Renewable energy is one of the most misunderstood sectors. Too many people have been led to believe that the federal government is using taxpayer funds to build massive renewable energy projects. It is not true. It is the states, not the federal government that are stimulating demand for renewable energy.
In fact, the federal government has no direct role in renewable energy. No federal program exists that creates, standardizes or regulates renewable energy. All attempts to develop national standards have failed. No federal regulations require any private business or individual to buy renewable energy. In fact, utilities and other businesses are not entitled to any federal subsidies for wind or solar.
The production tax credit ended last year. The investment tax credit continues, but it is offset by a larger adjustment in a company's depreciation schedule. For businesses, the investment tax credit has a zero or negative net benefit.
While it may not have a direct role, Washington does wield influence. Through the Clean Air Act, the federal government sets air quality standards. Through the Environmental Protection Agency (EPA), the federal government decides which pollutants need regulation. They also establish acceptable levels of pollution.
Another influence is financial incentives. Congress, through the U.S. Department of Energy (DOE), provides funding for research and development. Within the framework of federal statutes, DOE frequently provides funding to demonstrate new technologies. They also provide financial incentives to help companies implement developed technologies.
Southern Company (SO) is an example. Southern's utility subsidiaries have been beneficiaries of several federal funding programs. One was for clean coal technologies, like its integrated gasification combined cycle at Kemper. Another was more than $7 billion in federal loan guarantees to help build new nuclear construction projects at Plant Vogtle. In addition, Southern expect federal tax credits for its new coal and nuclear plants.
Finally, one of the largest influences available to the federal government is its own purchasing programs. Under Section 203 of the Energy Policy Act of 2005 (42 USC 15852), Congress required federal agencies to purchase renewable energy.
Since the federal government normally purchases electric power, Congress wants part of that power to be in the form of renewable energy. Accordingly, the federal government is to substitute certain percentages of its agencies' power consumption and the consumption of their respective contractors.
Incredibly, the Executive Branch Avoids Buying Renewable Energy
Notwithstanding clear statutory language, most federal agencies are not buying renewable energy. Instead, some agencies took the advice offered by DOE's Office of Energy Efficiency and Renewable Energy (EERE), which allows agencies to purchase renewable energy certificates in place of renewable energy.
EERE's instruction is called, "Renewable Energy Requirement Guidance for EPACT 2005 and Executive Order 13423." In section 2.2.12 of that document, the DOE argues:
"Renewable Energy Certificates (RECs) -- also known as green tags, green energy certificates, renewable energy credits or tradable renewable certificates, -- represent the technology and environmental (non-energy) attributes of energy generated from renewable sources. A certificate can be sold separately from the mega-watt hour (sic) of generic electricity with which it is associated. This flexibility enables customers to offset a percentage of their annual energy use with certificates generated elsewhere. RECs from renewable sources of electricity defined in this section may be used to meet the EPACT 2005 Goal and EO13423 goal."
Apparently, the Obama administration was captured by similar thinking. However, its guidance is more nuanced. Under Presidential Memorandum of Dec. 5, 2013, section 2, paragraph (iv), the administration also argues that renewable energy certificates are an option for agencies.
By ignoring the statute and stripping certificates from renewable energy, the administration is creating several problems. First, the administration is incorrectly assuming that a derivative and an underlying asset are fungible.
Second, if a federal facility that operates in one state buys renewable energy certificates from another state, the federal facility has not mitigated any carbon, greenhouse gases or air pollution on its host state.
Third, by treating state certificates equally and moving them across state lines, the federal government assumes certificates are fungible commodities. They are not. Each state designed its certificates to meet the state's specific needs, not their neighboring states.
As this mistake becomes better understood, the federal government may have to correct its approach. States will likely pressure future administrations to either correct the mistake or work with Congress to change the statute.
In all likelihood, future administrations will be forced to buy much more renewable energy. This will mean more opportunities for companies like NRG Energy (NRG), SunPower (SPWR) and First Solar (FSLR).
The next ten years will likely see significant growth in renewable energy. The federal government will have a roll, but the growth will be fueled by mostly state policies.