Jobs argument is potent in tax debate, but some say it's off point

Renewable energy industry leaders argue that failure to renew a key tax benefit threatens tens of thousands of jobs and blocks the creation of at least 65,000 more.

It's a powerful political assertion at a time of high unemployment. It's also flawed, analysts said.

Focusing on jobs is an inaccurate way to measure a policy's worth, said Roger Bezdek, president of Management Information Services Inc., an economic research firm that specializes in energy and environment issues.

"You subsidize anything enough, you're going to get jobs," Bezdek said. "That's the wrong metric. The government should spend tax dollars on projects or technologies that make sense economically."

The jobs contention comes as renewable energy and environmental groups lobby for extension of an incentive known as Section 1603, named for its place in the 2009 stimulus bill.


The program offers wind, solar, geothermal and other green-energy developers grants of up to 30 percent of project costs in lieu of tax credits they would otherwise receive. Hydropower and certain biomass projects receive half the amount available to the others.

The tax break expires at the end of this month, and an extension was left out of the deal struck between President Obama and Republicans. Their package would leave in place through 2012 tax cuts passed under President George W. Bush, continue unemployment insurance and cut the payroll tax by 2 percent for two years. Senate Democrats are working to get a continuation of Section 1603.

As they tried to win more supporters, the heads of the wind and solar industries' largest trade groups yesterday described the situation as dire.

"We have tens of thousands of jobs that are at risk," said Denise Bode, CEO of American Wind Energy Association. "If it's not extended, we're going to lose in the neighborhood of a quarter of industry jobs. We're already seeing it. We're already seeing right now in the neighborhood of 20,000 jobs in 2010 that will be lost."

A renewal of the program for two years would create 65,000 jobs in the solar industry, said Rhone Resch, president and CEO of the Solar Energy Industries Association.

"None of those jobs can we actually expect to be created if this program is not extended," Resch said. "Not only will those jobs not be created, but we will also contract."

"It's great that the administration and Congress is supporting additional unemployment benefits, but unfortunately, many people currently employed by the renewable energy industry will be standing in line and applying for those unemployment benefits unless the 1603 investment tax credit is extended," Resch added.

The jobs argument is problematic for several reasons, analysts said. One of the most significant is that the wind industry is facing a series of economic obstacles unrelated to the expiring tax credit, said Kevin Book, managing director of the consulting firm ClearView Energy Partners.

Wind, Book said, is struggling to expand amid low electricity usage and very low natural gas prices. Utilities don't need to add wind to supply extra power during peak demand periods, he said.

"The facts of wind demand are very bad, and they're very bad regardless of the policy circumstances you have in place," Book said.

Wind, with the grant program in place last year, doubled the number of megawatts it had added in 2008. But for the first half of this year, new wind developments were 71 percent below the same period last year. Liz Salerno, AWEA's director of industry data and analysis, in an October interview attributed that to lower demand for power and lower natural gas prices (Greenwire, Oct. 14).

Bode yesterday blamed the slower growth on the "slapdash policies" wind has had compared to the long-term support enjoyed by competitors in the fossil fuel industry.

"Congress has failed to act on the renewable standard, which would have provided more long-term certainty," Bode said, referring to a requirement that utilities generate a portion of power from green sources.

The contraction, Bode said, also is "a direct result of the fact that 1603 was not extended or wasn't planned to be extended before November," and people didn't know whether Congress would return for a lame-duck session.

"What we started seeing toward the end of this year was the manufacturers pulling back in response to the developers pulling back," Bode said.

Bode today defended the legitimacy of the jobs argument.

"The renewable energy tax credit helped create a $20 billion American industry with 85,000 jobs and 400 manufacturing facilities," Bode said. "We use tax credits all across the country to encourage development that’s good for America. Renewable energy tax credits in place now saved jobs last year and its pending expiration puts jobs at risk."

Jobs for whom?

But the jobs argument also fails to account for the fact that a portion of the parts used in wind, solar and other renewable developments are made overseas, Book said, even when the jobs installing those parts are domestic. That makes the jobs contention politically dicey, he said.

The 1603 program requires that the wind, solar or other developments be built in the United States. But there is no requirement that the parts used be made domestically. The Section 48C stimulus bill program, which offers grants in lieu of tax credits for manufacturing faculties, mandates that they be constructed in the United States.

Overseas manufacturing is just one of the reasons the 1603 program has stirred controversy. A Greenwire investigation found that of the largest projects, 64 percent went to projects that began construction before the stimulus measures started (Greenwire, Oct. 14).

"The idea that you're destroying a lot of high-value U.S. jobs" by not renewing the grant program, Book said, "is probably harder to substantiate when you consider how much of the [original equipment manufacturer] base is located somewhere else."

"The highest-value jobs are not the install jobs. They're the manufacturing jobs," Book added. "The 48C credit is a much bigger job driver than 1603."

The renewable industry argues that the 1603 incentive drives demand for renewable project parts, which leads to more of those being made in the United States. In the case of wind products, companies have said, they are expensive to ship, so those made domestically cut costs.

The domestic manufacturing sector has been hurt by the lack of federal movement to extend the 1603 program or pass a renewable portfolio standard, or RPS, Bode said.

"Manufacturers and others in the construction sector and others are starting to see there's no appetite for renewable energy by policymakers so far," Bode said. "There's not the outspoken support there was two years ago when this Congress began."

Money put into renewable projects creates more jobs than money put into fossil fuel development, said Nathanael Greene, director of renewable energy policy at Natural Resources Defense Council.

"There's much more of an upstream job-creation effect," Greene said, when considering the work on the steel used in towers, engineering of those towers, assembling the blades, and transporting the materials.

"That's part of the challenge for renewables," Greene said. "You have to put a lot more money down on day one, but then you have free fuel. So there's a trade-off there."

Future shock

Analysts disagreed about how essential it is that renewable companies get the 1603 extension for 2011.

Green sectors are likely to take a severe hit next year without a program that provides government grants in place of tax credits, Bezdek said.

"It's absolutely essential to keeping them alive," Bezdek said. "Whether you think it is wise policy to continue subsidizing these industries is a valid question -- but a different question. The salient point is that, without such subsidies, these industries will be greatly harmed."

With Congress unlikely to penalize carbon emissions over the next two years, he said, renewables "simply can't compete with conventional fuels" such as coal, oil and natural gas.

Book, however, said that over the long run, it doesn't help wind and the other renewables to have government grants available.

"Losing 1603 is almost certainly more bad than good in 2011," Book said. "It might be more good than bad in 2012 or 2013, though."

The 1603 program aimed to help companies during the recession by replacing a tax incentive that for many companies had become worthless. Wind, solar, geothermal and certain biomass developers qualify for a tax deduction of 2.2 cents per kilowatt-hour of energy produced. Before the recession, companies often sold investments to banks that then took the deductions.

During the recession, companies said, it became nearly impossible to find investors. Banks saw incomes fall and did not need deductions to lower tax bills.

The private market still falls short of meeting demand, Book said. But the government program also thwarts private investment, he said.

"If you do it next year, it's just another year that the market hasn't recovered," Book said. "It's just another year that government money crowds out private money."

"The private investor is probably going to demand a higher rate of return" because that investor is risking his money, Book said.

"To the extent that the private investor is going to compete with the federal government cash grant that has an effectively lower cost of equity, you really do have a problem," Book said. There's no space to figure out what investors will pay, he said, "when the government sweeps in and pays 30 percent no matter what."

If renewables could "swallow the bitter pill" and do without the 1603 program, Book said, the industry might be better off. "It seems like a much more reliable future to get the government out of the way," he said.

NRDC's Greene, however, argued that it's vital to renew the tax credit to sustain renewables.

"No one's asking for this to be or sees this as a permanent solution to moving us away from fossil fuels," Greene said "This is about keeping us alive and moving forward after the next year or two," until a national RPS can be passed or more states can pass green power mandates.

"This is a temporary fix," Greene aided. "Industry is really very much in the balance right now. Do we want to preserve the domestic wind and solar and geothermal industry that will continue to produce power forever, or do we want to go back to fossil fuel?"

Room to negotiate

Renewal of the 1603 program appears to have been omitted from Obama's deal with the Republicans because the program started in the stimulus legislation, Resch said.

"What we have heard is that Republicans have said no extensions of any of the Recovery Act programs," Resch said, adding, "It's unclear why the White House would not have included it, otherwise. They have supported this."

Vice President Joe Biden last month called for an extension of the tax credit (E&ENews PM, Nov. 9).

Extension of the renewable energy grant in lieu of tax credit program may have been left out of the White House-Republican agreement, but that doesn't mean it's dead, ClearView's Book said.

"When a car salesman hands a written offer to a buyer, and that buyer gets up from the table and walks away, the salesman seldom expects the negotiation to end, especially if the buyer really needs a car," ClearView says in a report issued Tuesday. "A buyer who comes back to a lower asking price -- even one that isn't as low as his bid -- can still claim to have emerged victorious from a transaction that ultimately benefited the seller."

Lawmakers similarly produce proposals that leave room to add items and take items out, the report says.

"In the final bill, we give better-than-even odds that green power will be in, too, probably incorporating some extension of, or modification to, Section 1603 [wind and geothermal] grants, and some allocation -- even as little as $500 million to the Section 48C [solar] credit," it says.

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