In his State of the Union address, President Barack Obama channeled the spirits of John F. Kennedy, Ronald Reagan and Henry Ford all rolled into one in his call for America to innovate its way into future economic competitiveness. Among his bold ideas for how the U.S. can meet its upcoming challenges was the diversification of our energy portfolio, and in particular the development of our renewable energy capacity. The onus now falls on Congress to develop an equally bold plan to see that challenge through.
Technological innovation comes from the private sector, and it is from there that the renewable energy industry will grow. Without picking winners and losers, the federal government can establish a market structure that will enable emerging industries to thrive. If the U.S. is serious about building its renewable energy capacity and achieving greater energy independence, then it has to establish a sound energy policy, one that creates incentives for growth and allows new technologies to compete fairly against the fossil fuel giants that dominate the U.S. energy market.
The first step the government should take is to establish a nationwide renewable portfolio standard. A renewable portfolio standard is a policy tool that requires electric utilities to gradually increase the percentage of renewable energy sources in their power supply. Setting renewable portfolio standards leads to an increase in electric generation from sources such as wind, solar, geothermal and biomass and a decrease in generation from traditional sources like natural gas and particularly coal. It is market based in that it does not tell utilities how to meet the standard but rather imposes the threat of a fine for noncompliance and lets utilities decide how best to comply.
Currently, 36 states either have a renewable portfolio standard or have set goals to create one. Maryland requires 20 percent of electricity generation from renewable energy by 2022. In 2003 (the most recent year for which complete information is available) the U.S. Department of Energy's Energy Information Administration attributed more than 2,300 megawatts of renewable energy generation to these programs, and growth has increased exponentially since then. Also, for those worried about consumer rate increases resulting from more renewable energy, from 1990 to 2005, states that adopted renewable portfolio standards experienced only a .35 percent increase in average electric retail prices relative to those states that did not adopt standards, according to a 2007 study by Christensen Associates Energy Consulting.
A second step Congress should take to spur growth in the renewable industry is to permanently extend the production tax credit. This credit, established in 1992 on a temporary basis, provides a 2.1-cent per kilowatt-hour benefit for the first 10 years of a renewable energy facility's operation. Since its inception, this credit has been critical to the growth of renewable energy in this country. Its weakness, however, is the precarious nature of its existence. It has been renewed and extended numerous times, most recently in the stimulus bill, yet its lack of permanence within the tax code makes investors skittish when deciding whether to finance a new wind or solar power plant.
For example, when the credits were allowed to temporarily expire in 1999, 2001, and 2003, the average annual installed wind power capacity in the U.S. was 298 megawatts for the following years. By comparison, the average annual installed wind capacity has been 4,601 megawatts for those years when the production tax credit was active, from 1999-2010. (To put that in perspective, 298 megawatts can power roughly 179,000 U.S. homes, while 4,601 megawatts can power roughly 2.76 million U.S. homes.)
Making the production tax credit permanent would send a clear signal to investors that this country is ready to see renewable energy growth through into the long term. Its existence on a temporary basis has been enormously helpful, but installing it in the tax code will help investors feel secure in knowing that their financial incentives won't disappear as a result of the political horse-trading of a new Congress or administration.
These steps alone will not solve America's energy challenges. There are still significant technological and financial hurdles that have to be overcome before renewable energy can step in and take the place of fossil fuels in the U.S. electricity sector. Rather, these steps would go a long way in creating a market environment where those technological and financial hurdles might be overcome in the foreseeable future.
The president is on board. The American public is on board. Will Congress get on board?
James S. McGarry is a candidate for a master's degree in environmental policy at the University of Maryland. His e-mail is email@example.com.