Monday, November 10, 2014

Should Renewable Incentives Continue or Should all Energy Incentives End?

By: Eugene Wilkie
With added comments by:
Gary Tulie





 


Renewable Incentives Versus Oil Incentives

The renewable energy industry would not exist at the level it is today without incentives. There are two Federal tax incentives that have spurred this growth. There have also been grant programs also that have had their hits and misses. I truly believe that it is important to be informed and so in this article I have listed both the oil incentives and the renewable incentives. I am focusing primarily on Federal but there is also local state incentives for both oil and renewables.

 


1. The 30% Federal Renewable Energy Tax Credit

2. MACRS or accelerated depreciation (applicable to businesses only)
To see how all Federal Renewable Incentives are structured visit www.dsireusa.org

When you consider these in comparison to oil it is a drop in the bucket.



OIL TAX INCENTIVES


1. Intangible Drilling Costs: These include everything but the actual drilling equipment. Labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if it costs $300,000 to drill a well, and if it was determined that 75% of that cost would be considered intangible, the investor would receive a current deduction of $225,000. Furthermore, it doesn't matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, the deductions will be allowed.

2. Tangible Drilling Costs: Tangible costs pertain to the actual direct cost of the drilling equipment. These expenses are also 100% deductible but must be depreciated over seven years. Therefore, in the example above, the remaining $75,000 could be written off according to a seven-year schedule.

3. Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.

4. Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the "depletion allowance," excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.

5. Lease Costs: These include the purchase of lease and mineral rights, lease operating costs and all administrative, legal and accounting expenses. These expenses are 100% deductible in the year they are incurred.

5. Alternative Minimum Tax: All excess intangible drilling costs have been specifically exempted as a "preference item" on the alternative minimum tax return.


 Here is a video that describes Oil Tax Incentives



In the United States, credible estimates of annual fossil fuel subsidies range from $10 billion to $52 billion annually yet these don’t even include costs borne by taxpayers related to the climate, local environmental, and health impacts of the fossil fuel industry. 





I have often wondered what would happen if all energy tax incentives were removed across the board. This of course would not have worked when wind and solar were in their infancy but the price point has matured to withstand direct competition with fossil fuel. At this point in the game I think there still needs to be renewable incentives to allow the energy storage market to mature. In recent years there have been leaps and bounds in battery technology due to the electric car market but we are still a ways from price point matching the market. One has to wonder how much longer the fossil fuel industry needs to mature into its own and stand without incentives or is just corporate welfare?

I do believe the fossil fuel industry has recognized the potential of renewables ability to finally be its own stand alone power. This is why, I believe, folks like the Koch brothers have spent so much money fighting renewable incentives. They are scared and they should be.

Lets ask the question: is it fair to end renewable incentives but still allow the $ billions in fossil fuel incentives. I don't believe so. 


I have added comments by Gary Tulie  he has some very relevant points

Gary Tulie Director / Renewable Energy Consultant and Co-Owner of Planet 3 LTD


Incentives have their place in allowing technologies to mature until they are able to stand without support.

The fossil fuel industry has had over 100 years of incentives, and should now be self supporting - with only special situations such as carbon capture and storage justifying ongoing incentive.

As alluded to in the article, by far the biggest incentive received by the fossil fuel industry is exemption from the full force of "polluter pays" in other words, the fossil fuel industry is not made to fully pay for its impact on climate change or other pollution related externalities.

A type of incentive also not taken into account is security - many oil and gas producers operate in areas where there is instability, and where American military might has been used to protect American interests. Possibly the Iraq wars with all their financial and personal costs might not have been fought if Iraq had no oil.

In regards to Renewables, the justification for incentives is coming to an end for the more mature technologies in favourable locations - with onshore wind nationwide, and solar in the Southern states at or very near the point where incentives can end. Other technologies such as emerging plasma torch waste to energy systems, offshore wind, energy storage, tidal and wave energy are still in the early stages and need incentives to achieve maturity.

The other exception where incentives are justified relate to R & D where incentives to develop technologies which improve the efficiency or reduce the cost of solar power can bring reduction in overall societal costs over time.

In regards to solar incentives, removal of the expensive disincentive of high soft costs (planning, permitting, grid connection studies, inspection) which cause domestic solar installations in the US to be nearly twice the cost of similar arrays in Europe and Australia is essential. Sorting this out by simplifying and standardising regulations across the nation would more than cover any loss in tax incentives.

Likewise with energy efficiency - whilst many technologies achieve a superb return on investment, there is a need to drive implementation through education and mandatory standards as many viable ways to save energy are not well known or understood. (fleet fuel consumption, building energy rating, tighter building codes insulation etc.) Whilst many such technologies are mature enough to be viable without support, there is possibly a strategic advantage in incentivising reductions in energy consumption (companies and organisations can achieve large emission reductions and cash savings for relatively low incentive costs freeing up extra resources for growth).

In the UK there is a small levy on all electricity sales to cover the cost of home insulation which is organised free of charge for many home owners by the electricity companies
.


8 comments:

  1. Definitely not right to end renewables incentives but still allow the $ billions in fossil fuel incentives. See also Guardian article at http://www.theguardian.com/environment/2014/nov/11/rich-countries-subsidising-oil-gas-and-coal-companies-by-88bn-a-year

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  2. Should energy incentives end? The short answer is yes, the long answer is how. Certainly all overt incentives should have ended long ago for fossil fuels, it is a mature technology. They have also been around long enough for the hidden costs, health and environmental impacts are a couple that readily come to mind, to have been assessed and added in to the cost of the fuel through taxes. This has not been done! For new energy sources there should be incentives to enter the market, new technology is almost always more expensive than the established, but should have a limited span which should combine both a time component and a milestone component. The time component should be sufficiently long to provide stability in the entrance phases and allow development to proceed. This should be based on the technological cycle of the system involved. For example, solar might be 15 years initially because of a relatively rapid cycle of development as compared to nuclear (thorium) say which might require a 50 year cycle. These times could be modified by realtime technical advances, for example if solar achieves parity or greater cost effectiveness than the current technology standard, before the 15 years then subsidies could be dropped earlier. Additionally, during this period the hidden costs, typically denoted as external costs, would be assessed and those costs added to the cost of the energy. Thus yes, incentives should end however not simply an across the board sweep which in general favours the extant technology and would inhibit new developments.

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    Replies
    1. Well said sir and thank you for your comments

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  3. Eugene, an interesting discussion and one that many do not want to openly discuss. At this point, behind the meter PPA for large facilities is very much a reality and growing. Utilization of hybrid and electric vehicles further reduce overall operational costs. State incentives to reduce unemployment is a further enticement to move to renewable energy since solar and wind tend to employ a lot of people.

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  4. Eugene, I'm a big fan of incentivizing renewables, but I fear this is not a fair "apples-to-apples" comparison. The oil tax "incentives" you use for comparison are mostly standard tax treatment for any US corporation (depletion allowance excepted). Any corporation can immediately deduct the cost of expenses such as labor and non-durable items. A wind turbine manufacturer will immediately deduct labor costs and expenses associated with its assembly, just as a driller will deduct these "intangible" expenses. Purchasers of wind turbines will deduct 100% of this "capital cost" over its depreciable lifetime, just as a driller will deduct "tangible" expenses. The other "incentives" you mention are comparable to standard tax treatment in other industries, depletion allowance aside.

    The depletion allowance is iffy, but there is a rationale: unlike non-extractive industries, the product depletes and is, well, non-renewable.

    I'd rather have us just forget the (losing) game of comparing supposed "tax breaks" between fossil fuels and renewables, and focus, as Gary Tulie points out, on the externalities question, where it is easy to argue that renewables face an unfair disadvantage because these costs are not accounted for with fossil fuels. This is the most powerful argument for renewable tax incentives.

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  5. I think end both incentives will put renewables above non-renewables. But, remove incentives only for renewables will put them in a huge competitive disadvantage. Also it is important to take in account that the oil and gas prices are highly dependent of politics, agreements between nations and so on, this is one of the reasons that had avoid renewables be above non-renewables.

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  6. Let us be realistic and practical. Indeed, established powerful companies in any area do manage to lobby for and receive unfair and disproportional government incentives. These companies know how to lobby governments to maintain that type of support. What needs to be done if we want things to change is to show how other large powerful companies and organizations who do not a vested interested in Oil & Gas/Nuclear can make even more money than with the old paradigm dirty energy businesses by obtaining government support through hidden subsidies that are appropriate for renewable and other clean(er) energy industries such as energy storage, efficiency, electric transport).

    The non-oil mining sector is a good example (copper, gold, silver, nickel.) and so are many other industries that have a lot to gain by reducing their dependance towards volatile fossil fuels. They can see the huge savings possible thanks to renewable. Google got it, Ikea and Virgin got it, and many others are starting to get it, even Wallmart is starting to get it (at least in theory so far).

    Some of the wealthiest private and public investors (insurance companies, smart private investors like Warren Buffet) are getting it and can assist to bend the rules the same way the oil and gas folks have.

    Frederic Pouyot
    cleanenergyeducation dot net
    Green Power Environment Knowledge Systems (GPEKS) dot com

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