Enhancing the investor appeal of renewable energy.

• Author: Mormann, Felix
• Position: VI. Toward a More Investor-Oriented U.S. Renewables Policy through VII. Conclusion, with footnotes, p. 725-734

6. TOWARD A MORE INVESTOR-ORIENTED U.S. RENEWABLES POLICY

   Both empirical evidence across the globe and this Article's qualitative "soft-cost" factor analysis suggest that the United States would be well advised to adopt a feed-in tariff approach to leverage greater investment in renewable energy. However, designing and implementing a feed-in tariff that spurs sustainable growth of U.S. renewables while limiting the financial burden on ratepayers requires careful consideration of a number of factors, and must not be rushed into. (300) In the meantime, well-targeted, specific adjustments to the currently employed policy instruments represent crucial first steps toward a more investor-oriented U.S. renewables policy. (301)

   1. Adjustments to Current US. Policy Instruments

      For the past quarter of a century, renewable energy policy in the United States has been dominated by RPSs and tax credits. (302) Based on this Article's qualitative analysis, both policy instruments would considerably improve their attractiveness to investors if they offered a more favorable treatment of the "soft-cost" factors related to the electricity market structure, such as grid access, dispatch priority, and balancing responsibilities. (303) In addition, policy-specific tweaks in design and implementation could significantly improve the impact of RPSs and production tax credits on investment-based "soft-cost" factors and, hence, enhance their ability to leverage investment in renewable energy technologies. (304)

      1. Enhancing the Market Efficiency of RPSs

         There are about thirty state-level RPS regimes in force in the United States today. (305) Under these RPSs, renewable energy investors are exposed to the dual market risks of the wholesale electricity market (to sell their power) and the market (to sell the certificates they receive for relying on renewables). (306) The REC market in particular imposes enormous uncertainty on the profit expectations of investors and, as a result, drives up the cost of capital.

         The absence of a unified national REC market and the multiplicity of competing standards have led to a proliferation of state certificate markets. (307) The various state RPS mandates have brought forth a panoply of inconsistent definitions of eligible renewable energy technologies. As a result, the U.S. renewables market has splintered into regional and state markets, offering investors poor liquidity and, with it, enormous volatility. (308) The problem posed by different REC definitions is exacerbated by conflicting rules on the treatment and value of these certificates. (309) The REC shelf life, for instance, ranges from three years in Michigan, to indefinite validity in Arizona. (310) The vastly different ability to bank RECs for future sale or proof of compliance directly affects their market value, and inevitably fosters the creation of different REC sub-classes. To make matters worse, there is not even a universally accepted currency for state-issued RECs. While most states award one certificate per MWh of eligible electricity, some issue RECs on a per kWh basis. (311) In addition, state RPS mandates vary considerably in their aspirational aggressiveness, as well as in their planning and enforcement rigor, all of which affect--directly or indirectly--the market value of RECs. (312) This multiplicity of state RPS mandates has produced huge fluctuations in certificate market prices, ranging from $1.75 in California to $35 in New England for a REC over 1 MWh of wind energy. (313) With such uncertainty, it is hardly surprising that investors are reluctant to fund U.S. renewable energy projects, and, when they do so, charge a premium for their risk exposure.

         A federal RPS is often celebrated as the panacea that would reduce the REC market risk to investors by creating a unified national certificate market with harmonized definitions, accounting, and compliance rules. (314) A more liquid, transparent, and less volatile national REC market could indeed be expected to increase investment in renewable energy technologies, while saving utilities and ratepayers billions of dollars (315) Washington's history of more than twenty-five failed proposals for a federal RPS, however, makes it politically unlikely that a federal RPS will unify the panoply of fragmented state REC markets in the near future. (316)

         In the meantime, RPS states should continue to fulfill their role as laboratories of democracy, (317) but cooperate more to create a harmonized RPS market from the bottom-up. The Northeast's Regional Greenhouse Gas Initiative and the Western Climate Initiative have demonstrated the ability of regional, multi-state collaboration to combat climate change. (318) To better align REC trading with the physical sale and delivery of electricity, I recommend that states join forces to create regional certificate trading markets that unite RPS states in the Eastern and Western Interconnects. (319) In the near term, RPS states would be well advised to at least increase the transparency and predictability of their in-state REC markets, for example by replacing the widespread over-the-counter trade of certificates with a mandatory trading platform. Such a platform could build on the certificate tracking systems developed in Texas, Wisconsin, and the New England Power Pool. (320) More transparent REC markets would also do a better job of conveying relevant information to potential investors, such as how close a jurisdiction is to reaching its RPS target. At present, prospective investors have to rely on publicly available information about pending interconnection applications in order to assess the market's saturation. (321) The transmission interconnection queue, however, is a poor source of information, since many proposed projects apply for interconnection long before they secure financing or regulatory approval and, as a result, never come to fruition.

      2. Complementing Tax Credits with Direct Subsidies

         The need for sufficient tax liabilities to reap the benefits of the federal tax credit program has already been identified as a major deterrent to renewables investment in the United States. (322) A recent study illustrates the enormous cost of tax equity to investors and taxpayers. (323) Between 2005 and 2008, tax credits worth $10.3 billion were drawn to deploy some 19 gigawatts (GW) of new wind turbine generation capacity. (324) Factoring in the cost of tax equity, the same deployment could have been achieved with approximately $5 billion in direct cash subsidies--in other words, at half the cost to taxpayers and the mounting national budget deficit. (325)

         Until a feed-in tariff establishes a direct cash subsidy for renewable energy deployment and reassigns the associated costs to ratepayers rather than taxpayers, the federal tax credit should be complemented with an option to receive cash subsidies instead. Such an opt-out would not yet fully remove the burden of tax credits on the national budget, but it would, at least, ensure more efficient e of taxpayers money and, hence, help relieve the national budget deficit. From 2009 to 2011, the Treasury's section 1603 Cash Grant offered this sort of cash subsidy in lieu of tax credits, which revived America's struggling renewable energy industry. (326) Regrettably, the section 1603 Grant was not extended beyond 2011 and federal support for renewables deployment has reverted back to its historic reliance on tax incentives alone. (327) To maintain the investor appeal of renewable energy in the United States, and spare the industry another chapter in its long history of boom and bust cycles, (328) I recommend the immediate renewal of the section 1603 Cash Grant.

   2. Keys to Feed-In Tariff Success in the United States

      Successful feed-in tariff design and implementation represent a huge challenge. In contrast to RPSs or other quantity-based policy instruments, regulators cannot rely on the market's invisible hand to determine the appropriate level of financial support. As a price-based policy, feed-in tariffs require regulators to set tariff rates at a level that balances investor needs with ratepayer concerns. (329) To harness the full promotional potential of feed-in tariffs, a multi-tiered tariff structure should account for differences across technology strands and project sizes. (330) Finally, a successful feed-in tariff must be compatible with, and sensitive to, the existing panoply of competing policy approaches at the U.S. state and federal level. (331)

      1. Getting the Tariff Right--And Keeping it Right

         To effectively leverage investment in American renewable energy, a U.S. feed-in tariff must offer financial subsidies that allow investors to make a reasonable profit without imposing an undue burden on electricity ratepayers. Argentina's feed-in tariff experience illustrates that, if the tariff is set too low, it will fail to attract the necessary investment to deploy renewable energy technologies. As a concession to political opposition, Argentina's 2006 feed-in tariff for wind energy was set too low to inspire serious investment, leaving deployed wind capacity stable at a meager 30 MW nationwide---the equivalent of fifteen present-day wind turbines. (332) At the other end of the spectrum, a tariff that is set too high will impose undue hardship on electricity ratepayers and undermine public support for renewables, as Spain's feed-in tariff for solar photovoltalcs has demonstrated. The Spanish regulators chose to adopt rates similar to Germany's widely praised feed-in tariff, only to find out that, in reality, these rates were far too high in light of Spain's 60% -greater insolation as compared to Germany. (333) As a result, the Spanish tariff offered renewable energy investors windfall profits at the expense of ratepayers, eroding public support for renewables and eventually forcing the Spanish government to suspend its feed-in tariff. (334)

         Feed-in tariff rate determination tends to...