Renewable energy investors hope that someday the development of clean energy projects can be divorced from reliance on the inefficient federal tax code, and, by extension, the whims of Congress and two-year legislative cycles.

One budding proposal gaining some bipartisan credibility is the reverse auction concept to support renewable energy development.

The American Energy Initiative is legislation proposed in the U.S. House of Representatives by the Republican majority and was the subject of a recent hearing by the energy and commerce committee.

Neil Auerbach, a managing partner at renewable energy investor Hudson Clean Energy Partners, spoke to me about his recent testimony before the committee.

“This bill is well-designed but there are improvements that can be made,” Auerbach said.”It’s a commendable effort by Congressman Nunes, but there are some improvements that can be made so it becomes a bill the industry can embrace.”

Rep. Devin Nunes (R-Calif.) had discussed some aspects of the bill at the Energy Central EnergyBiz Leadership Forum earlier this year. And Auerbach said Rep. Henry Waxman, the ranking member of the committee, endorsed the concept.

“It really introduces a market discipline to the size of the financial incentive that’s being offered to renewable energy producers as they continue their march toward scale,” Auerbach said.

In the reverse auction, developers would respond to a solicitation and the lowest bidder wins. California has embraced the concept for solar projects of less than 20 megawatts for the three investor-owned utilities.

The bill also proposes the creation of the American-Made Energy Trust Fund. Auerbach hopes the bill would provide the kind of long-term certainty absent from the current tax credit approach. Annual Congressional appropriations, the way Congress treats renewals of tax credits, is not a way to instill confidence in an industry that makes investment decisions over a several-year-long time frame.

As the concept makes its way through the legislative process and hopes to gather bipartisan support, a few questions need to be answered.
There is a fear that the auctions might be a way to quickly eliminate tax credits that are the lifeblood of the industry, a fear that Auerbach does not believe is justified.

“But until the issue of letting go of the security blanket of tax credits is resolved to the satisfaction of the industry that has legitimate concerns about not getting upended ... in making massive investments, we are assuming that Congress would keep these credits available for a certain period of time,” he said.

That’s the core issue facing renewable energy as it competes with incumbent fossil fuels at a time when it is lowering its own costs while trying to reach scale, especially at a time when the shale gas boom has created a new set of market dynamics.

“Incumbency advantages will dissipate as new competitors reach scale,” Auerbach said. “I believe that wind and solar will be able to compete on cost, but asking them to do so right out of the starting gate … is not only unfair, but counterproductive.”

And that’s why there is some urgency to embrace new ways to incent renewable energy. The clock is ticking on the expiration of the production tax credit at the end of 2012, and assuming it is extended yet again, renewable energy needs more sustainable federal support.

The industry is promoting a pilot project to see how the auctions would work and clean energy developers would respond, perhaps in the procurement of federal electric power needs.

And that could be one step away from the current boom-and-bust cycle.

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