U.S. Needs to Extend Renewable Tax Credits Now

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May 22, 2008

by Mark Heesen and Lezlee Westine

Tired of high prices at the gasoline pump? Stay tuned, because a recent Goldman Sachs report says that the current high prices could go even higher, rising from $125 per barrel today to a range of $150-$200 per barrel by the end of the year.

Gasoline prices have risen nearly 400 percent since 2002 and now hover around $4 a gallon. And there is no end in sight. Recent media attention has focused on short-term remedies as a way to drive down the cost of gas. But without a strategic national energy policy, that applies basic economic principles and encourages new sources of energy, price volatility will remain a threat.

There is another way. Technological advances in solar, wind, biofuels, energy efficiency, fuel cell design and other emerging energy sources are creating the energy and cost efficiencies necessary to transform the world¿s energy consumption. This shift can reduce drive gas prices, improve America¿s competitiveness and help address the world¿s environmental challenges. Today, however, common sense legislation supporting renewable energy creation is being held up because of Washington politics.

Some may ask what is the connection between green energy and the price of oil? The answer is the most basic of economic tenets ¿ high demand and limited supply lead to higher prices. Today, two-thirds of the oil used in the United States is for transportation. Outside the U.S., roughly 50 percent of the oil consumed is used for non-transportation purposes such as electricity generation. Given the world¿s limited supply and heavy reliance on oil, there simply are no market forces working to drive down costs. To bring down and keep down the price of oil (and America¿s gas prices), greater competition in the world energy market is needed. Consumption must shift from oil to a more balanced mix that includes greener energy alternatives.

But without reliable federal policy that drives this transformation, clean energy sources are unlikely to reach the economies of scale necessary to compete with oil in the world energy market.

Congress deserves credit for legislation signed into law this past December that raised fuel economy and energy efficiency standards. These steps represented good long-term solutions, but in that effort, the Senate failed by one vote to approve critically needed incentives to promote investment and production of clean energy.

The energy sector is among the most capital-intensive industries in the world. The substantial upfront costs of generating electricity and developing and installing new technologies requires a significant time and funding commitment. Federal tax incentives can spur this process by helping new energy sources achieve the economies of scale necessary to compete. Unfortunately, existing incentives that can help drive this process are set to expire at year¿s end. Without these tax incentives, promising clean energy industries may fail.

In February, we were encouraged that the U.S. House approved a measure to prevent the expiration of these incentives, despite the repeated veto threats of the Bush Administration. In April, the Senate passed similar legislation after several attempts. But the Senate and House have yet to reach a consensus on how to make up the revenue lost by extending these incentives, and it remains unclear if the Bush Administration will support the move.

Today, a broad, bi-partisan, majority of economists and policy-makers agree that tax incentives are critical to long-term investment and expansion of alternative energy sources. Project developers must know for certain, or possess a realistic level of confidence, that the tax credit will be in place for roughly 2 to 6 years in advance, as the development work is carried out. Failing to provide that certainty otherwise causes pre-construction project development activity to be reduced and significant job loss. When the production tax credits last expired in 2004, the amount of power produced from wind installations dropped 77 percent in a single year.

There are more than 42,000 megawatts (MW) of clean power generation projects now in development in 45 states, employing thousands of workers. Recent studies suggest that extending the investment and production tax credits for green energy projects would help create 120,000 jobs and spur nearly $20 billion in economic investment in the United States. (move that sentence to this paragraph to make it flow better) If no agreement can be made and the incentives expire, it will deal a devastating blow to the renewable energy industry.

Failure to extend the credits would be a tragedy as the United States is now in a historic position to lead the world in clean energy. While our advancements are the envy of the world, our global competitors are doing everything they can to corner the market through aggressive public policies and strong renewable energy laws. In fact, it¿s no surprise that in cold, gray Germany over the past five years, the top two job creating industries are the wind power and solar energy industries.

In the United States, the private sector has stepped up to the challenge on clean energy. In the venture capital community alone, investment in the alternative energy sector has grown to $2.9 billion in 2007, up more than 50 percent from $1.9 billion in 2006.

It¿s pretty simple. Business leaders will not make these investment risks without knowing the potential of this market. It¿s time for our government to back them up and make real steps to support renewable energy.

Passing the energy incentives now being considered by Congress will help curb rising energy costs and create a vast new wave of green collar jobs, while simultaneously helping future generations live better lives on this planet.

Mark Heesen is President of the National Venture Capital Association and Lezlee Westine is President and CEO of TechNet.