Policy analysis of The Energy Freedom Act and the tax credit extension for renewable

energy property

Brian Vaughn

March 24, 2015

ENEC 490

Executive Summary

Recently introduced legislation in the North Carolina General Assembly attempts to retain and grow the billions of dollars of investment in renewable energy, especially photovoltaic solar.

North Carolina is a national leader in creating jobs in the renewable energy sector.

Renewable energy investment is disproportionately concentrated in poor, rural communities. Energy Freedom Act

The proposed bill would make 3rd party power purchase agreements legal in North Carolina for non-profits, governments, and military bases.

Similar enactments in California and Arizona grew renewable energy production considerably.

The act would allow solar energy, an already flourishing industry in North Carolina, to grow further.

Supporters of the legislation include big box stores and businesses such as Wal-Mart and VF Corp., which would benefit from bypassing the utility’s higher rate for electricity if they had their own power purchase agreement.

Duke Energy, Dominion, and Duke Progress would likely disagree with the legislation in its entirety. But Duke may be open to certain tenants such as third party sales, which it allowed in South Carolina. Renewable Energy Investment Tax Credit

The renewable energy investment tax credit (REITC) was introduced in 2008. It has facilitated $2.6 billion in renewable energy projects since 2008.

The REITC cost the state $182.6 million in the same span of time, creating about 14 times more private investment than it cost in expenditures.

Legislators should consider the case of the federal production tax credit for wind energy and the effect of its inconsistency on wind energy investment when making their decision to renew North Carolina’s REITC.

Those who disagree with tax credits do so because they believe it will lead to higher income tax rates and picking winners.

Context: The 2015 North Carolina Clean Tech Summit

On February 19-20, The University of North Carolina at Chapel Hill hosted the 2nd

Annual Clean Tech Summit at the Bill and Ida Friday Center for Continuing Education. Clean

energy industry leaders, academics, entrepreneurs, community members, and students were

brought together to learn from one another through lectures and informal discussion. The

Summit also facilitated panels on a wide array of clean energy topics, focusing on the military’s

relationship to renewable energy, smart cities and sustainable communities, and the future of

electricity in the Southeastern United States (UNC Institute for the Environment, 2015).

This paper draws heavily from one panel, “Energy Issues and Legislation at the NC

General Assembly”. The panel was moderated by Betsy McCorkle off the North Carolina

Sustainable Energy Association. The panelists were Keith McAllister of Kestava Energy

Management, Lee Peterson of CohnReznick, and Representatives Jason Saine and John Szoka of

the North Carolina General Assembly (Gibson, 2015, p. 47). Both Assemblymen talked

extensively about the legislation they would soon introduce in the legislature, Szoka’s Energy

Freedom Act and Saine’s expansion of the renewable energy investment tax credit (2015, p. 47).

The panel’s discussion spurred my interest to investigate what effects their bills would have on

the expansion of renewable energy in North Carolina.

Introduction: What is a renewable energy investment tax credit?

As with any asset, a tax liability is assessed by a government after an investment is made.

Because governments, both at the state and federal level, have shown commitment to increasing

the share of energy production from renewable sources, they have instituted specific tax credits

focused on renewable energy installation. In North Carolina, these include the Renewable

Energy Investment Tax Credit and the Business Energy Investment Tax Credit.

What renewable energy tax credits (REITCs) are available in North Carolina?

Credited by the state, a personal tax credit allows the renewable energy installer, usually

an individual installing a rooftop solar panel, a 35% tax credit. This is used to lower the cost to

the consumer of construction costs, installation costs, and the cost of panels (Database of State

Incentives for Renewables & Efficiency, 2015). Combined with federal incentives and tax

credits, the cost of a photovoltaic solar system to the consumer in North Carolina is only about

35% of its true cost (Yes! Solar Solutions, 2015).

What has been the effect on renewable energy investment?

In concert with other renewable energy-focused policies such as the Renewable Energy

Portfolio Standard (REPS), net metering, and decrease in cost of solar energy production cost,

REITCs have led to substantial increases in clean energy investment in the state. In 2007, the

final year before the state REITC was introduced, investments in both renewable energy

installation and energy efficiency were less than $50 million. By 2014, $900.7 million was being

invested. Solar photovoltaics were 82% of the total investment in clean energy projects during

this time period (RTI International, 2015, pp. 2-2).

What have been the wider economic implications of renewable energy?

Renewable energy has been a tool for rural investment. According to the state’s

Department of Commerce, every county is designated in a tier to describe its economic distress,

calculated using the factors of unemployment rate, median household income, growth in

population, and property tax base. Tier 1 is the most economically distressed, while Tier 3 is the

least (North Carolina Department of Commerce, 2015). Robeson, a mostly rural Tier 1 county,

has received the second most clean energy investment of any county in the state since 2007

(Downey, Report: N.C. incentives, due to expire this year, encourage large investment in

renewable energy, 2015). Robeson is indicative of a larger trend. Of the $2.6B invested in

Figure 1 Renewable Energy Investment in North Carolina, 2007-2014. Courtesy of Economic Impact Analysis of Clean Energy Development in North Carolina-2015 Update, pp. 2-2

renewable energy projects since 2008, more than $1.9B was in Tier 1 and Tier 2 counties (RTI

International & ScottMadden Management Consultants, 2015)

A report from Duke University outlines the myriad steps along the supply chain of utility-

scale solar, which provides about 4,307 jobs in the state (Brun, Hamrick, & Daly, 2015). Most

utility-scale solar projects are executed in rural areas. The chain and its many steps are shown in

the diagram below.

What can we conclude about renewable energy’s economic effect?

In the state of North Carolina, renewable energy has had a transformative effect. It is no

wonder North Carolina is home to 166 thriving solar companies. Big industry names such as

Apple, IKEA, Verizon, and SAS have come to North Carolina because their energy-intensive

businesses do not want to pay utility prices, nor be implicated in their greenhouse gas-intensive

generation. More and more companies demand access to affordable and renewable energy to

Figure 2 Utility-Scale Solar PV Value Chain. Courtesy of The Solar Economy: Widespread Benefits for North Carolina, pp. 15

remain competitive, and communities that serve them could continue to reap the benefits. It is

clear that the policy implications of two pieces of proposed legislation, the Energy Freedom Act

and the renewable energy tax credit extension, will have lasting effects on North Carolina’s

ability to attract businesses, create new jobs, and meet the requirements of its REPS.

Energy Freedom Act:

At the 2015 North Carolina Clean Tech Summit, Representatives John Szoka and Jason

Saine discussed the Energy Freedom Act, which they later proposed in the house of the General

Assembly in March (McAllister, K., McCorkle, B., Peterson, L., Saine, J., Szoka, J., 2015). The

legislation would allow renewable-energy generators to sell to power consumers, thus bypassing

a utility. However, this would not cut into the utility’s principal business model, providing

electricity to households and businesses. This is because the third-party sales allowed by the act

would be limited to government offices, non-profit entities such as universities and colleges, and

military bases (Downey, Bill allowing renewable-power sales direct to N.C. consumers could be

a boon for solar, 2015).

During the panel, both lawmakers cited examples of the success of third party power

purchase agreements (PPAs) and net metering in Arizona and California (McAllister, K.,

McCorkle, B., Peterson, L., Saine, J., Szoka, J., 2015). In both states, a majority of distributed

generation systems were third-party owned, and after PPAs were allowed in 2007 in Arizona and

2010 in California, production from renewables increased (Solar Energy Industries Association,

2015). They also stressed that while tax incentives and credits give short term benefit, they

provide no long term certainty for investors, especially with the REITC concerning long term

projects. Profitability on these projects is key, and one way of achieving that goal is by working

outside the utility to provide the electricity to the consumer.

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Figure 3 courtesy of The Department of Energy: http://apps1.eere.energy.gov/states/compare_states.cfm

In support of this legislation are free market advocates, renewable energy companies,

public university systems, and large businesses such as Wal-Mart and VF Corporation (Downey,

Bill allowing renewable-power sales direct to N.C. consumers could be a boon for solar, 2015).

The main opposition is likely to come from Duke Energy, the largest electric utility provider in

the area. Their distributed energy business model is not conducive to the model proposed by the

Energy Freedom Act. For a point a clarification, the Energy Freedom Act is not related to the

Electricity Freedom Act, which sought to repeal North Carolina’s REPS (Elsner, 2014). The

recently proposed legislation is also at odds with recent attempts from Duke Energy to limit the

profitability of net metering from those connected to the grid. Duke’s proposed legislation is

similar to a model resolution created by the American Legislative Exchange Council, a group

funded by the heavily-fossil fuel-invested Koch Brothers (Halper, 2014).

Renewable Energy Tax Credit Extension:

Who wants to extend REITCs? Who wants to see them disappear?

North Carolina has a storied history of tax credits that have helped spur business. During

a recent visit to Rocky Mount, Republican Governor Pat McCrory cited former President Ronald

Regan’s affinity for tax credits applied to historical preservation as “the most conservative

philosophy that you can promote, and that is to encourage the private-sector investment through

lower taxes.” But in 2013, the Republican-majority General Assembly reformed the tax code

with the end goal of lowering income tax by eliminating many tax credits (Downey, Report: N.C.

incentives, due to expire this year, encourage large investment in renewable energy, 2015).

Governor McCrory’s budget does not reflect his ideological affinity. His most recent

budget recommendation calls for an REITC, but one that is limited to only $7 million and does

not include investment in solar. From 2007 to 2014, $182.6 million was paid out in tax credits,

about $22.8 million per year (RTI International, 2015, pp. 2-7). Meanwhile, solar continues to be

most heavily invested in; $2.143 billion was invested in solar photovoltaics between 2007 and

2014.

Senate Bill 329, An Act to Extend the Tax Credit for Renewable Energy Property, would

keep the state’s 35% REITC in place until the end of 2019 (2015). During the 2015 North

Carolina Clean Tech Summit, Representative John Szoka of the General Assembly clarified his

position on the REITC and its value to North Carolina. He described that though he was initially

opposed to tax credits as a whole, he believed their effectiveness in growing the renewable

energy investment in the state speaks for itself. Representative Jason Saine agreed. He noted that

the “facts are what they are”, and that both REPS and the REITC have significantly grown the

economy of the state. He argued that the REITC is essentially a “1986 Reagan era tax cut, so

let’s frame it that way when speaking to Republicans,” (McAllister, K., McCorkle, B., Peterson,

L., Saine, J., Szoka, J., 2015).

Unfortunately for the bill Szoka and Saine support so vociferously, a powerful senate

leader is philosophically opposed to tax credits. Senator Bob Rucho, finance committee co-

chairman, said in an interview with the Raleigh News & Observer that tax credits are picking

winners and losers, and that communities without historically significant buildings (or renewable

energy projects, for that matter) are subsidizing those with them (Campbell, 2015). Fellow

Republican Charles Jeter, a representative from Mecklenburg County, counters that businesses

that would no longer receive tax credits, such as American Airlines, would simply relocate their

investments to a nearby state with lower jet fuel taxes, such as South Carolina. Applied to the

REITC, this logic would mean the hundreds of businesses and thousands of jobs supporting

renewable energy installation and upkeep would continue to exist and benefit citizens, but in a

state with a better regulatory and tax credit climate for those businesses than North Carolina.

A test case: the ever-changing Production Tax Credit for wind energy in the United States

The wind industry in the United States provides a test example for what may happen to

production should the North Carolina REITC expire. At its peak, the U.S. wind energy industry

employed between 85,000 and 90,000 people. But by 2010, about 10,000 of those jobs went

away. A $1 billion federally subsidized production tax credit (PTC) had been found politically

unacceptable, and representatives of lobbies such as the American Energy Alliance claimed that

“government shouldn’t continue to prop up industries that never seem to be able to get off their

training wheels,” (Cardwell, 2012).

Considered over a longer period of time, the success of wind energy is positively related

to the existence of a PTC, though other factors may influence expansion. When tax credits

expire, wind installation and many of the economic benefits that come with it come to a trickle.

The diagram below, courtesy of The Economist, shows the connection.

Figure 4 accessed from: http://www.economist.com/news/united-states/21579046-wind-power-doing-well-it-still-relies-irregular-and-short-term-subsidies-blown

The Economist article that accompanies this graph remarks that it may be utility companies that

are most threatened by the PTC. It also mentions that while lobbyists of the fossil fuel industry

may chastise renewables for being dependent on tax credits, they are “perhaps forgetting how

handsomely they have been subsidized in the past,” (Blown away: Wind power is doing well, but

it still relies on irregular and short-term subsidies, 2013).

What can we conclude about the value of North Carolina’s REITC?

Solar energy has benefitted considerably from the REITC in North Carolina since 2008.

Its contribution to the sector’s growth is similar to the federal PTC that has spurred wind

energy’s growth in the United States when it has been in effect. In a lecture to an Environmental

Studies Class, Professor Greg Gangi said it is likely that, should the REITC expire at the end of

2015, solar developers would rush to install solar energy hastily (Gangi, personal

communication, 2015). It is ultimately up to state policymakers to determine if the cost of

subsidization is worth the benefit of high-paying, stable jobs and rural economic development.

Allowing subsidies to disappear instead of ramping them down from the existing 30%

installation credit may prove to be limiting to the further expansion of renewable energy in North

Carolina.

Works Cited Act to Extend the Tax Credit for Renewable Energy Property, (proposed Mar. 18, 2015) (to be

codified at § 105-129.16A.)

Retrieved from:

http://www.ncga.state.nc.us/gascripts/BillLookUp/BillLookUp.pl?Session=2015&BillID

=S329&submitButton=Go

Blown away: Wind power is doing well, but it still relies on irregular and short-term subsidies.

(2013, June 8). The Economist. Retrieved March 24, 2015, from

http://www.economist.com/news/united-states/21579046-wind-power-doing-well-it-still-

relies-irregular-and-short-term-subsidies-blown

Brun, L., Hamrick, D., & Daly, J. (2015). The Solar Economy: Widespread Benefits for North

Carolina. Durham: The Duke University Center on Globalization, Governance &

Competitiveness (CGGC). Retrieved March 24, 2015, from

http://www.cggc.duke.edu/pdfs/02152015Duke_CGGC_NCSolarEnergyReport.pdf

Campbell, C. (2015, March 6). Tax credits loom large in NC budget debate. The Raleigh News &

Observer. Retrieved March 24, 2015, from http://www.newsobserver.com/news/politics-

government/state-politics/article12888731.html

Cardwell, D. (2012, September 20). Tax Credit in Doubt, Wind Power Industry Is Withering.

New York Times. Retrieved March 24, 2015, from

http://www.nytimes.com/2012/09/21/business/energy-environment/as-a-tax-credit-

wanes-jobs-vanish-in-wind-power-industry.html?pagewanted=all&_r=1

Database of State Incentives for Renewables & Efficiency. (2015, March 18). Business Energy

Investment Tax Credit (ITC). Retrieved March 24, 2015, from

http://programs.dsireusa.org/system/program/detail/658

Database of State Incentives for Renewables & Efficiency. (2015, March 11). Renewable Energy

Tax Credit (Personal). Retrieved March 24, 2015, from

http://programs.dsireusa.org/system/program/detail/541

Downey, J. (2015, March 17). Bill allowing renewable-power sales direct to N.C. consumers

could be a boon for solar. Charlotte Business Journal. Retrieved March 24, 2015, from

http://www.bizjournals.com/charlotte/blog/energy/2015/03/bill-allowing-

renewablepower-sales-direct-to-n-c.html?page=all

Downey, J. (2015, February 24). Report: N.C. incentives, due to expire this year, encourage large

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due-to-expire-this-year.html?page=all

Elsner, G. (2014, May 21). North Carolina Renewable Energy Standard Fight in 2013. Energy

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