The US green gauge

Although the US’s new energy bill offers some much-needed mandates for energy efficiency, targets for renewable energy fall disappointingly short.

On 19 December 2007 President Bush signed into law the US Energy Independence and Security Act of 2007.

For those of us that follow such matters, the new legislation contains significant improvements to the US’s current energy policy by requiring the first major increase in vehicle fuel efficiency standards in more than three decades, the greater use of bio-fuels, such as ethanol, the construction of more energy-efficient homes and the manufacture of more energy-efficient appliances.

But did the legislation go far enough in terms of reducing the country’s dependence on oil, fighting global climate change and expanding the production of renewable fuels?

Acknowledging that legislation in this area is particularly complicated, with various interest groups vying for desired outcomes, credit should be given to the legislators for enacting the law prior to the year-end’s Congressional recess.

However, it is difficult not to think that somehow we may have missed another opportunity to make the US’s energy policy more forward-looking and less dependent on fossil fuels.

What does the new legislation mandate?

The new law requires cars and light trucks sold in the US to average 35 miles per gallon, measured across each automaker’s fleet, by the year 2020. This is the first mandated improvement in fuel efficiency since 1975.

The law also requires refiners to replace 36 billion gallons of gasoline with biofuels by the year 2022. The legislation limits the amount of biofuels that can come from corn-based ethanol to no more than 15 billion gallons, out of concern for food prices. The balance will come from advanced biofuels, including ethanol made from switch grass and wood chips.

The new legislation also establishes higher efficiency requirements for refrigerators, freezers and dishwashers and requires a 70 per cent increase in the efficiency of light bulbs. In addition, the new law sets higher energy efficiency standards for the construction of new commercial properties and requires greater energy efficiency in federal office buildings.

The legislation has established the Office of High-Performance Green Buildings in the US General Services Administration to promote green building technology in federal buildings.

What the law does not contain is a national renewable portfolio standard (RPS) for electricity generation and it does not provide for the extension of the existing production tax credit or the investment tax credit to encourage investment in renewable energy projects.

The new legislation also does not impose new taxes on the fossil fuel industry – the revenues from which were initially earmarked to be used to support the production of new sources of renewable energy.

What does the new legislation mean for the US renewable energy industry?

The year 2007 began with renewed optimism for significant policy developments that would enhance the growth of the industry in the country.

Many industrialised nations have already targeted renewable energy sources to generate upwards of 20 per cent of electrical power during the next several years, so the proposal to establish a national RPS of 15 per cent by 2020 was not considered to be overly ambitious.

To put things in perspective, renewable energy accounts for less than 5 per cent of the US electricity supply. This contrasts sharply to coal-fired generation, which produces approximately 47 per cent of US electricity.

Many renewable energy projects rely on subsidies, principally from federal tax, to compete favourably with fossil fuel generation. Wind and solar energy have enjoyed the most dramatic increases in generation capacity, assisted by such tax incentives.

The failure of the new legislation to extend the production tax credit for renewable sources beyond the current expiration date of 31 December 2008, or to extend the investment tax credit for solar projects, does not bode well for long-term planning for renewable energy sources.

While the US has a history of allowing such tax incentives to expire, only to have them renewed and applied retroactively, such ‘start and stop’ policies are not conducive to long-term planning and tend to depress new development.

While the lack of federal support through tax subsidies will not necessarily stop the growth of renewable energy projects, investors may begin to look elsewhere, particularly given the lead time required to develop new projects and the fact that other markets, including Japan and Germany, are encouraging the development of renewable energy sources more aggressively.

There are already significant developments in the European solar industry stimulated by national policies promoting solar technology and binding limits on greenhouse gas emissions.

Where does the legislation fall short?

Perhaps the most significant loss in the last-minute compromise to pass the energy legislation is the omission of a federally mandated RPS. While many states have taken the step of enacting their own RPSs, our national energy policy needs a country-wide standard to focus growth in the development of renewable energy production facilities. The lack of a national standard will only add to inefficiencies in planning the growth of the industry.

A further omission is the lack of adequate support for the financing of R&D. While the private markets can carry the research burden to a certain extent, the full development of renewable technology will require government initiatives and funding to achieve the breakthroughs that will allow this industry to accelerate over the short term to achieve the levels of production that will be required to sustain a growing economy.

While progress has indeed been made with the passage of the Energy Bill of 2007, and such progress has been generally welcomed in the renewable industry, there is a palpable sense of disappointment that the legislation did not go further in providing additional support for renewable energy.

It will be up to Congressional leaders to revisit this matter in 2008 to address the need for a national RPS and to avoid the expiration of the tax credits prior to the year-end. To do otherwise will risk a further delay in advancing the renewable energy industry until a new congress and administration have been installed, resulting in a further gap in the continued development of this industry that we can ill afford.

Clyde Rankin is a partner in the New York office of Baker & McKenzie