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Uncertain tax incentives, regulations pose challenges to developing renewables

Amid a shifting North American energy landscape, utilities sayexisting regulatory processes and the timing of tax incentives often pose challengesto developing renewable projects.

A lot has changed in recent years. "If six or seven yearsago, those of you that were in the industry, said that we have to start thinkingabout moving natural gas out of Pennsylvania down to the Gulf [of Mexico], you wouldhave gotten fired for being incompetent or drunk," Geronimo Energy vice presidentof origination John Larkey said Oct. 7 at the North American Energy Markets Associationfall conference in Bloomington, Minn. "You could have made a similar commentsix or seven years ago that [SouthernCo.] or [American ElectricPower Co. Inc.] would be leading renewable energy companies and youprobably would have the same result."

But utilities continue to face challenges in their transitiontoward renewables amid the same uncertain tax incentives and bureaucratic processesthat still exist.

Xcel Energy Inc.manager of renewable energy purchased power Tara Fowler said it can take more thantwo years from the time Xcel's utilities file their integrated resource plans tothe time they have regulatory approval of their purchased power agreements.

"It's a process where we will make a filing and then basically,everyone and their son is able to come in and intervene and make their case thatthey agree or disagree with what we have stated in our [integrated resource plan],"Fowler said.

Larkey compared that timeline to the time horizon of renewabletax incentive extensions, saying that when you factor in the regulatory timeline,the time period that utilities have to take advantage of those incentives is muchshorter.

"[With] those two- or three-year extensions, we need tostart moving fairly quickly to match up with your processes and also take advantageof [the tax credits]," Larkey said. "The reality is the timeline is notas long as you think."

Others said the uncertainty around tax incentives makes it difficultto plan as the cost of renewables declines.

"We've had some issues where we took some projects to ourcommission and said 'you have to approve these now because the tax credit is goingaway and prices are never going to be cheaper,'" Southern Co. renewable generationdevelopment manager Brandon Looney said. "Every time we've done that what happens?Tax credits get extended and prices get way cheaper. So there is always this weird— if you're in a regulated environment — risk of chasing tax credits, because youcan't control what Congress does. As much as they promise, 'this is the final taxextender. It's got a sunset provision. We're not touching it again.' … I've heardthat story before."

"It's like this race to the bottom," Looney continued."Are costs going to get to the point where the tax credit doesn't matter? Everymegawatt I've bought — of solar particularly — I kind of wish I had not bought it,because I can buy it tomorrow so much cheaper."

Looney said that the way regulators view tax incentives putsutilities that want to build their own solar projects at a cost disadvantage relativeto merchant generators.

"Relative to an [independent power producer] that can flowthrough tax credits day one, we're talking about a 20% disadvantage on the costof solar," Looney said. "That's why a large amount of our solar comesfrom [power purchase agreements]. The opportunities we've had to self-build andself-own have been unique customer-oriented opportunities, like our federal militarybases."

Looney said the military preferred to partner with a utilityin order to avoid involving a third party.

"We were able to rationalize a small premium in price forthose opportunities," Looney said. "But believe me we've spent countlesshours, days trying to figure out how you get around tax normalization in a way thatmakes it equitable, but we just haven't found it yet."

Looney said tax incentives for wind power production are morefavorable to utilities, but he lamented the lack of access to wind resources inthe Southeast.

"Unfortunately, the wind is so far up there we haven't gottento it yet. So if we were in a wind state maybe we wouldn't care as much about thetax credit," he said.