Long-term Contracting the Way to Renewable Energy Investment: Lessons from Brazil Applied to the United States

• Publication year: 2013

Long-Term Contracting the Way to Renewable Energy Investment: Lessons from Brazil Applied to the United States

Leah B. Chacon

LONG-TERM CONTRACTING THE WAY TO RENEWABLE ENERGY INVESTMENT: LESSONS FROM BRAZIL APPLIED TO THE UNITED STATES

Abstract

Fostering development of a renewable energy industry is critical to ensuring energy security and sustained economic development. The United States recently lost its status as global leader in new financial investment in renewable energy, while investment in renewable energy has increased in the developing world. For example, Brazil is the sixth largest investor in renewable energy and has moved up in renewable energy rankings. It is time for the United States to regain its leadership role and create a stable climate for renewable energy investment.

This Comment argues that the current legal framework in the United States is inefficient in stimulating continuous investment in electricity generation from renewable resources. The start-and-stop approach created by reliance on tax incentives, a patchwork of state laws, and the inability of many power producers to secure long-term power purchase agreements fail to provide potential investors with the long-term predictability they need. An examination of Brazil's legal framework for investment in renewable energy demonstrates that a mechanism that assures a certain return on investment over a long period of time is crucial to promote continuous investment in renewable energy projects and related industries.

This Comment ultimately recommends that the United States encourage more continuous investment in renewable energy by adopting a national renewable portfolio standard and requiring utilities to enter into long-term contracts with nonutility power producers through a competitive process to meet the requirement, unless a utility can meet it in a more cost-effective manner by generating the required amount of renewable energy itself.

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Introduction............................................................................................1566

I. An Introduction to Investment in Renewable Energy.........1570

A. Financing a Renewable Energy Project................................... 1571
B. Mechanisms Used to Encourage Investment in Renewable Energy ...................................................................................... 1572
C. The Hallmarks of an Effective Renewable Energy Investment Framework ............................................................................... 1573

II. The Legal Framework for Renewable Energy Investment in the United States.....................................................................1574

A. PURPA: An Antiquated Approach to Encouraging Renewable Energy Investment .................................................................... 1575
B. Tax Incentives: Creating a Boom-and-Bust Investment Cycle . 1579
C. State Mechanisms PromotingInvestment in Renewable Energy...................................................................................... 1584

III. Brazil's Legal Framework to Promote Investment in Renewable Energy.......................................................................1588

A. PROINFA: Long-Term Access to the Grid and a Fair Return . 1589
B. A Switch in Strategy to Power Auctions ................................... 1590
C. Complementary Tax Incentives ................................................ 1591
D. Development Bank and Climate Change Policy Round Out the Framework ......................................................................... 1592

IV. Lessons from Brazil's Experiences ..........................................1593

A. Nonutility Power Producers Need Access to Long-Term Contracts .................................................................................. 1593
B. The Price Must Be Right........................................................... 1596
C. Tax Incentives Should Complement Rather than Dominate Other Incentives ....................................................................... 1599
D. Renewable Energy Targets Ensure Contracts Are Made and Minimize Cost........................................................................... 1600

V. Recommendations for the United States................................1602

A. A Framework Based on Long-Term Contracting..................... 1603
B. Reinforcing the Framework and Minimizing Costs Through a National RPS............................................................................ 1606
C. Potential Challenges to the Proposed Framework ................... 1609

Conclusion................................................................................................1611

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Table of Acronyms

ARRA: American Recovery and Reinvestment Act

BNDES: Brazilian National Development Bank

CONFAZ: Brazilian National Council of Treasurers

FERC: Federal Energy Regulatory Commission

FIT: Feed-in Tariff

GHG: Greenhouse Gas

ICMS: Brazilian Sales Tax

IPP: Independent Power Producer

ITC: Business Energy Investment Tax Credit

kWh: Kilowatt Hour

MME: Brazilian Ministry of Mines and Energy

MW: Megawatt

PPA: Power Purchase Agreement

PNMC: Brazilian Climate Change Policy

PROINFA: Incentive Program for Alternative Sources of Energy

PTC: Renewable Electricity Production Tax Credit

PURPA: Public Utility Regulatory Policy Act

QF: Qualifying Facility

REC: Renewable Energy Credit

REIDI: Brazilian Investment in Infrastructure Incentive Program

RPS: Renewable Portfolio Standard

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Introduction

As of 2010, the United States still relied on fossil fuels for about 81% of its primary energy requirements.¹ In contrast, renewable resources—those that "regenerate and can be sustained indefinitely"² —supplied about 8% of energy consumed and electricity generated in the United States.³ Even though total new financial investment in renewable energy in the United States has been growing,⁴ the overall increase in renewable energy generation has been small and unsteady.⁵ Moreover, in recent years the United States lost to China the position of global leader in new, renewable energy investment⁶ and, until May 2013, the position of most attractive country for renewable energy in Ernst & Young's quarterly Renewable Energy Country Attractiveness Indices.⁷

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Slow growth of renewable energy in the United States has been attributed to various factors, including the following: high capital costs; low power purchase agreement (PPA) rates; inability to lock in long-term purchase agreements; regulatory hurdles; demise of key federal incentives; and erosion of Congress's support for subsidies.⁸ Since 2008, a fall in natural gas prices has exacerbated these barriers by promoting the building of natural gas plants and depressing further contract terms for renewable energy projects.⁹

The United States' fall to China as global leader in new, renewable energy investment represented a trend of energy investment shifting toward developing countries.¹⁰ In various regions of the developing world, investment in renewable energy has increased as governments strive to diversify their country's energy mix.¹¹ For example, in 2010, new financial investment in renewable energy in South and Central America, excluding Brazil, nearly tripled.¹² Brazil itself was the world's sixth largest investor in renewable energy as of 2012.¹³ It produces almost all of the world's sugar-based ethanol and has been working to add more small hydroelectric, biomass, and wind power to its energy mix.¹⁴ In fact, largely due to strong growth in its wind

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market, Brazil broke into the top ten ranked countries in Ernst & Young's November 2011 Renewable Energy Country Attractiveness Indices.¹⁵

Around the world, countries such as Brazil, China, India, Spain, and the United Kingdom have been working to reap the benefits that renewable energy offers.¹⁶ Diversification of a country's energy matrix to include more renewable energy can promote economic development, national security, and environmental sustainability.¹⁷ The environmental ramifications seem to be clear. Conventional fossil fuels pollute the air and water, and they contribute to global warming.¹⁸ Producing electricity using renewable resources can mitigate these negative environmental effects.¹⁹ Avoiding such pollutants results in economic benefits such as lower health care costs.²⁰ Additional economic benefits derive from spending more locally to build and maintain the renewable energy facilities than on costly resource inputs from other countries

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or states.²¹ In addition, using renewable energy reduces the country's vulnerability to volatile fossil fuel prices, which may benefit ratepayers by stabilizing electricity rates.²²

However, to achieve these beneficial results, special legal frameworks to encourage investment in renewable energy are necessary because the capital costs associated with renewable energy projects are higher than for conventional power plants.²³ The frameworks governments use vary greatly, but they generally attempt to compensate for high costs by subsidizing renewable energy, establishing special power-purchasing rules, and lowering transaction costs.²⁴ Currently, the United States encourages investment in renewable energy largely through subsidies in the form of short-term tax incentives and state renewable energy mandates.²⁵

This Comment focuses on the current legal framework to encourage investment in electricity generation from renewable resources in the United States.²⁶ It is premised on the fact that the United States has already decided to promote renewable energy, as demonstrated by various measures it has adopted to do so. It considers those laws that have been most successful in encouraging investment in renewable energy in the United States.²⁷ Based on an analysis of the current U.S. legal framework and a study of Brazil's efforts to diversity its energy mix, which have contributed to its increasing...