Washington, D.C., has a long way to go in its support of policies to benefit the waste-to-energy industry.
Waste to energy (WTE) operates in extremely competitive markets for waste and energy, and those markets are often influenced by government policies. Policies crafted in Washington, D.C., by Congress and the executive branch play a vital role in whether the WTE sector will grow, maintain or regress.
More often than not, gridlock in Washington has prevented significant policies from moving forward that would have given WTE strong incentives to drive new development.
As a technology, WTE is dependent on policies governing waste, energy and materials. The United States has no comprehensive national policies on any of those topics. Energy policy in the United States has historically consisted of a fragmented set of programs that attempt to provide a low-cost supply of energy from a diverse set of sources. The specifics of a policy and how it is applied to a technology governs the effectiveness of that policy in achieving its goals. For example, contracts under the Public Utility Regulatory Policies Act of 1978 led to growth in the WTE sector. On the other hand, eligibility for the Production Tax Credit from 2004 to the present has not.
Looking to Congress
Congress often has tried to create national programs that will promote renewable, clean and low-carbon electric generation technologies. Over the last four years, Congress has enacted legislation that would benefit renewable production (including WTE) through production tax credits, investment tax credits, cash grants and government purchasing. Unfortunately, many of the enacted policies have not benefited WTE projects because the policies catered to projects with short lead times for development.
Congress also has failed to enact policies that would have helped WTE, such as renewable energy standards, clean energy standards and greenhouse gas cap-and-trade programs.
WTE is an eligible technology under the section 45 renewable energy production tax credit. From 2009 through 2012, WTE facilities “placed in service” prior to Dec. 31, 2013, were eligible for a tax credit of 1.1 cents per kilowatt hour for a period of 10 years. Since the development timeline for a WTE facility can be five to eight years, a tax credit that is available for less than five years will fail to stimulate much growth. In addition, a tax credit can only be claimed by the owner if it is a taxpayer. Therefore, local governments that own WTE facilities are unable to capitalize on this important federal incentive, as was the case with the five recent expansions of publicly owned WTE facilities.
Congress did make an important change to the Production Tax Credit when it enacted the American Taxpayer Relief Act of 2012 (“fiscal cliff bill”) on Jan. 2, 2013. To be eligible for the tax credit, an eligible facility no longer had to be placed in service by, but rather begin construction by, Dec. 31, 2013. Through recently issued guidance, the Internal Revenue Service has defined this to be either the commencement of significant physical construction or the expenditure of 5 percent of the estimated costs of the facility. While this helps bring the eligibility date further back in the project development timeline, it is still a tall hurdle for a WTE facility to meet in one year. To be useful, WTE needs longer eligibility periods or eligibility triggers that are earlier in the development process, such as the signing of a written binding contract with a local government to take waste.
Political Climate Change
The legislative politics in Washington are different today than they were four years ago. With President Obama’s enthusiastic support for clean technology, policies in support of those technologies became a wedge leading up to the 2012 presidential elections. Congressional Republicans pursued investigations into clean-tech firms that received federal support under the Obama administration and went bankrupt.
Whether government should “pick winners or losers” was debated hotly. Candidates were forced to take a position on whether they supported renewable incentives, and that position was then used against them by the opponents. This has created a chasm on energy and environment issues that is proving difficult to span. However, the current discussion on tax reform is one place in which renewables may be part of a broader bipartisan dialogue.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) are leading the push on comprehensive tax reform. Rep. Camp will reach his term limit as committee chairman after 2014, and Sen. Baucus has announced he will not seek reelection in 2014. This leaves both chairmen extremely motivated to reform the tax code in the next two years to cement their legacies. This dynamic has created back-channel, bipartisan coordination that stands in stark contrast to the partisan politics that increasingly grip Washington.
Tax Reform
Comprehensive tax reform means something different to everyone, which is why it is so difficult to achieve. At its most basic level, comprehensive tax reform seeks to simplify the tax code by removing tax credits and loopholes in exchange for lowering the base income tax rate. Up for debate will be a myriad of weighty issues, such as who pays taxes and in what proportion, what is the tax rate, how much revenue needs to be raised to fund government activities and whether to use the tax code to achieve policy goals.
Tax policies have been extremely effective at spurring investment in the energy industry and industries will not want to give up this important tool.
Earlier this year, the House Way and Means Committee created 11 working groups on different topics (including energy) to review current law in their designated issue areas and to identify, research and compile feedback. This effort led to the publication of a 568-page report compiled by the Joint Committee on Taxation. Many of the comments received by the committee suggested not only that energy tax policies be maintained but enhanced. While it is too early to tell what may transpire, it is clear that energy tax policies, including those affecting WTE, will be subject to a broad spectrum of positioning, debating and negotiating before anything is settled. Most experts say they expect that this effort will take more than two years.
MLP Potential
Another area in which there has been significant discussion relates to master limited partnership (MLP) status to clean energy developers. During a time in which bipartisan agreement in Congress is rare, a bipartisan collection of House and Senate lawmakers in April introduced MLP legislation, which would extend favorable tax treatment to renewables, including WTE. The push—led by Sens. Chris Coons (D-Del.) and Jerry Moran (R-Kan.) and Reps. Ted Poe (R-Texas) and Mike Thompson (D-Calif.)—would expand to renewable projects the use of so-called MLPs currently enjoyed by the fossil fuel industry.
MLPs are business structures that are taxed like partnerships but have shares traded like corporate stocks—thus lowering capital costs and attracting more investment. Only oil, natural gas, coal and pipeline projects qualify now. Sponsors of expanding that opportunity to renewables are touting broad support—including from Senate Energy Committee leaders in both parties, White House science advisors and a broad coalition of renewable industries and environmental groups. It is unclear whether this legislation may be considered on its own merits or whether it will be subsumed as a component of the tax reform dialogue.
Conclusions
The market conditions for WTE are difficult in light of the low price of natural gas and the low cost of landfilling. The low cost of natural gas is driving the price of wholesale electricity markets, and all renewable generators are finding it difficult to compete.
Renewables in general, and WTE in particular, deserve a sensible government policy that provides incentives for development in order to create and maintain generating diversity. It is not in anybody’s interest for the market to over-rely on natural gas-based electric generation.
Municipal solid waste is an abundant fuel that is generated in every community in America (and the world). It does not need to be mined or transported across the country. Recovering energy from this feedstock should be encouraged and prioritized. However, policymakers must understand the challenges faced by each technology and ensure that policies address those challenges. If a policy fails to help the project developers deploy new energy generation, then it was only successful in generating favorable press releases for its supporters.
The author is president of Energy Recovery Council and a partner at AJW, Inc. and can be contacted at [email protected].