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 utilitys
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 Carolinas 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 militarys
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, Szokas Energy
Freedom Act and Saines expansion of the renewable energy investment tax credit (2015, p. 47).
The panels 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).

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

What have been the wider economic implications of renewable energy?

Renewable energy has been a tool for rural investment. According to the states
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

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 utilityscale 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.

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

What can we conclude about renewable energys 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

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 Carolinas
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 utilitys 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.

Millions

California's Electricity Generation from Non-Hydro

Renewable Energy Resources
30
25

Kwh

20

Electricity
Generation
from NonHydro
Renewable
Energy
Resources

15
10
5
0

Year

Kwh

Millions

Arizona's Electricity Generation from Non-Hydro

Renewable Energy Resources
0.6
0.5
Electricity
Generation
from NonHydro
Renewable
Energy
Resources

0.4
0.3
0.2
0.1
0
Year
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 Carolinas 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. Dukes 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
Regans 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 McCrorys 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 states 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
lets 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 cochairman, 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 shouldnt 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-doingwell-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 Carolinas REITC?
Solar energy has benefitted considerably from the REITC in North Carolina since 2008.
Its contribution to the sectors growth is similar to the federal PTC that has spurred wind
energys 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-stillrelies-irregular-and-short-term-subsidies-blown
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