Tax Incentives for Renewable Baseload Power

By Bob Cleaves | August 22, 2012

Washington, D.C., is busy with debate over the proposed extension of the Section 45 production tax credit (PTC), a benefit currently available almost exclusively to wind power, but it could easily benefit baseload renewable sources like biomass. 

Industry leaders claim that failure to extend the “placed-in-service date,” a deadline by which a facility must begin providing power if they are to receive the credit, would be harmful to U.S. turbine manufacturing facilities and stall the growth of the U.S. renewable energy fleet. Opponents claim that the credit is nothing more than a handout to a mature technology that should be able to stand on its own two feet after decades of support. 

Although wind-powered electricity generation facilities were made eligible for the PTC back in 1992, the entire renewable energy market—including wind—is still largely unstable. The fact of the matter is that until the country develops a national renewable energy standard (RES), government support such as the PTC is necessary for virtually all forms of renewable energy. That being said, it is important that we understand Section 45, and ask ‘is Section 45 working and for whom?’

First, we must look at one of the most prominent recipients of PTC: wind power. We know that in recent years, federal tax incentives have spurred tremendous growth of wind power. Since 2007, the U.S. wind capacity has more than tripled in size, and the PTC is the driving force behind the rapid growth of the industry. These credits allow wind investors to build and expand the considerable infrastructure needed to capture large-scale power from wind. However, wind powered facilities are incapable of providing predictable baseload power, especially during critical high demand times. Predictable baseload power is necessary for U.S. communities, especially as they endure these hot summer days.

It is important that we consider baseload energy sources such as geothermal, biomass or waste energy. These sources can provide predictable power to the energy grid regardless of severe weather or other uncontrollable circumstances. However, in comparison with the wind industry boom, there has been meager growth in these sectors since 2007.  Overall, these sources have grown by about 10 percent. While they technically qualify for Section 45 credits, it is very difficult for baseload energy developers to take advantage of them. Due to the longer lead-time required to complete facility construction for these energy sources, combined with the very short congressional extensions of the placed-in-service deadline, the incentive power of Section 45 PTCs remains just out of their grasp.

For as long as the U.S. works to decrease its fossil fuel dependency without a federal RES, federal energy tax policy decisions will continue to have a major influence on renewable energy development.  For example, if tax policy continues to disfavor baseload renewable energy resources, periods of high energy demand could cause areas that rely heavily on intermittent energy sources to resort to fossil fuels peaking facilities, or worse, to lose power altogether.

There is an easy solution that would allow for continued support of wind and solar power while ensuring that baseload sources are able to grow.  By adjusting the section 45 placed-in-service date to allow more baseload power facilities to qualify, Congress could enhance the incentive value of the renewable incentives to baseload power developers, stimulating additional build-out and significantly broadening the portfolio of generation available to the grid.

In the coming months, Congress is expected to look at extending Section 45 credits. While considering this legislation, Congress should enact the changes necessary to make Section 45 accessible to baseload developers. The government has the potential to better support biomass, geothermal and waste energy.

Author: Bob Cleaves
President and CEO, Biomass Power Association