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The $17 billion tax package attached to Wall Street rescue legislation that the Senate approved Wednesday and the House is voting on today would overhaul energy tax policies in ways that go far beyond well-publicized efforts to extend incentives for renewable electricity projects.
Key aspects include a one-year extension of the expiring production tax credit for wind projects and an eight-year extension of expiring investment tax credits for residential and commercial solar projects. The industry calls extension of these incentives vital.
But there are more than two dozen provisions ranging from new incentives for plug-in electric vehicles to credits for storing carbon dioxide emissions underground, changes to biodiesel incentives that could spell trouble for a major oil company project, and new credits for the fledgling marine renewable energy sector.
The package also includes -- to the dismay of environmentalists -- provisions that support refineries processing oil shale and oil sands.
One energy expert termed the various tax provisions, while positive in some cases, a "Christmas tree" and cautioned that it should be accompanied by a more cogent energy policy strategy, including an effort to provide some certainty about climate regulations.
"The bigger question going forward is: Will these types of provisions be complemented by a larger-scale or more widespread strategic approach to energy policy next year?" said Sarah Ladislaw, a fellow in energy and national security at the Center for Strategic and International Studies.
But even on their own, the myriad tax provisions represent an attempt to alter the risk-reward balance for several emerging industries. Here's a sampling:
Provisions aimed at encouraging carbon capture and storage (CCS) are drawing mixed reviews.
Ian Duncan, head of the earth systems and environment group at the University of Texas, Austin's Bureau of Economic Geology, said a $10 per ton credit for capturing carbon dioxide from industrial sources for use in oil fields could be significant.
"I think that [the credits] are probably going to be quite meaningful for carbon dioxide enhanced oil recovery," Duncan said.
Today, oil companies pay a premium to purchase compressed carbon dioxide that is then injected into aging fields to push oil to the surface. With CO2 prices at about $25 per ton on the open market, Duncan said, $10 could tip the scales in favor of using captured carbon.
The credit, which would apply to the first 75 million metric tons of CO2 captured, would likely cover the needs of two major injection sites per year, he said.
But Duncan was less sanguine about the prospects for a $20 per ton credit that would apply to CO2 permanently injected underground for sequestration -- a technology that has so far seen only limited use in test projects.
He suggested that if planners already had in mind a coal power plant that was to enable the latest CO2 separation technology and be connected to a CO2 pipeline -- decisions that are costly to implement -- then the availability of a sequestration credit might push them toward developing a way of injecting the resultant carbon stream underground.
"Twenty dollars is not going to create a revolution, but it might incentivize a couple of projects," Duncan said of the proposal.
Alex Klein, a senior analyst for Emerging Energy Research, agreed that the sequestration credit, in particular, would have little effect on its own.
"As it stands now in isolation, it will have a small impact in providing an incentive," Klein said. "But if, down the road, the development of more robust carbon policies evolve [with] additional incentives to avoid emissions, then this in addition to that could help to provide a more comprehensive driver."
Klein suggested that the incentives could attract attention not just for coal or natural gas power plants, but in other industries where CO2 is a byproduct. In natural gas extraction, for example, he said, companies must remove CO2 from the gas as it comes out of the ground, and a single facility could produce more than the 500,000-ton threshold for receiving credits under the Senate bill. Fertilizer production, too, generates large quantities of the greenhouse gas that are just released into the atmosphere.
Klein said that as regional and state-based programs addressing CO2 come online, a federal incentive could become an important part of the larger financial picture for sequestration.
"In and of itself [this] won't be a huge driver, but as carbon policies evolve and additional incentives emerge, you're seeing a policy picture at the state and federal level that is helping to get CCS off the ground," he said.
The legislation aims to entice consumer purchases of plug-in electric vehicles by providing tax credits to the first wave of buyers.
The credits would range from $2,500 to $7,500, depending on the vehicle's specifications, and would be used against the purchase of a new plug-in vehicle until the total number of qualified plug-ins sold in the United States tops 250,000.
Automakers ramped up lobbying this year for bills that spur technological advances and consumer demand in several ways, including the early adopter tax breaks (Greenwire, June 13).
Greg Martin, a spokesman for General Motors Corp.'s Washington office, praised the plug-in provision. "As tradition has shown, consumer credits can be very effective," he said.
Electric car advocates, who have long pushed to secure government and industry support for the nascent industry, also applauded the credits.
Advocacy group Plug In America said it will help consumers take the plunge into the electric market. "Basically, we love it; we support it 100 percent," said Plug In America spokeswoman Zan Dubin Scott. "It will be a terrific boost to the inevitable shift toward electric transportation."
She pointed to the much-hyped forthcoming launch of General Motors' Chevy Volt, a plug-in electric hybrid that will be capable of traveling its first 40 miles without burning any gasoline. "The Volt would qualify for the maximum credit," she said. "If GM can bring the Volt in at $35,000, consumers can be paying less than $30,000 for a plug-in car."
GM's Martin declined to give an estimate of what the Volt's sticker price will be when it hits dealer showrooms sometime in late 2010, but said the tax credit would provide a substantial discount to car buyers.
The Volt will not be the only plug-in that could reap the rewards of the tax breaks. Toyota and Nissan also plan to mass-produce plug-ins. And last month, Chrysler shocked the industry when it announced plans to produce three plug-in models that it had been working on in secret for more than a year (Greenwire, Sept. 24).
The credits could provide enough momentum to help the plug-in market hit full speed. "There is much more acceptance out there for alternatives," said Rob Tregenza, an automotive analyst with consumer marketing firm Iconoculture.
He said consumers are already much more willing to consider plug-ins after this summer's run-up in fuel prices, interest that will grow further once the first batch of plug-ins starts hitting U.S. roads.
"Once they are launched in the key major metro areas and are seen on the road, I think it's one of those things that is going to spread like a viral video," he said.
A handful of startups with marine power technologies say they are poised to capitalize on an extension and modification of the energy production tax credit. For the first time, any project that generates at least 150 kilowatts of nameplate capacity from river currents, ocean waves or tides is eligible for the same production tax benefit that wind turbines and other land-based power projects get.
The so-called marine renewables projects must be producing power by the end of 2011.
Industry backers say that perhaps a dozen or so startup companies could have sufficient permits and funding in place to receive the production tax credit (PTC).
National Hydropower Association Executive Director Linda Church Ciocci said the PTC is critical to would-be marine power developers' ability to prove to investors the commercial viability of their turbines, buoys and other devices.
"These are not by any stretch of the imagination cheap to build," said Ciocci, whose organization represents utilities, independent power producers and equipment manufacturers. "There's also a lot of testing and study needed."
The production tax credit, she added, would help bolster the young industry's profile among investors.
"Investment money is going to be harder to come by," she added.
Carolyn Elefant, general counsel for the Ocean Renewable Energy Coalition, which also represents marine power developers, said the handful of projects that could be in the water in time to take advantage of the PTC would be small in scale.
"At best, these projects will be small and will not likely reap much value from the PTC," Elefant explained in an e-mail. "Nevertheless, we support the inclusion of marine renewables technologies in the legislation because it gets these technologies in the door and qualifies them for inclusion in future legislation."
Mark Stover, a vice president with underwater turbine-maker Hydro Green Energy LLC, said debt financing, in particular, will be a more expensive proposition for the industry as Wall Street lending tightens.
Stover's Houston-based company, which makes turbines that generate power from rivers and tidal straits, hopes to close on a second round of startup capital this year. The company is seeking perhaps in excess of $70 million, he said, to be able to build pilot-scale projects in Alaska, Maine, Mississippi and New York.
"Financially, we're fine now," he said. "But to be able to advance all these projects, we need to close on that B-round funding."
If all goes as planned, Hydro Green plans to seek pilot commercial licenses from the Federal Energy Regulatory Commission next year for all four projects. The FERC licenses would permit Hydro Green to place grid-connected tidal turbines off the coasts of Alaska and Maine, as well as in-stream turbines amid the Niagara and Mississippi rivers.
Each of the pilot-scale projects would produce enough power to comply with the PTC requirement, Stover said.
Trey Taylor, president of New York-based Verdant Power LLC, also hopes to utilize the production tax credit. Two Verdant turbines submerged in the East River -- which is actually a tidal strait -- are already producing about 35 kW apiece. Taylor said he plans to apply for a FERC pilot commercial license by the end of the year, so he can expand the project to about 40 turbines -- enough machines to produce about 1.5 MW.
Ultimately, Taylor hopes to get a full commercial license to expand the East River project to 300 turbines. "The PTC would be very, very helpful for us," he added. "So much of what we're trying to do is create distributed generation -- power close to the user."
The bill would extend 30 percent investment tax credits for residential and commercial-scale solar energy projects. And perhaps equally importantly, the legislation removes what the industry has called a major barrier to faster growth in the residential market.
The current residential credit, which was begun under a major 2005 energy law, capped the credit for residential projects at $2,000. That means in practice the credit is worth nowhere near 30 percent of the cost of residential solar power systems.
The bill would remove the $2,000 cap for residential solar electricity projects, whose cost generally ranges from $25,000 to $35,000, according to the Solar Energy Industries Association. Therefore, with the cap in place, the credit would only cover $2,000 of a $30,000 project, while without the cap, the credit applies to $10,000 of the cost.
Industry officials are cheering the removal of the cap, saying it will put home solar systems within reach of many more buyers.
"It takes the federal credit from being a nice add-on for a residential customer to being a really prime incentive available to all customers across the country," said Jeff Wolfe, CEO of a groSolar, a Vermont-based solar company active in many states. "With a $2,000 cap, you always were way, way under 30 percent."
The tax language could alter the future of a nascent fat-to-fuel venture between oil major ConocoPhillips and Tyson Foods Inc.
For 11 months, Tyson has been shipping tallow from its beef-processing plant in Amarillo, Texas, to ConocoPhillips' oil refinery in the nearby town of Borger. ConocoPhillips is using a pressure-heating technology, known as thermal depolymerization, to convert the hardened fat into the chemical equivalent of diesel.
The Borger refinery is producing 300 to 500 barrels a day of so-called renewable diesel, which is mixed with petroleum diesel, said Tyson spokesman Gary Mickelson. ConocoPhillips has vowed to spend up to $100 million to upgrade four refineries to produce 175 million gallons of renewable diesel annually.
The venture is able to get a $1-per-gallon federal tax credit today, thanks to a provision in the 2005 energy bill (Greenwire, June 15, 2007). Language in the pending Wall Street bailout bill, however, would cut to 50 cents per gallon the credit for diesel fuel created by co-processing biomass with other petroleum.
Without the full $1-per-gallon credit, "it is unlikely this venture will remain economically viable," Mickelson wrote in an e-mail.
In a subsequent interview, Mickelson stopped short of predicting whether that means ConocoPhillips and Tyson would stop making renewable diesel altogether or scale back their plans.
"If this legislation is approved -- and that could be soon -- we'll have to sit down and discuss the future of this venture," he said.
Like Mickelson, ConocoPhillips spokesman Bill Graham said the companies would evaluate their venture to produce renewable diesel if the bill passes.
"At 50 cents, it doesn't support expansion of the production of renewable diesel," he said. In other words, it wouldn't be economical to ramp up production to 175 million gallons per year of the fuel.
The bill also targets European biodiesel producers that have been shipping fuel across the Atlantic Ocean and back just to collect the U.S. tax credit.
The legislation will close the so-called "splash and dash loophole" that allowed foreign producers to collect the biodiesel tax credit, even if they had minimal input from U.S. biofuels. The practice was an unexpected result of the $1 per gallon incentive for biodiesel.
Previously, tankers with a shipload of foreign biodiesel could come to U.S. ports, blend their fuel with a "splash" of U.S. diesel and "dash" off again -- sometimes traveling as far as from Europe and back to collect the credit. The European Commission opened an anti-dumping probe into the policies over the summer in response to a complaint by some E.U. biodisel producers.
The new package extends the biodiesel tax credit for commerce in the United States, but bars the credit for biodiesel imported and sold for export.
Most U.S. lawmakers said they never intended the "splash-and-dash" phenomenon when first drafting the biodiesel credits.
"This has no energy policy benefits," said Michael Frohlich, spokesman for the National Biodiesel Board, which represents the U.S. biodiesel industry. "From the start, we have been vehemently opposed [to the practice], and we're pleased to see the language included in the legislation,"
U.S. biodiesel exports quadrupled last year, and the credits were estimated to cost taxpayers about $30 million. Agriculture economists have blamed the practice for putting upward pressure on soybean oil prices.
Overall, the $1 per gallon credit has given a big boost to the domestic biodiesel industry. American biodiesel production has grown more than twentyfold since the credit was first enacted. U.S. producers say it is a vital for their continued expansion. There are 171 biodiesel plants in operation now and 60 new plants under construction.
"It's really critical to keep the industry growing," Frohlich said.
Reporters Michael Burnham, Ben Geman, Jenny Mandel, Josh Voorhees and Allison Winter contributed.
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