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The Power of Association

Influential forces work quietly behind the scenes on Capitol Hill in favor of biomass power producers. These forces-organized people with an important message-are not often sensationalized in the newspapers, but their work is important and lawmakers know who they are.
By Ron Kotrba
To most people the value of a penny is rather inconsequential. To biomass power producers though, the difference between a penny and 2 cents can make or break projects and hogtie the whole industry. Small biomass power plants from California to Maine have been denied equal access to the full renewable energy production tax credit (PTC) in section 45 of the Internal Revenue Service tax code for which their counterparts in the wind and geothermal industries have been eligible for years. The full credit is 2 cents per kilowatt hour-plants burning forest and agricultural residues for electrical generation for sale back to the grid receive only 1 cent per kilowatt hour. This disparity is one of the most debated issues in the broader renewable energy complex and is a major point of contention among those in the biomass industry itself. "Closed-loop" biomass power plants have been eligible for the full credit for 15 years but the allowance of "open-loop" generators to receive any credit at all was an afterthought. Consequently, they drew the short ways-and-means stick.

A closed-loop biomass power plant is one in which the feedstock is grown specifically for the purpose of power generation. These are eligible for the full PTC as stated in section 45 of the IRS tax code. Jerry Whitfield of Biomass Investment Group told the U.S. House Committee on Ways and Means recently that no closed-loop section 45 biomass electricity PTC has ever been claimed since its inception in the Energy Policy Act of 1992. Robert Cleaves, chairman of the USA Biomass Power Producers Alliance, suggests why. "A number of us think that the reason why there has not been a closed-loop system built-not withstanding 15 years of tax credits for it-is because the economics have been challenging and the development horizon is long," Cleaves tells Biomass Magazine. "And there doesn't seem to be an obvious business model out there that would accommodate a closed-loop system."

Disparity in Section 45 Eligibility for a 50 MW Biomass Power Plant

Over the course of a year, a hypothetical 50 MW closed-loop biomass power plant is eligible for $4.4 million more in IRS section 45 production tax credits-at the 2-cent-per-kW/hr rate-than the same sized open-loop biomass power plant, which is only eligible for 1 cent per kW/hr.
SOURCE: USA BPPA


Unlike closed-loop systems, an open-loop biomass power facility burns waste wood or other lignocellulosic residues to generate electrical power. Because the nature of the open-loop's feedstock and the lower or even negative cost of the hand-me-down fuel, these power companies may only cash in on half the value of the full PTC allotted to wind and geothermal power generation, and the nonexistent closed-loop biomass facilities. The 41 members of USABPPA represent 70 percent of all the standalone biomass power generated in the United States, accounting for 1,100 megawatts of electricity-all from open-loop biomass power generation.

"We are the only national trade association in biomass to energy doing what we do," says Bill Carlson who recently retired as USABPPA chairman after nearly a decade of service-the position Cleaves filled. "We are different than ACORE (American Council on Renewable Energy) in that the way we are funded and organized, we have the ability to advocate legislatively-ACORE cannot. Through our lobbyists in [Washington] D.C., we advocate our position on Capitol Hill. Our ability to be successful there is directly tied to our ability to have success in getting a broad membership in different geographical regions of the country." Without a voice in Washington biomass power producers may never receive section 45 tax parity, nor gain an extension to the "in-service" date-which is critical to growing biomass power generation.

Extension is Job One
All the advocating in the world for tax parity between open- and closed-loop biomass power projects means nothing if the in-service date is not extended. In his statement, Whitfield told Congress that these one-year extensions do little to instill confidence in investors to fund the move from design to construction-especially for the elusive closed-loop system which hitherto has been a specter in the biomass power industry. Rather than a short extension, Whitfield suggested a five-year prolongation. Lengthening the in-service date of the PTC despite the disparity is on the forefront of the USABPPA agenda-and signs of success are beginning to show.

California Feedstock Cost Increase

According to USABPPA leadership the competition for wood waste in California over the last five years, in part due to power plant retrofitting in preparation to meet the Golden State's upcoming RPS, has caused wood-waste feedstock costs to jump from an average of $22 per bone dry ton to $40 per BDT.
SOURCE: USA BPPA


At press time, biomass power projects currently under construction must be operating by the end of 2008 in order to be eligible for the credit. If projects meet this deadline they are eligible for the PTC for 10 years from the in-service date. Sandy Feldman, section 45 attorney with K&L Gates, explains that the duration of the PTC for plants in existence earlier depends on when they came on line. Those in service before Oct. 22, 2004, may receive the PTC until Dec. 31, 2009. Projects beginning operation between October 2004 and August 2005 may receive the credit for up to five years of the in-service date. Renewable energy power plants coming on line between August 2005 and Dec. 31, 2008-as the law stands now-are eligible for the PTC for up to 10 years from the in-service date. But thanks in part to the USABPPA lobbyists, pending legislation may indeed extend this date, but not for five years.

On April 3, Sen. Maria Cantwell, D-Wash., introduced S.2821, which proposes to extend the PTC in-service date one year, pushing the deadline back to Dec. 31, 2009. According to the office of Sen. Ken Salazar, D-Colo., who sits on the Senate Committee on Finance and is a proponent of the PTC in-service date extension, S.2821 passed 88-8 in the Senate as an amendment to the housing bill. As is the case with all legislation-stay tuned. In the meantime, USABPPA lobbyists will be quietly working away on Capitol Hill to do what's right for its members. "Our sole reason for being is to create a setting where both existing and new biomass power plants can be successful," Carlson says. "We're very active at the national level-we work behind the scenes and people don't read about us in the newspaper. But the people in Congress know who we are."

The Case for Tax Parity
While USABPPA's immediate advocacy efforts are focused on extending the in-service date, the issue of tax parity is still paramount-and for good reason. "If we can claim the full tax credit, open-loop biomass power projects have a pretty solid set of economics in many locations," Carlson says. "That's the model that works-taking people's waste materials and making electricity out of it." Here's the problem with open-loop systems only being eligible for 1-cent per kilowatt hour: Competition from a growing number of state renewable portfolio standards (RPS) and pending advanced biofuels project developments are driving the cost of lignocellulosic feedstocks up-and driving down the economic viability of biomass power. This already happened in the state of California where the USABPPA has its roots.

"In California they have an RPS coming due in 2010," Carlson says. "The utilities there are scrambling all over themselves to find additional sources for renewable energy and biomass is in there. They're picking up lucrative contracts and restarting old plants and, basically, getting into competition with the plants already there for a limited amount of fuel.

That could easily happen-the fuel suppliers make all the money out of the supply contract rather than the guy running the power plant." According to USABPPA, the retrofitting of old plants in California to generate power from biomass has helped boost feedstock costs per bone dry ton from $22 to $40 in the past five years. "And the revenue stream has not gone up at that same rate," Cleaves tells Biomass Magazine. "A lot of them were under fixed contracts with the utilities while the new interests have more lucrative contracts-so it's kind of messed things up there from a profit perspective." Without PTC tax parity projects will not have the financial wherewithal to compete, and may be run out of business.

Maine is suffering from a problem similar to that which is ailing California's biomass power industry. Cleaves, who is from Maine, says old power plants are being retrofitted to compete for the nearby Massachusetts RPS market. "That's very lucrative so they end up starting all these old plants, converting fuel from coal to wood and falling all over each other," he says.

Moreover, cellulosic ethanol and some alternative diesel fuels will be competing for the same feedstocks. "With some of the incentives coming down from Congress, they will really skew the economics in favor of cellulosic ethanol and away from biomass power," Carlson says. That's just one more reason why biomass power producers need a voice on the Hill.

Ron Kotrba is a Biomass Magazine senior writer. Reach him at rkotrba@bbibiofuels.com or (701) 738-4962.
 

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