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Renewable Energy: Why Tax Incentives Are Essential And Should Be Continued

The renewable energy industry has made great strides over the past few years. Growth has been in the double digits, with the benefits flowing to developers, investors, manufacturers, and the public.  The availability of capital for projects has been accompanied by rapid decreases in costs for wind and solar technologies.  The result?  Renewable energy is making strides toward being an affordable alternative to traditional energy sources.  Although nuclear, coal and gas generation still form the bedrock of American energy supply, in light of the push by regulators and the public to require use of renewable energy, reducing the cost of renewable energy sources will not only benefit the climate, but could minimize hikes in energy prices resulting from the imposition of renewable requirements.    Despite the strides made by renewable energy technologies, renewable energy still costs more per kWh than traditional generation sources.   Aside from requiring utilities to purchase from renewable energy sources, the primary way regulators have encouraged development of renewable energy is to provide tax credits, grants, and other incentives that will allow renewable energy sources to provide more competitive pricing.  Several federal programs that have been instrumental in causing investors to provide financing for renewable energy projects will soon expire or have already disappeared.  The consensus among those in the industry is that the result will be a huge drop in investment, installation and manufacturing in the United States.

The tax credits in question are the Production Tax Credit (PTC) and the 1603 grant program.  The PTC provides a credit of 2.2 cents per kWh of energy produced in a wind or solar project for the first 10 years of operation.  This credit has been instrumental in project creation, especially for wind projects, but is set to expire in 2012.  One estimate from a study by Navigant Consulting is that if the credit expires, investment in the industry will drop from a predicted $15.6 billion in 2012 to $5.5 billion in 2013.  Trade groups attempted to have a one-year extension included in the proposed payroll tax cut extension bill this month, but were unsuccessful.

The PTC was attractive to investors seeking to reduce their tax bill.  Because the recession greatly decreased the demand for tax credits in the renewable energy market, the 1603 program was enacted in 2009 to encourage continued financing of renewable energy projects.  Under this program, companies investing in renewable energy would receive a one-time cash payment in lieu of the credit.  The 1603 program was very popular, and paid out over $3 billion in 2011.  It caused a decided uptick in renewable projects, including solar projects, but expired at the end of 2011.

Because developers must line up financing well in advance of breaking ground on new projects, the expiration of the 1603 program and the impending expiration of the PTC for wind projects has already dampened project planning and capital investment.  Regardless of changes in the political climate, it seems certain that over time, regulators will require increased use of renewable energy generation.  In light of this certainty, it makes economic sense to provide incentives to assist the renewable energy industry in obtaining private investment, lowering costs per kWh and providing a more competitive product.

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