The US should follow Germany's example

WORLDWIDE: In the midst of the 1970s oil crisis, Germany and the United States sought to encourage renewable-energy development by choosing two different approaches.

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In the US, support for renewables is provided through federal tax incentives and myriad local incentives. At present, a wind project can choose between a federal investment tax credit or grant, equal to 30% of the qualified cost of the facility, or the production tax credit, currently $0.022 per kilowatt hour. In each case, the facility must be placed in service by the end of the year. For the grant, it must also "begin construction" in 2009-11. Added to this is the permitted write-off of nearly all of a facility placed in service in 2011 and of 50% in 2012. Notably, all these breaks end for all but the smallest facilities placed in service after 2012.

Projects must also determine which, if any, local subsidies they can use. These vary dramatically by state, ranging from grants to renewable-energy credits (RECs) and feed-in tariffs (fixed rates for the sale of electricity), as well as renewable portfolio standards that can drive up the demand for renewables. The receipt of state grants is generally taxable for federal purposes, which can be off-putting to a tax-motivated investor, and the value of RECs is significantly impaired because they must either be sold in highly volatile spot markets or to long-term purchasers at a price that accounts for the market risk.

The European model, as typified by Germany, has the government setting guaranteed feed-in tariffs high enough to encourage the development of renewables by providing far greater comfort for lenders and investors. In Germany, the tariff for a facility is set for a minimum of five years - and generally for 20 - with the intention of enabling the operator to make a profit. The cost of the tariff is spread among consumers. The programme also encourages technology improvement by modestly reducing the tariff that applies to new facilities each year.

Steady does it

But there is a more fundamental difference between the two approaches. Throughout their history, US subsidies have been extended in fits and starts, typically two years at a time, generating an uncertainty that undermines investor confidence and troubles lenders. Because the American system is built into the tax code, the fear of government review inspires demand for higher returns from some investors while causing others to avoid this investment altogether. The German system has been predominantly driven by EU goals and national legislation incentives that have consistenly promoted renewables for more than 20 years.

Of course, the American system has had very good results. America has the second-largest installed wind capacity in the world, 43.5GW, which is 2.3% of the country's electricity. But the year-to-year record swings wildly in line with federal credits renewal. For example, the percentage increases in the US swung from low single digits to 30% and more for several years in the past decade. German wind power installed capacity, at 27.2GW for a population one quarter the size of the US, represents 7% of the country's capacity and has been rising in double digits every year.

The American policy of renewal and expiration every couple of years severely tests the ability to plan a wind facility that takes that long or longer to develop. Entrepreneurs should be asked to have confidence they can bring a project in on time and budget, not to read a crystal ball and determine whether a government benefit will be extended long enough for them to take advantage.

Similarly, it is a big ask of all the parties to develop practices, procedures and forms to build wind facilities under the constantly looming shadow of an always pending termination of the programme. America could do well to incorporate at least the vision and permanence of the German system.

Forrest Milder is a partner at US-based law firm Nixon Peabody, specialising in renewable energy and tax credit finance & syndication.

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