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Sen. Baucus draft for energy tax reform focuses on clean production of electricity and fuels; repeals plug-in vehicle credits

Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced the latest in a series of discussion drafts to overhaul the US tax code. This new staff discussion draft focuses energy tax policy on stimulating domestic, clean production of electricity and transportation fuels, which account for 68% of energy consumed in the US. It also would repeal a number of current tax incentives, including those for plug-in electric vehicles and fuel cell vehicles.

Under current law, there are 42 different energy tax incentives, including more than 12 preferences for fossil fuels; 10 different incentives for renewable fuels and alternative vehicles; and 6 different credits for clean electricity. Of the 42 different energy incentives, 25 are temporary and expire every year or two, and the credits for clean electricity alone have been adjusted 14 times since 1978. If Congress continues to extend current incentives, they will cost nearly $150 billion over 10 years.

Furthermore, the draft notes, existing energy incentives provide different levels of subsidies for different technologies, picking winners and losers with no discernable policy rationale. Some clean energy production, such as generating electricity by capturing excess heat at manufacturing facilities, is ineligible for the production tax credit because it is not expressly listed in the code, while other types of energy production generating significant air pollution receive sizable tax subsidies.

To address these issues, the staff discussion draft proposes a smaller number of targeted and simple energy incentives that are flexible enough to accommodate advances among fuels and technologies of any type. These proposals are intended to promote domestic energy production and reduce pollution. Specifically, the discussion draft offers proposals to:

  • Establish a new, technology-neutral tax credit for the domestic production of clean electricity;

  • Establish a new, technology-neutral tax credit for the domestic production of clean transportation fuel;

  • Consolidate almost all of the existing energy tax incentives into these two new credits, with appropriate transition relief; and

  • Provide businesses and investors with more certainty by making the new incentives long enough to be effective, but phasing them out once clearly defined goals have been met.

Specific proposals include:

  • Clean electricity tax credit. The staff discussion draft replaces the existing patchwork of incentives for clean electricity with a new tax credit that is technology-neutral and performance-based. The cleanliness of the generating technology determines the size of the credit. For any type of electricity generation, a business can choose whether it wants to receive the credit as a production tax credit (which is claimed each year), or an investment tax credit, which is claimed when the facility begins to operate. The tax credit expires when the cleanliness of the US electricity market increases significantly.

    Any facility producing electricity that is about 25% cleaner than the average for all electricity production facilities will receive a tax credit. The cleaner the facility, the larger the credit. Cleanliness is defined by a simple ratio of the greenhouse gas emissions of a facility, as determined by the Environmental Protection Agency (EPA), divided by its electricity production.

    The maximum production tax credit for a zero emissions facility is $0.023 per kilowatt of generation, indexed for inflation. The production tax credit can be claimed on a single facility for a maximum of 10 years and cannot be claimed for facilities that begin to operate before 1 January 2017 (though such facilities may be eligible for the extended, current law production tax credit, described below).

    The maximum investment tax credit is 20% of the cost of the investment. Generally the investment tax credit cannot be claimed for facilities that begin to operate before January 1, 2017. However, after 2016, a 20% investment tax credit can be claimed for existing facilities that undertake a carbon capture and sequestration retrofit that captures at least 50% of carbon dioxide emissions.

    The credit phases out over four years once the greenhouse gas intensity of the US electricity generation declines to the point that it is 25% cleaner than 2013. In order to qualify for the credit, the electricity must be produced in the United States.

  • Clean fuels tax credit. The staff discussion draft also replaces the current patchwork of incentives for clean fuels with a new tax credit for clean transportation fuel that is technology-neutral and performance-based. The cleanliness of the fuel determines the size of the credit. Businesses can claim the credit as either a production tax credit or investment tax credit. The tax credit phases out when the cleanliness of the US transportation fuel market increases significantly.

    Any fuel that is about 25% cleaner than conventional gasoline will generally receive a credit. The cleaner and more energy efficient the fuel, the larger the credit. Cleanliness is defined as how clean a given fuel production process is on a lifecycle emissions basis, as determined by the EPA. Energy efficiency is defined as the energy density of a fuel compared to conventional gasoline. The credit per gallon of fuel is calculated by multiplying its cleanliness by its energy efficiency.

    In order to simplify the credit calculation and allow businesses to plan effectively, EPA has authority to group similar production processes together and is required to provide provisional credit amounts for new technologies within 12 months of application.

    The credit phases out over four years once the greenhouse gas intensity of all transportation fuels has declined to a level that is 25 percent cleaner than conventional gasoline.

    In order to qualify for the credit, the fuel must be produced and sold within the United States.

  • Repeal of other incentives. The staff discussion draft on cost recovery and tax accounting proposes repealing 11 current energy-related tax incentives: Section 25C credit for residential energy efficiency; Section 30B credits for fuel cell motor vehicles; Section 30D credits for electric plug-in vehicles; Section 43 credit for enhanced oil recovery costs; Section 45I marginal well production credit; Section 45N mine rescue training credit; Section 45Q carbon dioxide sequestration credit; Section 45L credit for construction of energy-efficient new homes; Section 45M credit for energy-efficient appliances; Section 48C credit for investment in advanced energy property; and Treatment of gain resulting from Federal Energy Regulatory Commission restructuring.

Request for comments on additional areas. In addition to specific comments on the proposals for the two main areas above, committee staff is also interested in broader comments.

This staff discussion draft focuses on developing two simple, technology-neutral tax incentives for domestic production of clean electricity and clean fuels. The draft does not include tax incentives for other parts of the US energy economy, such as energy efficiency, clean vehicles, transmission, combined heat and power, and storage. Staff made this choice in order to target tax incentives on areas that appear to have the largest bang-for-the-buck in reducing air pollution and enhancing energy security, given concerns about overlapping regulations and spending programs, compliance costs, and the potential for fraud or abuse.

For example, the tax code currently includes investment tax credits for infrastructure to deliver clean fuels from the refinery to vehicles. While this infrastructure is a critical part of the fuel supply chain, staff believe that it is most important to build the supply of clean fuels first. Without this supply, the infrastructure to deliver clean fuels will not exist.… Comments are also requested on whether and how tax incentives for these sectors could be implemented on a technology-neutral basis.

The draft also notes that an alternative to encouraging clean production would be to discourage energy production that is not clean. Committee staff is seeking comments on the overall merits of approaching energy policy through a subsidy for clean technologies versus a tax or fee on heavy polluting technologies or air pollution. Additional comments are requested on how to design such a tax or fee so that it would not harm trade-exposed and energy-intensive industries, and would not disproportionately harm low-income households.

Senator Baucus also called for additional feedback from members of Congress, key stakeholders and the general public on the discussion draft. Feedback on the discussion draft is requested by 31 January 2014.

Last month, Senator Baucus released staff discussion drafts regarding international tax reform, tax administration, and cost recovery and accounting.

Resources

Comments

SJC

The original ideas to try other technologies were stopped by an Admiral in the Navy who decided light water reactors would be used in ships, he was given authority over civilian power plants later on. HE decided it was good enough. His people were part of getting the scientist who created the light water reactor fired.

SJC

"Weinberg went head-to-head with the political and military paymasters of the nuclear program, in the criticism of LWRs and the promotion of the safety superiority of LFTRs, and for this, he was asked to leave the nuclear industry. His loss to ORNL, meant that his work had a short-lived legacy, withering on the vine until funds were withdrawn in the early 70s."

http://lftrsuk.blogspot.com/2011/03/safety-of-light-water-reactors-lwrs.html

Bob Wallace

I really doubt that an US admiral set the nuclear programs for all the other countries in the world.

Multiple non-US countries gave pebble bed reactors a try.

Did they apply to an US admiral for special permission?

France, Russia, Germany, Japan, China and other countries have nuclear industries. They have their own nuclear scientists and nuclear research programs. They decide the route they want to take.

HarveyD

Should the NPP industry be forced to have a $200+B disaster fund or equivalent insurances?

The same should apply to Railroads, Tankers, Pipelines and Trucks transporting Oil products.

We had a nasty rail accident on MMA railroad transporting Oil in Lac Megantic QC this summer. It killed 47 people, destroyed the town centre and polluted the nearby lake and river. The $25M MMA insurance will cover less than 5% of the repair/clean up cost. The other 95+% will have to be paid by tax payers. Legal action will take years and cost $100+M of tax payers $$$..

SJC

We were THE nuclear nation after WWII, when we said light water power reactors, the world took notice. France has reprocessing, Canada has heavy water, Russia has sodium and breeders.

Weinberg knew light water reactors were inherently unstable and potentially dangerous. He warned the government and they fired him for not being a team player. THAT is the true story.

Bob Wallace

We were THE nuclear nation after WWII.

We built reactors because we believed that they would give us all the affordable electricity we would ever need.

And then we found out that reactors were too expensive and we quit building them.

They haven't become less expensive....

HarveyD

.....they certainly have not become less expensive....how about 1000% to 2000+% more expensive to build and overhaul?

Many people falsely claimed that NPP could produce e-energy at less than $0.02/kWh while the real TOTAL cost is closer to $.25/kWh

Both Solar and Wind can produce e-energy for les,s including storage.

HarveyD

Only excess energy from Sun and Wind have to be stored.

In many cases, that could be as low as 0% and as high as 20% in rare cases.

Bob Wallace

High penetration of nuclear also requires storage.

Both the US and Japan built a lot of storage in order to use nuclear on their grids.

Nuclear and wind/solar present the same sort of problems for grid integration, just in a different form. Nuclear can't be turned on and off quickly (including for financial reasons). Wind/solar can't be turned on when desired.

It takes storage with both to carry energy from when it is produced to when it is needed.

ai_vin

The financial services firm UBS is predicting a "difficult year ahead" for global investor-owned utilities.

In a recent research paper, UBS equities analysts outlined a combination of challenges for utilities: rising interest rates that will likely push investors toward higher-risk stocks and away from utility stocks, as well as the slowing demand for power worldwide.

The second issue is a structural one that will afflict utilities well beyond 2014. Through 2020, UBS analysts predict negative growth in Europe and Australia, zero growth in the U.S., and substantially slower growth in developing countries where new power supplies are being added most rapidly.

http://www.greentechmedia.com/articles/read/ubs-analysis-efficiency-and-solar-create-difficult-road-for-utilities

The real problem of wind/solar for utilities is that anybody can collect the energy for their own use. In Germany, for example, nearly half of the renewable power generated is produced by the people that the utilities would otherwise think of as "consumers."
http://www.ilsr.org/wp-content/uploads/2013/05/germany-people-powered-2012.003.png

For some reason the Utilities prefer to send out bills to their customers, not checks.

HarveyD

Yes, with current lower cost 25% efficiency TOTAL solar panels and future 35+% units, people living in areas with enough sunshine will produce more and more of the electricity they need.

This trend could go into higher gear by 2020 or so when BEVs and PHEVs will become common place and solar panels + storage (*) become cheaper.

(*) the grid could be used for excess solar energy storage by exchanging day-night power.

However, not everybody can benefit from solar panels. The need for grid power may be reduced but will remain a necessity.

Very expensive NPP will have difficult times ahead.

Unfortunately, very cheap CPP may stick around longer than they should specially where they are converted to cheap NG.

ai_vin

Oh it's more than that Harvey. The Utilities have costs of operation. To keep their prices low these costs have to be spread out among a large customer base. As people take themselves of grid or just reduce their demand with solar/wind/efficiency the Utilities have to redistribute their costs to those customers who remain. The result is their prices go up which encourages more people to invest in solar/wind/efficiency to reduce their demand also, rinse/wash/repeat. The Utilities call this the "Death Spiral" and they've known about it for awhile.

http://www.americanprogress.org/issues/green/report/2013/07/15/69249/the-electrical-divide-new-energy-technologies-and-avoiding-an-electric-service-gap/

A similar shift happened in telecom as the rise of mobile phones made copper lines nearly obsolete, and we see the same thing happening to the postal system now;
http://www.cbc.ca/news/canada/ottawa/canada-post-to-phase-out-urban-home-mail-delivery-1.2459618

Roger Pham

Good point, ai vin.

However, generating your own power is too much work for the home owner, and not so cost-effective when it comes to repair and maintenance of the solar system and batteries. It is better for the utility company to own, operate, and maintain these solar panels, no matter whether rooftop PV's or solar farm PV's. In this way, they can adjust the amount of investment in backup generation capacity and remain sustainable business-wise.
For this reason, Hawaii recently mandated that home owners must get approval from utility company before installing their own rooftop PV panels.

ai_vin

Well, there is the idea of renting out your roof to someone with more knowhow;
http://www.solar-facts-and-advice.com/solar-rooftop-leasing.html

The concept of using someone else's roof space for a project is not new. Building owners have been renting space for cell phone towers & etc for years.

For homeowners a similar idea called garden sharing; http://en.wikipedia.org/wiki/Garden_sharing has shown such agreements can work on the smaller scale.

T2

Although a diversified grid is desirable it still supports the centralised electricity generation culture.

In Canada and most of the northern USA we should be moving towards residential/commercial electric power generation using Natural Gas powered gensets as a first line attack. Definitely NOT the renewables of solar and wind which IMO represents flawed thinking for these geographical regions.

IOW instead of burning natural gas in the traditional open flame forced air heating system, instead we repurpose this gas into an internal combustion engine driving an alternator while extracting the waste heat from the engine jacket and exhaust system by coolants which are then passed through conventional radiators conveniently mounted inside the existing forced air plenums.

For benefit of those not educated in thermodynamics, this is the same 70% of heat that is normally discarded by conventional thermal plants at the megascale level into lakes rivers and oceans or those huge cooling towers that you see whenever those other environments are unavailable.

This microgeneration method is thermodynamically way more beneficial for the business client and home owner to be burning the gas in this way rather than paying someone else, i.e. the established power producers, to be doing it for us.

Thus electricity comes by way of a byproduct of the home heating process but with the advantage of there being no electricity bill to worry about at the end of the month.

ai_vin

And what about needing electricity during those months that we DON'T need home heating?

ai_vin

Associated Press:

NEW YORK (AP) — The average amount of electricity consumed in U.S. homes has fallen to levels last seen more than a decade ago, back when the smartest device in people’s pockets was a Palm pilot and anyone talking about a tablet was probably an archaeologist or a preacher.

Because of more energy-efficient housing, appliances and gadgets, power usage is on track to decline in 2013 for the third year in a row, to 10,819 kilowatt-hours per household, according to the Energy Information Administration.

That’s the lowest level since 2001, when households averaged 10,535 kwh. And the drop has occurred even though our lives are more electrified.

Here’s a look at what has changed since the last time consumption was so low.

BETTER HOMES

In the early 2000s, as energy prices rose, more states adopted or toughened building codes to force builders to better seal homes so heat or air-conditioned air doesn’t seep out so fast. That means newer homes waste less energy.

Also, insulated windows and other building technologies have dropped in price, making retrofits of existing homes more affordable. In the wake of the financial crisis, billions of dollars in Recovery Act funding was directed toward home-efficiency programs.


BETTER GADGETS

Big appliances such as refrigerators and air conditioners have gotten more efficient thanks to federal energy standards that get stricter ever few years as technology evolves.

A typical room air conditioner — one of the biggest power hogs in the home — uses 20 percent less electricity per hour of full operation than it did in 2001, according to theAssociation of Home Appliance Manufacturers.

Central air conditioners, refrigerators, dishwashers, water heaters, washing machines and dryers also have gotten more efficient.

Other devices are using less juice, too. Some 40-inch LED televisions bought today use 80 percent less power than the cathode ray tube televisions of the past. Some use just $8 worth of electricity over a year when used five hours a day — less than a 60-watt incandescent bulb would use.

Those incandescent light bulbs are being replaced with compact fluorescent bulbs and LEDs that use 70 to 80 percent less power. According to the Energy Department, widespread use of LED bulbs could save output equivalent to that of 44 large power plants by 2027.

The move to mobile also is helping. Desktop computers with big CRT monitors are being replaced with laptops, tablet computers and smart phones, and these mobile devices are specifically designed to sip power to prolong battery life.

It costs $1.36 to power an iPad for a year, compared with $28.21 for a desktop computer, according to the Electric Power Research Institute.

T2

And what about needing electricity during those months that we DON'T need home heating?

Well ai_vin in the summer you can at least open a window and circulate air with a fan. There is no such immediate remedy in the winter - you freeze in the dark as many around these parts were finding out last week.

An excuse to mention the susceptibility of centralised power generation systems given that the recent ice-storm brought many bad tree limbs down on to power lines cutting power to 300,000 homes in the greater Toronto region.

It strains credibility but 46,000 were still without power FIVE days later. This scenario is seeming to repeat itself about once per decade. It will be interesting to see how the rest of the winter pans out. There is now talk of burying the wires in older neighbourhoods albeit at great cost, so I won't again be without power when someone down the street elects not to trim their tree out front.

Buried wires, are they kidding ? That's what I want. NOT. Thanks to the cable company I already got dozens of buried wires around my property and they have no idea why or where they go !! Let's not give power companies free reign to do the same.

Perhaps this would be the time to alternatively offer residents a grant for an alternative power plant.

Last night we may have broken a record set in 1920 for overnite lows if the temperature fell below minus 21 deg C.

In such conditions a microgeneration unit can always be brought up to max output by loading the generator with electric heating elements and also by drawing down the storage batteries during a cold spell.

I don't think it is practicable or even necessary to construct a one-size-fits-all cure here as Florida and Alaskan climates are always going to need a different mix of equipment for optimal use at affordable price points.

Ai_vin I support your ideas for demand management. I think there is much we can do as consumers.

As someone pointed out, the way current natural gas heating works it is just too easy get up out of our chairs and raise the thermostat temperature - the equivalent of throwing yet "another log on the fire" as opposed to the work needed to erect further renewable infrastructure.

ai_vin

What I favor for home generation is maximizing electrical production over heat prduction. Any need for heating can be dealt with through other means: Superinsulation, passive solar, geothermal, etc. Superinsulation generally works the best for the least cost, in my area 14 inchs of recycled paper fiber would make my house so well insulated we could heat it just by living in it. http://en.wikipedia.org/wiki/Passive_house

Roger Pham

Good point, T2.
A NG combustion engine for CHP is the best complement to the solar PV output at the present, until H2-FC will take over in the future. This is why:

In the summer, solar PV will produce plenty of electricity, even in Northern latitudes. At sundown, the NG engine CHP will be turned on. Room heating is not needed in the summer, however, there will be hot water needed in the evening for cooking, dishwashing, laundry, and bathing. Perfect! Ditto for springs and falls.

In the winter, a lot of room heating will be needed, but solar output is minuscule. Perfect! Crank up the NG CHP engine in cold and cloudy days to get both heat and electricity.

Excess solar PV output will be used to produce H2 to be released into the NG piping system, up to 20% by volume, for use in the winter, early spring, and late fall. A NG ICE CHP can take advantage of a mixture of H2 and NG (Hythane) to burn more efficiently with low emission.

Excess H2 over 20% of the volume of H2 in Hythane will be used in industry for petroleum refining, for production of fertilizer, and for the hydrogeneation of pyrolyzed biomass to triple the volume of biomethane for a given amount of biomass.

In this fashion, the grid may be 100% supported by solar PV energy during sunlight hours, while backed up by Hythane ICE CHP for distributed generation and waste heat utilization. The advantage of small ICE is that it can be cranked up real fast, unlike gas turbines or steam turbines that must take a lot of time to spool up and suffer high wear rates. The eventual use of biomass for production of biomethane via pyrolysis of waste-biomass, augmented 3 folds energy-wise by electrolytic H2 produced from excess solar PV energy, will mean that we will be able to achieve 100% fossil-fuel-energy free.

In countries without a lot of waste biomass and without NG reserves, H2 will be substituted 100% for NG or biomethane or Hythane. Simply upgrade the NG piping system to be compatible with 100% H2, and use FC, which is more efficient than ICE without the emission problem of ICE.

Roger Pham

Furthermore, T2, if more room heating is needed than electricity, then the A/C unit can double as a heat pump for occasional very cold nights, and that will double the efficiency of NG or Hythane utilization. In very cold climates, the use of CO2-heat pump/A/C will be more efficient than the use of HFC as refrigerant. Still, if the output of the heat pump is still too cool for room heating, then the waste heat of the CHP ICE will be added to this to make the room quite toasty!

ai_vin

Solar panels are the next granite countertops: an amenity for new homes that’s becoming a standard option for buyers in U.S. markets.

http://www.bloomberg.com/news/2013-09-10/solar-panel-is-next-granite-countertop-for-homebuilders.html

T2

My take is that we should have people with some thermodynamic education in powerful positions that can make appropriate choices. Obviously Sen Baucus is morely likely to be interfacing with lobbyists for major power interests.

Burning fossil fuels , mostly NG in this case, for space heating destroys the one chance to obtain electric power from that resource in a relatively inexpensive and simple manner compared to wind and photovoltaics. The latter sources have severely impacted my electricity bill when their generous Feed-in tariffs result in my billing having to incurr ever increasing rates per KwH.

Roger Pham

Another good point, T2.
Perhaps the Feed-in tariffs are flawed policy for encouraging RE development. Perhaps the gov. should incentivize the Utility Companies to adopt RE and incorporate RE into their entire power generation portfolio, instead of allowing small-time players to feed in RE without having backup generation capacity of their own and without having means to absorb excess RE generated.

In other words, those who supply RE to the grid must be able to demonstrate ability for backup generation of equal nameplate rating to the RE capacity, in order to qualify as a power supplier. All homeowners supplying solar PV power to the grid must have their own generators that is standby and ready to supply power when sunlight is not available, as well as the ability for grid-balancing against power excess that can damage the grid. This would means having energy storage means on ready standby to absorb the excess RE. These measures should help rate payers from having to shoulder the unfair burden due to the Fit-in Tariffs. Since these requirements are too much for a homeowner, the role of a power supplier should be delegated to the professional utility companies who have expertise to handling all the above concerns.

Kit P should have no reason to fear that RE will take away his job. In fact, RE will create more jobs in the economy.

ai_vin

Tea Party’s Green Faction Fights for Solar in Red States

http://www.bloomberg.com/news/2013-11-12/tea-party-s-green-faction-fights-for-solar-in-red-states.html

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