RMI
Corporate interest in renewable energy is skyrocketing as companies realize that off-site projects can offer the flexibility and scale necessary to meet their needs. Companies contracted for 1.56 GW of off-site renewables in 2016, with almost half (642 MW) coming in the fourth quarter alone (see Figure 1). Purchases by companies outside the tech sector (443 MW) showed that the buying pool is diversifying beyond the usual suspects. More than 80 companies have now committed to purchasing 100 percent renewable energy through RE100, and Rocky Mountain Institute’s Business Renewables Center (BRC) now counts 100 corporate buyers as members.
FIGURE 1
But despite growing interest, less than one-fourth of corporate renewable energy buyers in the BRC’s network have completed an off-site transaction to date—this from a group of companies that are actively looking to participate in the market. If your company has not yet engaged in an off-site renewable energy transaction, here are five reasons why you should get started in 2017:
1. Beneficial tax credits are still available
The explosive growth of the off-site market in 2015 happened largely because of companies trying to “beat the clock” before the Renewable Electricity Production Tax Credit (PTC) for wind and Business Energy Investment Tax Credit (ITC) for solar expired at the end of the year. Congress extended these incentives in late December 2015, but it also designed the value of the credits to phase down over time (see Figure 2).
FIGURE 2
Though the extension of the tax credits is a big win, it doesn’t mean that time is on the buyer’s side. The PTC has already initiated its 20 percent annual decline, meaning that buyers are essentially losing $5 per MWh (half a cent per kWh) in benefits for each year that they wait to buy wind energy. The IRS recently issued Safe Harbor guidance that would, in practice, allow more wind projects to lock in the full PTC value beyond the designated phase-down schedule, but there is no guarantee that buyers will receive the retroactive value of tax credits. Developers may exhaust their supply of grandfathered equipment by the time a contract begins.
Capturing the maximum value of tax benefits is often a make-or-break proposition for renewables projects, because these credits can account for a large share of the revenue that a developer derives from a project. A common misconception is that developers earn most of their revenue through the PPA rate they charge to customers. In fact, a project’s overall value is also tied to depreciation-related tax benefits (MACRS), revenue from the PTC/ITC, and energy sales in the post-contract period. The ramp-down schedules for the PTC and ITC put the impetus on buyers to take action today.
What’s more, although the new presidential administration may bring changes to the energy landscape, corporate interest in renewables should remain strong. At a recent BRC conference for leaders in the corporate renewable energy sector, 92 percent of attendees said that their U.S. renewable energy strategy would see more engagement or remain unchanged after the elections.
Political leaders have signaled that comprehensive corporate tax reform will be a priority in the coming months, but many analysts expect the PTC and ITC to endure due to bipartisan support in the past. It is worth noting that reducing corporate tax rates would make the PTC and ITC less valuable, which might then lead to higher PPA rates. For companies seeking to add renewables to their portfolios, it is advantageous to act while tax credits hold the most value.
2. Interest rates are near historic lows
Interest rate fluctuations significantly affect PPA rates, because the total cost of a renewable energy system is paid almost exclusively up front and amortized over the lifetime of the project. Renewable energy generation has virtually no marginal costs, because the “fuel” is free. Developers finance almost the entire cost of the project up front and pass the costs onto the buyer in the form of the PPA.
The Federal Reserve Board of Governors just raised its target range for the Federal Funds Rate to between 0.5 percent and 0.75 percent in December 2016. This action followed a period from 2008 to 2015 during which rates were at virtually 0 percent. The prospect of higher interest rates means that it makes sense for buyers to pursue projects in the current capital environment where money is likely cheaper than it will be in the future.
Some question whether it makes sense to hold off for a better wind or solar deal in the future given the pace at which technology costs are falling. But hard costs do not tell the full story. On the solar side, hard costs account for about half of the total. The other half comprises so-called soft costs, which are subject to cost inflation tied to broader macroeconomic conditions. So while technology costs may put downward pressure on PPA rates, the countervailing effects of interest rates and tax credit reductions justify getting started in 2017.
Some companies question whether a better deal may be just around the corner given tax credit extensions, falling technology costs, and low electricity prices. The validity of this position depends on whether PPA rates will fall fast enough to counteract the effects of the ITC/PTC step-down, interest rate increases, and transmission line issues. Nobody has a crystal ball, but lengthy project development timelines, fast-approaching sustainability goals, and broader economic forces provide compelling reasons to get started in 2017.
Scott Macmurdo is a sustainability specialist with NRG Energy, which is a founding sponsor of the Business Renewables Center.
This post was published on February 22, 2017 11:13 am
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