a longer term basis.

Fed­eral poli­cies drive pri­vate invest­ment many times over.  The Pro­duc­tion Tax Credit (PTC) is a prime exam­ple. The PTC has played a cru­cial role in the devel­op­ment of wind energy in the U.S. since its incep­tion in 1992, yet Con­gress has allowed the PTC to sun­set four times. Accord­ing to the Amer­i­can Wind Energy Asso­ci­a­tion, 60 per­cent of a wind turbine’s value is now pro­duced in Amer­ica, com­pared to 25 per­cent prior to 2005. While the credit sur­vived the fis­cal cliff, wind investors were left skit­tish while debates car­ried on in Wash­ing­ton. In extend­ing the credit, 75,000 wind power jobs were saved. The exten­sion gave cer­tainty and secu­rity to the wind power indus­try, but not much, since the PTC is due to expire again at the end of this year. A longer term plan for this impor­tant indus­try is needed.

Red and blue states alike ben­e­fit from the devel­op­ment of clean tech. Leg­is­la­tors at the state level have real­ized this and many have taken up the flag of pro­mot­ing clean tech within their juris­dic­tion. The indus­try still faces severe chal­lenges though, and fed­eral pol­icy is needed to drive energy inno­va­tion for­ward, a role it has played for centuries.

Nancy Pfund is a Man­ag­ing Part­ner of DBL Part­ners, a “Dou­ble Bot­tom Line” ven­ture cap­i­tal firm based in San Fran­cisco. Katie Plichta is a JD/​MBA can­di­date at Stan­ford Uni­ver­sity and cur­rently with DBL Part­ners as a Stan­ford GSB Impact Labs Associate.

Hear Nancy Pfund speak dur­ing the ple­nary ses­sion of Solar Power-​​Gen, tak­ing place on Feb­ru­ary 14th, 2013 in San Diego.  More infor­ma­tion about the show can be found here.