How dependent is renewable power capacity on policy? During today's OnPoint, Christi Tezak, managing director of research at ClearView Energy Partners, discusses the changing dynamics of the renewable energy tax policy debate and the impact master limited partnerships could have on clean energy projects. She also explains how U.S. EPA's New Source Performance Standards for power plants could affect state renewable portfolio standards.
Monica Trauzzi: Hello, and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Christi Tezak, managing director of research at ClearView Energy Partners. Christi, always nice to have you here.
Christi Tezak: Thank you for having me.
Monica Trauzzi: Christi, with the budget and tax policy still being debated by members of Congress, renewable energy is playing a significant role in the discussions and will continue to do so moving forward. How dependent is renewable power capacity on policy at this point?
Christi Tezak: Well, I think it's still pretty significant. I mean, when you look at how the dynamic had changed in terms of providing power in this country and how affordably priced natural gas has really made the power generation market more competitive, that didn't make the playing field any easier for renewable power. Even though we have seen incredible advancements in the improvement of their cost structure and they have gone down precipitously over the last several years, that stability and that low natural gas price has not made the wholesale market an easier place to play in, and so I think that there's still a reliance on the public policy incentives that help make it a little more competitive in order for regulators to justify paying that premium.
Monica Trauzzi: So there continue to be financial hurdles within the industry. Are renewables still considered risky investments, and what's sort of the marker that you're looking for to signal when this is no longer risky?
Christi Tezak: Well, I think when it comes to electric power markets, it's hard to say we'll ever be without risk. The question is, are we in a big purchasing phase or are we still in a bit of a retraction? We had a significant retraction with the recession, which actually, you know, increased our power margins a bit. We have seen, we saw a big drop in generation demand growth, so the appetite from consumers, from businesses, from industry in terms of their power needs stopped growing that 1 to 2 percent a year because GDP didn't grow. GDP contracted, and so when you're looking at, you know, most opportunity is from an incrementally and organically growing market. And when that organic growth stops, it even declines or begins, even when the economy begins to grow again, grows at a slower rate than it did historically and you have a surfeit of assets. Then, of course, it's going to be more challenging to say I'm the next project and you should have me as part of your power portfolio.
Monica Trauzzi: In previous years when tax policy was being debated, we saw a big push from renewable energy groups. It doesn't seem to quite be working that way this time around. How has the discussion changed? What's the dynamic difference?
Christi Tezak: Well, back in 2008, when the stimulus package was considered and we had the extensions of the tax credit, particularly the wind energy production tax credit in 2008, and the subsequent stimulus-related package in early 2009, the wind production tax credit sunset earlier than some of the other programs. The biggest one people identify with, of course, is the solar investment tax credit, which sunsets in 2016. So with the wind credit, you know, having being scheduled to sunset last year, getting its one-year extension with a little bit longer lead time to go into service, then I think that, you know, what you saw was what had been a monolithic group of diverse power sources coming in together with an expiration of their program happening at the same time, it was easier to get that critical mass just because of size and because of how things were managed during 2008 and 2009. The wind production tax credit is sunsetting earlier and so it, in this environment where everything has been complicated by the prospect of tax reform and will that get done first and how should that all be handled, it's made an extension of that program much more difficult this year.
Monica Trauzzi: Well, talk about master limited partnerships. They're part of this discussion. In your view, what role could they play on clean energy projects? Could there be success there as compared to what we've seen in the oil industry?
Christi Tezak: Well, I think certainly most of the beneficiaries of a production tax credit would prefer that program. Looking ahead, if that program contracts, sunsets, you know, is this an opportunity? I think there is a place for it and it's something that can be used beyond renewable power. It's also the Coons bill, the bill proposed by Sen. Chris Coons of Delaware, and cosponsored on the House side, or introduced on the House side by Rep. Ted Poe from Texas, would offer a financing vehicle to the renewable power and the renewable fuel sector that isn't currently available. It's limited to natural resources, energy procurement and transportation, so it's energy E&P on the conventional side, and of course, transmission of that energy via pipeline. And that has been very successful in that it has really increased the velocity of capital through the sector.
Now the challenge is when you look at renewable power development historically, it's the tax equity model through the production tax credit or the investment tax credit was very helpful in a project finance basis. When you look at its application through oil and gas or through pipelines in particular, you take an asset that's sort of been compiled and built and then you drop it down, they call it, into a master limited partnership structure where you change the financing arrangements and you take that cash loan and give it directly to investors. And it may be helpful in releasing another round of cash for the next round of development, but it doesn't necessarily jump-start a brand new project from scratch. It helps, you know, perhaps big companies like a Next Era, which is already, has a balance sheet that's significant, and take an existing set of assets that are secured by purchase power agreements, drop them into a different vehicle, and then take that cash and then put it into the next round. So I think it can be helpful. The question is it may not be as broadly applicable to every project developer, but it could probably do some good and I think it would be additive, and they're pretty excited about it. The problem is the tax discussion is still a little bit in its beginnings, so it's hard to say where we're going to wind up.
Monica Trauzzi: What's the interplay between EPA's New Source Performance Standards for power plants and state RPSs?
Christi Tezak: Developing. I think that certainly Joe Goffman of EPA has been signaling that the agency is very receptive to hearing about how that might be integrated. You know, we're seeing a shift from the EPA. There's been some conversation initiated by the Natural Resources Defense Council about a year ago about taking the emissions rate-based approach from the new unit in SPS and applying that to the existing portfolio. There seems to be a push from the states instead to do something that's more mass-based, more tonnage-based at the state level, to more easily incorporate A.B. 32 or RGGI programs, and hopefully also create some room or opportunity for recognizing some of the advancements nearly 40 states have made with their renewable portfolio standards and how they've changed their portfolio and made it less carbon-intensive.
Monica Trauzzi: Talk to me about the role you think offshore wind could play in our energy mix and sort of the example that Cape Wind could provide.
Christi Tezak: Well, I would say, you know, as we said earlier, eight years is a long time to be working on a project. Certainly that's not unheard of in the electricity business. Ask American Electric Power about the 13 years they spent sighting a transmission line. You know, it takes awhile, and new things take awhile in the electric utility business. I think managements are conservative. State regulators tend to be conservative and cautious about spending ratepayer money. We've had a lot of ups and downs in the electric power business. I think it's, you know, unfortunately Europe, I expect, is going to stay ahead of us for a while, but hopefully the European experience we'll be able to bring here, and once we start getting that first project, getting Cape Wind out and done and productive and looking like a success story, then I think the opportunity to see it happen more frequently is more likely, but it's difficult. It's easy to think they're out there and they're offshore, but you bring that big power line up there on a shoreline, and that's delicate and sensitive area, often not inexpensive real estate with neighbors that get concerned about what's going on nearby, and I think it's going to continue to be slow and challenging, but a good successful project could change the pace.
Monica Trauzzi: All right. We're going to end it right there. Thank you so much for coming on the show. Very interesting.
Christi Tezak: Thank you, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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