The Omnibus Spending Package: Good Energy Policy, Bad Energy Policy

Posted on Sat 12/26/2015 by

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Marita-Noon_avatar-80x80By Marita Noon ~

The decades-old legislation that prevented American producers from exporting oil is officially overturned—despite previous presidential threats to veto a bill to lift the oil export ban. That’s good policy. However, to get the support of “reluctant Democrats,” The Economist reports: “an additional five years of tax credits for wind and solar power” was part of the package. That’s bad energy policy.

bigmoney-628x353While it will likely be months before the first tanker of crude oil leaves U.S. shores, the benefits of lifting the ban are already being felt as the spread between the global benchmark price, known as Brent, and the U.S. benchmark, known as WTI (for West Texas Intermediate), has shriveled to the smallest in years. Because U.S. crude had limited markets—and the crude being produced by the shale revolution didn’t match what many American refineries needed—its price was forced down to make it more attractive to refineries. At one time the price differential between the two benchmarks was as high as $30 (September 2011). Between 2011 and 2013, the spread has been closer to $10 to $25 a barrel. Once some of the bottleneck of U.S. production was relieved when the southern leg of the Keystone pipeline was opened and limited amounts of light crude were approved for export or swap, the gap began to really shrink. On December 11, the spread was $2.31 per barrel. Once the export ban was lifted, it dropped to only a $1 difference—with a brief blip of WTI being above Brent.

This helps American oil producers as it gives them a wider market for their product and allows them to sell oil at essentially the same price as the international benchmark prices—WTI goes up, Brent comes down. The lower global price helps consumers as the price of gasoline is based on the international price, not WTI.  The win/win makes for good policy—a win I have pushed for many times in the past year and predicted last year.

The bad policy comes as part of the bargain struck to get the Democrats on board: the Production Tax Credit for wind energy (which had already expired) has been revived, and the Investment Tax Credit for Solar power (which was scheduled to ramp down at the end of 2016) has been extended. Many Democrats wanted the taxpayer handouts made permanent. Instead the deal, part of the $1.1 trillion omnibus spending bill, gave only multi-year extensions to renewables.

Greentech Media explains the package: “the 30 percent Investment Tax Credit (ITC) for solar will be extended for another three years. It will then ramp down incrementally through 2021, and remain at 10% permanently beginning in 2022. The 2.3-cent Production Tax Credit (PTC) for wind will also be extended through next year. Projects that begin construction in 2017 will see a 20% reduction in the incentive. The PTC will then drop 20% each year through 2020.”

A reader of the Greentech report named “Chuck” responds: “Anyone know who [were] the key players who wrote and fought for the renewable credits?”

An answer is found in a letter Sunnova Energy Corporation CEO, William J. (John) Berger, sent to Senator Orrin Hatch, Chairman, Senate Committee on Finance, to discourage the ITC extension.  Berger wrote: “There has been an effort by many in the solar industry to convince legislators that the need for a 5-year, or even permanent, extension of the ITC is necessary to the continued functioning of the industry.” While Sunnova is a residential solar company founded in 2012 that is active in 23 states, Berger concludes: “A policy such as the ITC that was implemented for a market that existed almost a decade ago is no longer the best option for meeting renewable energy goals in today’s world.”

One company that is in need of renewable energy subsidies, likely referenced in the Sunnova letter, would be the company that is the single largest recipient of taxpayer funds through Obama’s 2009 Stimulus Bill: Abengoa. Its stock prices have tumbled throughout 2015. On November 25, the company filed for insolvency protection in Spain. Figures released in the proceedings indicate that Abengoa’s largest creditor—$2.35 billion—is the U.S. Treasury. Additionally, $280 million is owed to the ExIm Bank—the controversial U.S. export finance agency. Representative Mike Pompeo (R-KS), who serves on the House Energy and Commerce Committee and has an Abengoa project in his district, is concerned. In a press release he said: “Abengoa’s bankruptcy is a glaring example of how the President’s green loan program puts billions of taxpayer dollars at risk for no return. … We have been down this road before. Except this time, instead of losing millions, the American people could be on the hook for billions of dollars in loan guarantees.”

Abengoa—which has so many subsidiaries and projects it is difficult to keep all of them straight— is scrambling to find ways to restructure its debt and raise cash.

Just before Christmas, thousands of the company’s employees worldwide have been laid off—many stranded in the countries in which they worked without a way to get back to their home countries. One of its solar farm projects, Palen, located in Southern California, is for sale. Plants have been shut down, suppliers are not being paid, dividend payments have not been made, and construction projects have been put on hold. All this, despite the fact that Abengoa received more than $2.7 billion from U.S. taxpayers—obviously not enough to keep this green-energy company afloat.

Abengoa, reports the Washington Free Beacon: “is seeking additional federal backing.” Despite its financial woes—or, perhaps because of them—the company has spent $70,000 in the past three months “lobbying Congress for renewable energy subsidies.” It looks like the company may get a short-term reprieve as the lobbied-for credits have been extended. (No news is available at the time of writing as to how the extensions might directly impact Abengoa.)

When you hear about the tax credit extensions being such an important policy development, remember the Abengoa story, as it is companies like it—who hope to game the system and fleece the taxpayers—who spend big money on lobbyists to push for legislation that benefits them.

One slight silver lining: removing the oil export ban is permanent; extending the renewable energy tax credits is temporary.

The Economist, concludes its coverage of the trade off this way: “Congress is freeing up one part of the energy industry while picking winners in another.”

Marita Noon contributes posts at the CFACT site, where she is a policy analyst. She is the author of Energy Freedom.

Read more excellent articles at CFACT  http://www.cfact.org/