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United States

United States

US energy policy comes under scrutiny post-election

UNITED STATES: "Things may come to those who wait, but only the things left by those who hustle." US President Abraham Lincoln's warning about the perils of indecision will strike a chord with all involved in the US wind industry.

While other nations have set the pace with long-term policies promoting renewable energy as a central component of their transition to a clean energy economy, the US has dithered. For clean energy investors, it is starting to make more sense to hustle for business elsewhere.

The wind industry has demonstrated its ability to build new wind farms and attract significant investment in manufacturing, even in the short-term market afforded by the federal renewable electricity production tax credit (PTC) and the American Recovery and Reinvestment Act 1603 grant programme. However, both the PTC and the 1603 programme are set to expire at the end of 2012.

Compounding the resulting market uncertainty, many of the wind goals set by renewable energy standards at state level have now been met. Meanwhile, historically low natural gas prices and dampened electricity demand from a sluggish economy continue to squeeze the market for wind power. The risk of industry collapse on the heels of an investor exodus is real, unless politicians take swift and decisive action.

Support

Fortunately, unprecedented bipartisan support for renewable energy remains among lawmakers, despite their inability to enact legislation prior to November's election. This is the stage set for the US wind industry as President Barack Obama embarks on his second term.

Obama made renewable energy a central component of his re-election campaign and his success at the voting booths offers hope to the wind industry, though achieving the fundamental change in energy market structure required will be no less difficult. Most immediately, a one-year extension of the PTC in December or January is probable, possibly sweetened by extending eligibility to projects which have started construction before the end of 2013. Beyond this, the transition to a long-term funding solution at federal level is less obvious.

What is clear is that tax reform and deficit reduction are critical and Congress must deal with them soon. Both provide opportunities for reshaping energy policy.

As a tax-based incentive, the PTC will be part of wider tax reform discussions. One option is a multi-year extension of the credit incorporating a gradual phase-out. Such a move could provide much-needed market visibility for investors and allow the industry to continue to drive down costs and compete head-to-head with conventional energy where possible.

However, such reform is not easy. The US tax code runs to a hefty 70,000 pages and although comprehensive reform is a perennial favourite of politicians, the last major overhaul was in 1986. Other more ambitious options such as a permanent PTC, a cap on and trade of CO2 emissions, or a federal clean energy standard - as in Europe - look more difficult to achieve given the government's fiscal constraints and the continued control of Congress by Republicans who are mainly fossil-fuel friendly.

Carbon tax

Those same fiscal constraints, however, offer another option: a tax on carbon. Despite America's distaste for the mere mention of a tax, the idea has started to attract some attention as a mechanism to help solve the federal government's fiscal woes. A recent Congressional Research Service study suggests that a $20 tax per ton of carbon, rising 5.6% annually, could generate up to $1.2 trillion over the next decade. Those revenues could be directed at deficit reduction or lowering corporate tax rates - measures which enjoy broad support - while stimulating low carbon investment. Hurricane Sandy has brought climate change and public understanding of the need for action back into the American dialogue, but as the fiscal cliff approaches, money may talk louder than climate science.

America's financial difficulties provide perhaps the most potent stimulus yet for a major rethink of its renewable energy policy and a rebalancing of the market for the future - including an economically sustainable electricity business. No other country has played a more significant role in the development and commercialisation of energy technologies than the US. Where the US leads, others will follow.

Renewed government commitment to clean energy will allow the wind power industry to innovate, drive down costs and further strengthen the already compelling case for wind energy. With the right policies, the US can maintain its position as a global wind power leader, and those in power need to heed the words of their 16th president and continue to hustle for a cleaner energy future.

Craig Houston is a senior consultant in GL Garrad Hassan's strategy and policy unit based in Washington, DC.

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