Regulations. Outline Environmental Financial/Accounting. Based on. .edu /~metin Page 1. utdallas

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1 Regulations Page 1 Outline Environmental Financial/Accounting Based on - ETE book - EPA Clean Power Plan - A. Kothandaraman Chapters 1 and 7 of Carbon Dioxide Capture by Chemical Absorption: A Solvent Comparison Study. PhD thesis, Dept. of Chemical Engineering, MIT

2 Combustion Produces Greenhouse Gasses Page 2 Burning coal, natural gas and other fossil fuel produces Carbon dioxide, nitrous dioxide Greenhouse gases: carbon oxides, nitrous oxides, fluor oxides, methane Greenhouse gases are generated by 31% power industry 27% transportation 21% industry 12% commercial and residential 9% agriculture Most of generated greenhouse gasses are carbon dioxide 82% carbon dioxide; 10 % methane; 5% nitrous (mono-di-..) oxide; 3% fluor oxides Carbon dioxide emission by power industry is the major problem EPA (Environment Protection Agency) in USA controls and regulates emissions EPA has a Clean Power Plan

3 Reducing Emissions Page 3 From simple towards complex Equipment and software updates Increasing efficiency of existing equipment through cleaning: boiler, preheater coils Target 3 stages with regard to combustion: Pre-Combustion: Clean coal (remove pollutants), specifically apply pure oxygen on coal to separately obtain carbon (mono-di) oxide, hydrogen gas which is burnt later with oxygen During combustion: Improve burning efficiency and increase MWh/fuel Post-Combustion: Bind/capture the carbon dioxide of the combustion with fluids. The quoted cost is $ per ton of carbon dioxide.» Chemical scrubbing liquids: Mono-ethanol-amine (most common), Chilled ammonia, Potassium carbonate» Physical absorption» Membrane separation Combinations of above are also possible. See Substitute coal energy with gas energy as gas combustion does not pollute as much as coal combustion Substitute coal and gas energy with nuclear energy and/or renewable energy

4 Regulations Financial/Accounting Page 4 Outline Incentives for Energy Efficiency Subsidies for Renewable Energy

5 Subsidies for Renewable Investments: Power Purchasing Agreements and Tax Credits Page 5 A state-by-state database of Incentives for Efficiency & Renewables The levelized cost with solar / wind, the levelized cost of coal/gas electricity. To subsidize the cost of renewable energy, use two main mechanisms: PPAs and TCs. Power Purchase Agreement (PPA): A government commits to purchase electricity generated with renewable resources at or above the market rate over several years. PPAs are more common in Europe. USA renewable energy partnerships PPA with WalMart, municipalities, state utilizes: e.g., SunEdison had PPA for its solar farm with HECO (Hawaiian Electric Company) in Ex: German government buys solar electricity at fixed rate of $ 150 per MWh over 10 years starting from the operation of the project. If the project starts generation by 2010, the rate is $ 150. If the generation starts by 2011, the rate is $ 149. In general if the project starts in 2010+x years, the rate is 150-x. This scheme provides smooth passage from one year to the next for the industry through a continuous rate function. This, by taking away the price & demand risks, significantly increases the economic visibility of the projects for the investors. Tax Credits (TCs) : A government gives tax credits (reduction of tax, not cash) to renewable energy generators.

6 Subsidies for Renewable Investments: Tax Credits Page 6 Tax Credits (TCs) in two common forms. Production Tax Credits (PTCs) allows the renewable energy producer to claim income tax credit for every kwh of energy produced: 2 cents/kwh for wind & solar; 1 cent/kwh for some forms of biomass and hydro. Investment Tax Credits (ITCs) are common in USA solar & are in 3 forms that are often implemented together:» Investment Tax Credit (ITC): An investor can reduce its annual income tax by a percentage of its investment into renewable (solar, wind, biomass) electricity generation project.» Bonus Depreciation: An investor can depreciate a large percentage of its investment in the first year. This percentage is much larger than 100/[economic life of the project].» Accelerated Depreciation: An investor can depreciate a large percentage of its investment in the initial years. This percentage in each initial year is much larger than 100/[economic life of the project]. Debt-financing: Frequently changing tax credits require companies to commit and build wind/solar farms without having time to search for debt financing. Debt has become difficult to obtain after financial crisis. Equity-financing: In USA, farms are often equity financed. Desired return on equity % per year. In an equity investment, there is an investor with money and a developer with know-how. Partnership: Investor + Developer of the renewable project.» The investor gets the tax credits. This is because the developer does not have much of a tax liability to benefit from a TCs.» The developer gets investor s financing.

7 Partnerships to Obtain Tax Credits Nicely structured partnerships can use tax credits to save 40-50% of the initial investment in the 1st year. This partnership must include a developer (SolarCity, SunRun) and a tax-equity investor with tax liability: Google, Credit Suisse (bank), P&G E (utility), etc. Ex: A few years ago USA government offered the following for solar investments» ITC: 30% of the initial investment» Bonus depreciation: 50% of the basis (=initial investment 0.5*ITC, according to the IRS rules)» Accelerated depreciation: Linear depreciation for the basis of 20% over 5 years as opposed to lifetime of 20 years Then Credit Suisse and SunPower partnered to build a solar farm by investing $60 million. What are the tax savings of the partnership in the first year after the construction, if the partnership is subject to 25% income tax.» ITC=(0.3)60=18 million» Bonus depreciation=(0.5)(60-0.5*18)=25.5 million can be claimed as depreciation expense in the first year» Accelerated depreciation=(0.2)(60-0.5*18)=10.2 million can be claimed as depreciation expense in the first year» First year tax savings for the partnership=18+(0.25)( )= close to 45% of the initial investment. Tax savings in the first, second, years must be distributed between partners. Partners have TC or liability depending on their distributive share in the partnership. Page 7 The distribution depends on the partnership agreements, 3 structures are common: Sale-leaseback, Flip, Inverted lease [Analysis of this] requires deep knowledge of partnership taxation (IRS subchapter K). It is a very painful, complex read and is known as the most complex part of the IRS code.» A wind industry professional in US Code IRS Code Income Tax Normal Taxes and Surtaxes Partners and Partnerships US Code Title 26 Subtitle A Chapter 1 Subchapter K 1. Lease panels 2. Install panels Consumer Developer Investor 4. Lease payment 3. Sell panels investor Lease panels back investor 5. Lease payment Sale-leaseback TC Partnership Structure Source:

8 China s Solar Energy Subsidy Program Page 8 Different subsidies for utility-scale ( 20 MW) and others (<20 MW) Both are based on production quantities Centralized: Utility-scale solar where utility companies generate solar power and feed it into the grid Subsidy policy: The production of solar energy in an area is entitled to the compensation for the cost exceeding the price of electricity generated by coal in that area The LCOE of coal is RMB 1/ kwh ($0.15/kWh) on average in 2016 Datong, Shanxi province, 90 MW, 2016 by SINENG ELECTRIC CO. Distributed: Households, organizations or commercials meet their own needs and sell the remainder to the utility market Subsidy policy: The production of solar energy can get compensation with RMB 0.42/ kwh ($0.06/kWh) rate and people can sell the electricity to utility company at LCOE of coal in their area. Every province may provide extra incentives Guangzhou province, 3MW, 2012 by SINENG ELECTRIC CO.

9 China s Solar Energy Subsidy Program Page 9 Solar panel installation reaches 6710MW (by National Energy Administration ) Subsidy application went beyond the solar energy funding in 5 provinces Government announced a more restrict qualification for solar subsidy, due to too many applications for subsidy Last two slides are provided by Wei-Hsuan Chou, Merit 17. ~ Cut the rate of subsidy by 20% for centralized system Demand for installation solar panel goes down 0%E6%9E%90/ English solar energy installation statistic by National Energy Administration, China

10 Summary Regulations Page 10 Environmental Financial/Accounting