Tax Breaks May Boost Biofuels

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"Biofuels subsidies are relevant to an energy policy debate mainly because oil companies retain subsidies. And there's a move afoot that may boost renewables further."

You know you have arrived if a Saudi oil minister and a UN official talk about your relevance or prevalence, right? In the past couple of weeks, renewables and biofuels have been on the tongues of such dignitaries, perhaps signaling they may be emerging from being seen as insignificant.

But there's a move afoot to alter the U.S. tax code to boost renewables further.

In discussing whether Saudi Arabia would need to expand its oil production capacity beyond its current level of 12.5 million b/d, the country's oil minister, Ali Naimi, on June 13, brought up renewable energy supplies as a factor to weigh. "I think it will take some time to see what is going to happen to demand. But obviously with what is happening in the oil and gas field and also the quick technological development of renewables, I question whether Saudi Arabia will need, at least now, to think about future production capacity," he said.

Biofuels came up, not surprisingly, at the Rio+20 sustainability conference last week, albeit not necessarily without criticism. The secretary-general of the UN's Conference on Trade and Development, Supachai Panitchpakdi, criticized how governments subsidize biofuels and warned about biofuels that use feedstocks that compete with food production. Granted, these two criticisms are refrains for biofuels opponents. But, the speaker's prominence may illustrate how widespread and high-level biofuels discussions have become.

But, biofuels still face steep challenges in being more widely adopted. Worldwide output of biofuels stalled last year, according to the BP Statistical Review of World Energy 2012 report issued in mid-June. World biofuels production increased by 0.7% of 10,000 b/d of oil equivalent in 2011, which was the slowest annual growth rate since 2000, according to BP.

While certain tax breaks may not be as relevant in the U.S. anymore for biofuels that saw their tax credits expire (see ethanol, biodiesel), there could be a change in the tax code that would benefit renewable energy.

American Council on Renewable Energy (ACORE) and the Advanced Ethanol Council, an affiliate of the Renewable Fuels Association, are among the supporters of a Senate bill introduced in June by Senator Christopher Coons, Democrat-Delaware, that would provide a method under the U.S. tax code for setting up master limited partnerships for renewable energy. The MLP format can be viewed as potentially favorable to investors.

Coons notes that MLP income is only taxed at the shareholder level while corporate income is taxed on the corporate level and then the shareholder level. The MLPs Parity Act would cover clean energy, including wind, closed and open loop biomass, geothermal, solar, municipal solar waste, hydropower, marine and hydrokinetic power, fuel cells, combined heat and power, as well as biofuels, including cellulosic, biodiesel and algae-based fuels, according to the senator's online white paper accompanying the bill.

ACORE President Dennis McGinn, in a recent interview with the U.S.-aired television show Platts Energy Week lauded the premise of the MLPs Parity Act. This bill, if it were to eventually become law, "perhaps in 2013," would boost the availability of capital for renewables and lower its cost, McGinn said. Asked if the proposed legislation would allow for MLPs much like those prevalent in the U.S. oil and gas sector, he said it would. "Exactly, and it makes sense for America to apply it to our whole portfolio of energy, including renewables," McGinn said.

Brooke Coleman, executive director of the Washington-based Advanced Ethanol Council, told Platts in a separate interview June 21 that the renewable energy advocates are trying to explain to U.S. policymakers that they are not asking for special favors, but asking for policy treatment comparable to what oil and gas companies receive. Without that, he said, it would be like preparing for a marathon race against oil and gas companies for which the government "hands them a pair of New Balance" running shoes, but the renewable fuels developers are "told it's a barefoot race."

The three primary ways the U.S. government provides subsidies to the energy sector is accelerated depreciation on assets to lower tax liability, production incentives and easier access to capital, the latter of which can come via MLPs, Coleman said. For cellulosic biofuel developers in the U.S., two key incentives will cease at the end of this year: a $1/gal production tax credit and accelerated depreciation of 50% the first year. There's an RFA list of them here.

The main reason that biofuels subsidiaries are relevant to a debate about energy policy and development is that the oil companies retain subsidies, Coleman said. As for the renewables MLP proposal, it may not gain traction, but any policy discussion should be helpful to bring awareness to the arguments lodged by biofuels proponents. "It's kind of a blatant inequity. Irrespective of the outcome of the bill, it's a good thing to talk about," he said.

Investors are seeking safe environments for their money and the oil and gas sector's tax policy considerations look better than the on- and off-again tax breaks that the renewable sector has seen. "They're chasing tax havens. An MLP is a tax haven," Coleman said. "The oil companies are doing a good job of spinning the market as free market and credit goes to them. That happens not to be true."

Renewable fuel advocates are asking policymakers for a level playing field and an extension of favorable tax policies. "No doubt, the expiration of the biodiesel tax credit has frozen further development," Coleman said.

Another expired break was the production tax credit for wind power. Also, a U.S. cash grant program for renewable energy is phasing out.

But, some waning of U.S. government backing for renewable energy does not spell the end of the sector, McGinn says. While there are still financial challenges, renewables could gain traction with investors seeking steady income, such as those who favor bonds, he said ahead of a financial forum his Washington-based group held for investors last week in New York. "While we are facing some headwinds in terms of varying policies, particularly at the federal level. . .there are projects that are in the pipeline across the whole spectrum of renewable energies and we are going to move ahead," he said.

The U.S. renewable energy industry knows it cannot rely on tax credits and the time has come for diversifying investment streams, McGinn said. Large financial institutions are likely to stay involved in the sector because it has already made them money, he said.

"But, the whole challengeónot the whole challenge, but a significant part of the challengeófor the cost of renewable energy across the board is the cost of capital and its availability," he said. "So, we're going to try to broaden the places that you can go to for capital."

Katharine Fraser
Platts

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