Mr. Chairman, Distinguished Members of the Subcommittee:
Thank you for the opportunity to present my forthcoming bill, the Renewable Energy Act for Credit on Taxes.
This is a tax credit to be given for investments in renewable energy systems based on solar, wind, or fuel cells providing up to $4.50 per Watt of electricity produced, capped at the lesser of 35% of the cost of the system or $6000 for residences and $50,000 for commercial enterprises. It would sunset in four years.
I would like to answer six key questions about this proposal:
Why renewable energy?
Why now?
Why residential and small commercial?
Why solar, wind, and fuel cell?
Why this method and these numbers?
What else is needed to make this program effective?
The recent ABC poll showed that 90% of the public support increased investment in renewable energy sources. In its National Energy Policy the administration has identified the need for investment in renewable sources. Clearly, a large number of members of Congress, including those from whom you have heard today, have given a great deal of thought to this issue and have constructed programs which they believe will meet this public policy goal.
I do not need to reiterate the importance of weaning America from its dependence on fossil fuels or to make the argument about pollution of the atmosphere. There is a common belief that we will need more energy, more readily available at peak times throughout our country in the near future. However, development of long term fossil fuel sources is not a strategy to address the short or near-term needs for energy supplies.
I offer an alternative focus, partly because I have been working on this issue steadily in California for the last year, and I believe it should be clear that responding to the shape of this supply-side need requires actions that will supply more energy at peak periods in the short run. Our experience in California has been that, without increasing the demand for energy during the peak periods of the year, we suddenly found ourselves with an inadequate supply of energy. The reasons that existing energy plants were not producing energy when needed is not the focus here. The issue is that one has to provide more peak load resources.
One of the problems encountered last summer was that when the normal pattern failed, the ability to transfer power between states was inadequate. There were also transfer points within the state that prevented power available in Southern California to be shared with needs in Northern California. There has been a general call to build additional transmission lines. However, these are both costly and time-consuming to site, and in the long run the need may be reduced and perhaps avoided. I understand that a number of companies are nearing commercial application of new transmission cabling technology that will increase the capacity of presently sited transmission lines.
Not only are there transmission capacity and transfer problems, but it appears that the very complex system of grids nationally and the oversight, financing, and regulatory responsibility are in need of major review and improvement to meet near-term as well as long-term needs. This issue merits study and solution, but it also makes clear that in the short and near term we must increase that production of power where it will be used.
I believe it is clear that America needs a multi-faceted approach to meeting our energy needs, targeted to different time frames and using different resources. New, full-sized plants must be built, but they take several years to come on line. Co-generation plants can be built much more quickly and are currently cost competitive. They must be encouraged for large sites, such as college campuses and large office buildings. Although they supply power on the site used and avoid transmission congestion, most plants rely on natural gas as a supply. This further exacerbates the existing supply/cost and pipeline capacity problem. In addition, energy efficient buildings must be promoted both in new construction and in retrofitting. In particular, schools and government buildings should lead in this effort. Finally, conservation of all sorts must be practiced. Not only are 90% of citizens supportive of conservation, but also in California the record of 11% reduction in demand in May shows that citizens will take action.
All of these methods are helpful, but, in the near term, it is evident that we need to give additional incentives to power sources that can be put into operation relatively quickly, locally, produce power at peak times and use renewable energy sources. The administration’s National Energy Policy states, “Photovoltaic solar distributed energy is a particularly valuable energy generation source during times of peak use of power.” [p. 6-10] I believe that this source meets all four policy goals; therefore, I have focused on increasing locally produced solar energy.
Under-used locations for increased production of power are homes and businesses. Owners have not invested in personal energy systems in part because they did not have an energy pricing incentive to do so as the systems themselves may have been too costly to provide a reasonable return on the investment. I believe that this gap can be bridged by using tax incentives to motivate additional private investment in power based on renewable resources and provide energy where it will be used in order to reduce demand on the current transmission systems, particularly at peak load times. The key concepts are "on-site" production and "environmentally sound sources." The benefit is a continuing stream of power without continued cost for purchase of fuel.
One type, solar power for water heating, has been used extensively in the West over many years because it has been a good investment. Although solar water heating also removes energy load from the system, alone it has not made a large dent in over-all demand. Yet, it demonstrates the willingness of owners to make this investment in appropriate circumstances.
Now, newer materials and more reliable systems have become available to make individual photovoltaic systems attractive as well. In April a solar demonstration home was built on the Washington Mall that not only incorporated many energy saving designs but also employed a solar energy system with back-up batteries. The system was designed to meet the household's energy needs (facilitated, to be sure, by the energy efficient design of the building and choice of Energy Star appliances and lighting which would decrease the demand.) The additional cost for the solar system for this large, three-bedroom, two story home was given as $30,000.
As a newly built home, after being moved to another site, the cost would become part of the value of the house and could be included in the mortgage an owner would obtain. Clearly, it is possible for a great many new homes to be built in this way. The question is how to motivate a buyer to choose this house over a similar one without the solar energy but at a price $30,000 less. Although future energy savings will pay back the investment over enough years, additional incentives would be needed to make it a sound investment today. A refundable tax credit that would convey to the original purchaser of the house can fill that margin. An owner of an existing home or business could also be encouraged to invest in a renewable energy system, although the opportunity for funding through a second mortgage or line of credit may be somewhat more costly.
Is a federal tax credit enough to encourage a homeowner to make this investment? Here is a possible financial scenario. Under my bill, the owner of an existing home comparable to the Mall home could invest in a similar system providing 4 kWh of electricity per year, with battery back-ups. Based on that amount of output, under my bill allowing for $4.50 per kWh, the system would qualify for $18,000 of the cost; however, the proposed cap in my bill would be the lesser of 35% of the cost or $6,000, leaving $24,000 of uncovered cost.
Although there would be price savings over time, it might not be a prudent investment. However, some states and municipalities have additional rebates. California, for example, has a rebate program also measured at the $4.50 per kWh rate - but capped at 50% of the cost; it would rebate approximately $15,000 in this case. Thus, the California homeowner combining the two programs would be paying only $9,000 of that cost. Without the California rebate, however, a homeowner could buy a system of half the capacity at $15,000 and have approximately $9,750 net cost.
Just how attractive this investment would be has many variables based on the current local cost of power, the cost of credit, and the individual’s monthly energy use that affect the length of time required for the investment to pay for itself. In the California house comparable to the Mall demonstration house, depending on other energy efficiency attributes, that household might use more power than provided by a system that size. Nonetheless, the owner could potentially reduce current electricity costs by 50% to 100% and provide a full return of that investment in five to ten years, depending on the cost of power where it was located. In a state without a rebate program, the homeowner choosing a system half the size supplying half as much power would of course require twice the time for return on the investment.
For businesses in non-rebate localities, the difference would be that with a cap of $50,000 the owner could purchase about 20 kWh of electricity for an additional $100,000. Again, the attractiveness depends on interest costs and local prices.
The advantage of a solar solution in terms of public policy is that in many locations the solar energy is most available when it is most needed - in the summer in the middle of the day. Obviously, not every climate makes this investment worthwhile, nor does every home or business have the appropriate roof size facing the required direction for currently available applications.
Because of regional variations in weather, I have also included wind systems. Presently, a new generation of larger, more efficient and cheaper commercial systems are available for wind farms. Assuming that the current program that expires December 31 is reauthorized, a rebate of 1.7 cents per kWh produced is given at the end of the year. At the present time, the net price is competitive with other types of power sold in the western market. Entrepreneurial businesses are putting together funding mechanisms and equipment to build additional wind farms. These will add to long-term needs, but applicable sites are limited and often require extensive time for permitting.
For individuals, the production tax credit is not an attractive financial incentive since the owner is using the product not selling it. Thus, a tax credit on the system's cost is the appropriate mechanism. There are applications available suitable for residences and businesses, not all of which require a tower and wind turbine system. Wind machines that look like a typical roof top vent can also create wind power, although each one may supply only one kWh of power, and several would be required. Once again, this is not a system that can necessarily take over all of the needs of a household or business because in most locations wind power is not a constant. However, it is a potential addition to the nation's energy supply that has the two key attributes - on-site generation and a renewable, non-polluting energy source.
Finally, I have included fuel cells for this funding. At the present time, these are marginally available for home application. However, again, the technology is in process, and fuel cells can provide a non-polluting source of on-site energy.
Regarding the financing mechanisms in this bill, I have chosen a tax credit rather than a grant program as providing a less bureaucratically complicated funding mechanism that is readily understood by and accessible to a taxpayer. I have made it a refundable credit, as it is the policy to create incentives for an investment that decreases demand. The details of a particular individual’s tax obligation is unrelated to meeting that policy goal. I have given a sunset to the bill in the belief, first, that our need is immediate and that the home or business owner should consider this as an option that requires current action. Second, any program should be reviewed after a reasonable time for its success and appropriate renewal.
Basing the payment on a verified, standards-based kilowatt/hour output assures that the funds are buying a desired quantity of generation. The amount is chosen to be comparable to the rates for the California program and to bear a cost-based relation to commercial prices for these types of systems per kilowatt hour. The cap was selected from the perception that they would be sufficient to motivate an owner to make a decision that he was not otherwise financially able to choose purely out of a desire to add to the nation's renewable energy sources.
To make these self-supplied energy sources viable, some additional mechanisms are required. I am aware that they are covered in other bills that have been submitted, and I have signed as a co-author. First, there must be a net metering system required for all jurisdictions. One of the greatest disincentives to providing individual renewable energy systems has been the unwillingness of commercial utilities to allow individuals to come onto their system and reduce their use of the utility's product. Charging high prices for the connection has been their practice. Reasonable charges for connection and for transmission must be a basis for fair pricing and must be both monitored and controlled by the appropriate agencies.
The value, particularly of solar energy systems, is that a personal system not only supplies power to its household, but it may have an oversupply which is then given to the grid (net metering) in return for possible use from the grid when the solar system may not be fully operative and back-up batteries are insufficient - at night and in bad weather. Utilities may, but have not been required to, pay an individual where this net metering system results at the end of the month in a surplus added to the grid. From a policy standpoint, the producer even of this excess supply should be valued at some level.
In sum, right now and as our population grows, more energy generation will be needed, particularly at peak-load times. For the next decade or so, energy providers may need to continue building low-polluting generating plants using non-renewable sources, in part to decommission older, more polluting plants. During that time and with government investment in Research, Development, and Demonstration, we need to achieve economically viable technologies based on renewable sources. However, we will also benefit both now and in the future by giving financial incentives to individuals both in their residences and in their businesses to meet at least some of their energy needs in the short term through personal systems. We will benefit from having on-site energy production that can be installed in a short time frame, produces energy at times of peak use, does not require transmission, and is based on non-polluting, renewable sources.
Thank you for the opportunity to appear before you today to present this proposal. I appreciate your time and attention.