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43–872—PDF 2007

S. HRG. 110–461

CLEAN ENERGY: FROM THE MARGINS

TO THE MAINSTREAM

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 29, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

WITNESSES

Bruton, John, Ambassador, European Commission Delegation, Washington,

DC .......................................................................................................................... 2

Krenicki, John, Jr., president and chief executive officer, General Electric

Energy, Atlanta, GA ............................................................................................ 10

Raba, Todd M., president, MidAmerican Company, Des Moines, IA .................. 12

Van’t Hof, Johan, chief executive officer, Tonbridge Corporation, Toronto,

Ontario, Canada ................................................................................................... 15

Wiser, Ryan H., scientist, Lawrence Berkeley National Laboratory, Berkeley,

CA .......................................................................................................................... 17

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 29

Bruton, John:

Testimony .......................................................................................................... 2

Prepared statement .......................................................................................... 32

Responses to questions from committee members ......................................... 48

Grassley, Hon. Chuck:

Prepared statement .......................................................................................... 53

Krenicki, John, Jr.:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 55

Raba, Todd M.:

Testimony .......................................................................................................... 12

Prepared statement with attachments ........................................................... 69

Van’t Hof, Johan:

Testimony .......................................................................................................... 15

Prepared statement with attachments ........................................................... 88

Wiser, Ryan H.:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 97

Response to a question from Senator Grassley .............................................. 110

(III)

(1)

CLEAN ENERGY: FROM THE MARGINS

TO THE MAINSTREAM

THURSDAY, MARCH 29, 2007

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:46 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Bingaman, Stabenow, Salazar, and Grassley.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

I have a prepared statement which I am not going to give due

to the time constraints now, except to say that a lot of us are inspired by Thomas Edison, who 131 years ago this week moved his

lab from Newark to Menlo Park, CA, creating the world’s first industrial research lab, and years after that he and his team developed the electric light bulb, and how that just has changed the

world. We are at a different stage now as we try to find ways to

make ourselves more energy independent and also focus on renewables, I think entering a new stage in our world’s history, combined

with greenhouse gas issues, and it is up to us to bring the same—

no pun—energy, creativity, and ingenuity as Thomas Edison, to

find ways to address all these issues.

There are provisions in our law in the United States to provide

incentives to renewable energy production, and I know the European Union has its own ways to develop incentives for renewables.

It will be very interesting to learn what those are and how those

work. We have a panel coming up later that will certainly explain

some of that in greater detail. But the goal here of this committee

is to do all we can to help our country be more independent in the

production of energy and also to dovetail with the greenhouse gas

issues so we can control carbon as well as we possibly can. We are

going to work hard on this and do what we can.

[The prepared statement of Chairman Baucus appears in the appendix.]

The CHAIRMAN. We are very honored to have with us today Ambassador Bruton, who is EU Ambassador to the United States. I

want to thank you, Mr. Ambassador, for coming. You are here voluntarily. Basically you are here to give us the benefit of your

thoughts. This is a little bit unconventional for the European

Union Ambassador to come and testify, to come and speak before

2

the Finance Committee, but we are very honored that you are here,

Mr. Ambassador, and that you decided that is something you wanted to do to help out. We are very, very appreciative of your participation here.

I could go on at great length about your history: Prime Minister

of your country and on and on. We just thank you for all of your

service to your country and to the continent and to so many people.

Just let it be known that we are very, very honored to have you

here with us. We are very thankful that you are here, and thank

you, Mr. Ambassador, and you can proceed in any way you wish.

STATEMENT OF HIS EXCELLENCY JOHN BRUTON, AMBASSADOR, EUROPEAN COMMISSION DELEGATION, WASHINGTON, DC

Ambassador BRUTON. Senator Baucus, I am very privileged to

have this chance of appearing before your committee. Historically,

it was when Europe and the United States faced major challenges,

as we did in wartime, that we have come most closely together, and

I think as we look at the prospects of a problem of global warming

and a problem of reduced energy independence, we are facing just

the sort of challenge that tends to bring Europe and America together to meet and overcome that challenge.

At the moment, energy use accounts for 80 percent of the greenhouse gases that are emitted in Europe, and, if current trends continue, our greenhouse gas emissions will increase by 5 percent by

2030. In contrast, however, we have now set ourselves a target of

reducing our greenhouse gas emissions by 2020 to 20 percent below

the amount that was emitted in 1990. We are proposing a radical

shift against current trends. We do emit somewhere in the region

of about half of the greenhouse gases per head of population compared to the United States, but our emissions are still far too high.

As far as the principles of our system of using taxation to achieve

our environmental goals are concerned, I have set these out in

some detail in the submission which the committee has in its possession. We operate on the basic principle that the polluter should

pay, so the emphasis in our system is more on disincentives to undesirable behavior than it is to incentives to desirable behavior.

There are exceptions to that, of course.

The biggest form of taxation on energy currently operating in Europe is in the form of excise taxes on certain fossil fuels that are

used in transportation and heating. Where these fossil fuels are

used, for example, for making plastics or other processes unrelated

to transport or the like, they are exempt from those taxes.

The European Union does not set these taxes. These taxes are

set by member states. But in order that we may have a free and

competitive market, the European Union does set minimum levels

of excise taxes.

We are moving also in the direction of doing the same thing in

regard to fuels used in commercial transport, because there is

something that has been christened ‘‘fuel tourism.’’ There are some

countries in Europe where the excise taxes are slightly lower and

truckers are literally diverting to go through that country on their

route, even though it may be a longer route, in order to fill their

tank at a lower price. And we have proposals which have been taVerDate 11-MAY-2000 16:19 Aug 20, 2008 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 43872.000 SFIN1 PsN: SFIN1
3

bled to deal with that problem. Those proposals were tabled on the

13th of March.

Also, yesterday—and I think this underlines the timeliness of

your hearing—we have tabled a Green Paper on the entire issue

of taxation and energy, and obviously we will be supplying you

with that, and we hope that we will be able to have more intense

discussion on its contents in the future.

This operates on the proposition that taxes should be neutral as

between different types of energy but, that said, that they should

give special encouragement to renewable energy sources and special encouragement to those energy sources that do not cause emissions of polluting gases, including CO2. As far as renewables are concerned, there is in existing EU law

an option for countries to exempt renewables from the taxes that

are levied.

As far as passenger cars are concerned, our tax systems also encourage countries to have exemptions or reductions in taxation for

high-efficiency vehicles and differentiation on the basis of the emission levels of CO2 per kilometer traveled.

We are also providing a framework in EU law for taxation that

is designed to pay for the road infrastructure—so to speak, tolls.

Obviously, we want to have a measure of uniformity in these tolls

across Europe so that there will be an effective common market on

this issue in the European Union.

The other notable matter to which I wish to draw your attention

is, of course, the European Union’s emissions trading system or our

cap-and-trade system. This came into full operation in January,

2005. There have been some controversies about it in the sense

that it has transpired that the allocations that were given initially

were probably too generous. The scheme does cover 10,000 installations throughout Europe in all 27 member states, and we are currently considering extending this scheme to include aviation. Also,

we are considering the full auctioning of permits after 2012 to ensure that there are not windfall gains to individual companies.

Coming towards a conclusion, I would like to refer to our concern

about ensuring that as we move towards greater use of coal, which

is inevitable—it is estimated that internationally twice as much of

our electricity will be generated from coal by 2030 as is now the

case because that resource is available plentifully—we obviously

have to provide for the use of carbon sequestration and other clean

coal technologies to ensure that coal does not add to the existing

environmental problems that we have. And while the technology is

in the course of development, we want to ensure that new plants

that are being built to use coal are, so to speak, capture-ready, that

the plant is designed so that it can adapt to a carbon sequestration

system as soon as that becomes available.

In my submission, I have also outlined individual national measures that have been adopted by individual countries in regard to

these issues, but, for reasons of time, I will not go into these in any

further detail. I also outlined national schemes to support biofuels

in individual member states, which differ, and systems to assist in

the installation of mechanisms to maximize the conservation of energy and the use of renewable energy in the heating and cooling

of buildings. And, again, there is quite a diversity of experience in

4

Europe in that matter, which I am sure the committee in its further inquiries will find useful to compare.

[The prepared statement of Ambassador Bruton appears in the

appendix.]

The CHAIRMAN. Mr. Ambassador, thank you very much. I am curious about your feed-in tariffs and how they seem to work. We

have a little different system. So far in this country we have the

section 45 tax credit for renewables, and I understand that Europe

has feed-in tariffs, which essentially are designed to accomplish the

same purpose, namely, guaranteed renewable production, the cost

essentially passed on to consumers. But there is a guarantee, as I

understand it, and I am just a little curious how well that seems

to be working.

As I understand it, too, it phases out a little bit over time. Just

any thoughts or advice you can give us with respect to your experience with that system?

Ambassador BRUTON. Feed-in tariffs are used in France, Spain,

Romania, Greece, Bulgaria, Hungary, the Czech Republic, Slovakia,

Latvia, Estonia, Lithuania, Luxembourg, Cyprus, and Malta. In

other countries, there is a para-fiscal levy system. A connection fee

system is used in Austria, Ireland, and the Netherlands, as well as

Slovenia. So there is quite a variety of different mechanisms used

in the EU.

The feed-in tariffs do, as you say, digress towards the end of the

period, although that may have to change. There is not, as I understand it, any proposal to standardize these systems.

There are variations in the way feed-in tariffs are used. In Germany, for example, there is a pure fixed tariff system. This means

that producers of green electricity can count on the fixed and same

tariff for a long period of time, because there are no fluctuations

depending on market price developments.

In Denmark, there is a premium system for onshore wind energy.

And while the level of the premium is fixed, other parts of the price

are dependent on market prices generally.

Spain has a premium system; however, it gives the option to

choose between the market price plus premium formula or a fixed

price plus premium formula. So there are quite wide measures of

variation within Europe on this issue.

The CHAIRMAN. I would like to ask you, if I could, a little bit

about carbon sequestration and your experience and your advice on

that technology. First, I guess you have some demonstration

projects, and one question is: When do you think they will show results? Second, your advice on the EU regulatory framework, how

to ensure that captured CO2 does not escape, for example, and how

to transport, how sites are selected. Then, third, how carbon sequestration is financed, that is, incentives. Just your basic experience with carbon sequestration, what has worked and not worked

and how you regulate it and so forth?

Ambassador BRUTON. I think like the United States, we are at

a comparatively early stage in the development of all of this. We

have not satisfied ourselves that we have cracked the issue of ensuring that there is zero or minimal risk of the carbon escaping

from the sequestered site. There are demonstration projects

5

planned, and we will be watching very closely developments here

in the United States.

I think it will be useful for me to research further the matter

that you just raised in this question, because I feel there is some

more information available. We envision up to 12 large-scale carbon sequestration demonstration projects by 2015, but it would be,

I think, our view that we would value cooperation not just with

this committee but with all those authorities in the United States

that are working on this subject, because we are learning as we go

here.

The CHAIRMAN. Just my final point to you, and other Senators

will have questions. What is the one message you want to give us

about renewables, that is, your experience in Europe, the need for

renewables, the amount which we should devote time and attention

to renewables, just kind of the one basic thought with respect to

renewables in this whole big issue that you think we should hear?

Ambassador BRUTON. I think the answer I would give is that renewables are a vital part of any system for dealing with our problem of energy independence and our problem of global warming.

But they are not a silver bullet. They will not solve the problem

on their own. They must be accompanied by very serious and tough

measures to deal with conservation of energy.

The CHAIRMAN. But a necessary part of the solution.

Ambassador BRUTON. A necessary part but not the whole solution.

The CHAIRMAN. All right. Thank you very much. Thank you, Mr.

Ambassador.

Senator Grassley?

Senator GRASSLEY. Mr. Ambassador, glad to have you with us,

and sorry that unpredictable things in the Senate kept us from getting started, and I will put my statement in the record, Mr. Chairman.

[The prepared statement of Senator Grassley appears in the appendix.]

Senator GRASSLEY. Mr. Ambassador, I want to thank you very

much for coming to share the European Union’s experience in energy tax policy. The United States, much like the EU, finds itself

faced with the rising reliance on fossil fuels and foreign sources of

those, but it appears Europe has been much more aggressive in addressing the diversification of its energy portfolio, especially if the

EU meets its goal of 21 percent of electricity generated by renewables by 2010.

Now, you have already shared your views, according to Senator

Baucus’s question on that issue, so I will not ask you to repeat

yourself, and I will go on to a second question.

Your written testimony includes some very interesting information on the European Union’s approach to the taxation of fuel and

incentives for biofuels. In addition, you discuss some of the EU

countries’ problems with fuel tax enforcement and fraud, which you

called ‘‘fuel tourism,’’ all of which I find very interesting.

Could you please describe your most successful biofuel initiative

and describe your least successful?

Ambassador BRUTON. I suppose people in my position are expected to accentuate the positive at all times; therefore, I may try

6

to pass on the second part of your question. But regarding the first

part I would say that I think biodiesel is probably the area where

we have had the most remarkable success. This has been particularly the case in Germany where a lot of investment has been put

into biodiesel. And in Sweden, they have had quite an amount of

success with bioethanol, similar to the experience in the United

States, and in your own State in particular. So I think those are

the two countries that would be most helpful and instructive as far

as the United States is concerned.

I suppose our problem, the biggest problem we have, is in getting

people to look at the medium-term future rather than the present

in the matter of the necessary sacrifices that have to be undertaken to introduce measures of conservation. For example, there is

this principal agent problem where the builder of a house who is

proposing to rent that house has no incentive, in putting the house

in place, to put in energy conservation measures because the electricity bill will not be paid by him but by the tenant. Finding a system and designing a system to ensure that builders have an incentive to conserve energy in the matter of heating and cooling is a

problem that I do not think we have tackled adequately.

Another area where we have not, I think, achieved adequate success is in dealing with urban sprawl. In many European countries,

there is quite an amount of low-density development, which is, of

course, generating, I think it has been estimated by some, up to 38

percent more energy use in transport than would be the case in

higher-density urban developments. And, again, that is a matter

not just for national governments. It is a matter for cities and

towns and counties to address, and I do not think we have adequately addressed that either.

Senator GRASSLEY. All right. Thank you, Mr. Chairman. That is

all I want to ask.

The CHAIRMAN. Thank you, Senator.

Senator Bingaman?

Senator BINGAMAN. Thank you very much for having the hearing, and thank you, Mr. Ambassador, for being here to speak with

us.

In addition to the feed-in tariffs, one of the ways that I believe

Europe has chosen to encourage use of renewables in the electric

utility sector is to have something of a Renewable Portfolio Standard. That is something we have at the State level in many States

here in this country today, and I have proposed—and we have

voted here in the Senate several times—to go ahead and try to do

a national Renewable Portfolio Standard as well.

My understanding is you have a similar sort of Europe-wide portfolio standard, a requirement for generation of renewable energy by

utilities, and you have similar country-by-country requirements. I

would just like to understand that better as to whether I am right

that you do have both a Europe-wide system and a country-bycountry system, and if so, how that works and to what extent the

Federal system preempts what countries are able to do.

Ambassador BRUTON. I will attempt to answer that question as

best I can on the information available to me. My understanding

is that we do not operate at Europe-wide level a Renewable Portfolio Standard, but we have set targets for the use of renewable enVerDate 11-MAY-2000 16:19 Aug 20, 2008 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 43872.000 SFIN1 PsN: SFIN1
7

ergy for member states. It is a matter, really, for the countries to

work to achieve those targets.

It may be relevant to you to be aware of the green certificate system which exists in the United Kingdom, Sweden, Italy, Belgium,

and Poland, where the consumers of the electricity are obliged to

purchase a certain number of green certificates, according to which

a fixed percentage or quota of their total electricity consumption or

production must come from green sources. If they do not, they have

to pay a penalty over that amount, and the money is then used for

research and development and demonstration projects.

Senator BINGAMAN. So that is a requirement on the consumers

of the electricity rather than on the utilities that are producing and

selling the electricity. Is that right?

Ambassador BRUTON. Well, that is the system as I understand

it that applies in the countries I mentioned. But, again, the European Union is not directly involved in managing these. These are

for individual countries, and the countries in question would probably be the best ones to provide you with the necessary information. But I will, if I may, seek out the information and supply

whatever I can find to the committee.

Senator BINGAMAN. Thank you. That will be helpful.

Let me ask about your emissions trading, your cap-and-trade system that you have adopted there. We had a workshop in the Energy Committee with several participants from Europe to talk

about that on Monday of this week, and it was very useful, I

thought. The emissions trading system or the cap-and-trade system

which you have adopted there in Europe applies just, as I understand it, to the electric utility sector. You mentioned 10,000, I believe, emitters that are currently covered. And you have chosen not

to try to apply it to the transportation sector, not to other less

energy-intensive sectors.

Can you explain your thinking on that? What we have talked

about here and what various economists have advised me would

make more sense in this country would be to try to have an economy-wide cap-and-trade system so that the cost of putting carbon

into the atmosphere was reflected anywhere in the economy that

that is actually occurring, that would be reflected in the cost of the

products involved there.

What are your thoughts on that?

Ambassador BRUTON. Well, as I mentioned in the written submission, we do have quite heavy excise duties in all European

countries and a minimum level set by the European Union for

them on road transport and fuel use in road transport. And we

reckon that actually fulfills the function that a cap-and-trade would

fulfill for road transport to a very considerable extent, particularly

when combined with the additional taxation that we impose on vehicles which are not energy efficient, the way in which we are proposing to redesign further our tax system on motor vehicles to ensure that there is a tax advantage for CO2-efficient vehicles vis-a`- vis others.

When we were designing the cap-and-trade system that we now

have in place, there were very extensive debates about whether or

not we should have gone for a carbon tax rather than a cap-andtrade, and I know that many economists will argue that a carbon

8

tax is more neutral and more efficient. But we felt, in terms of the

amount of up-front progress that we would make in the short to

medium term, that we would make more progress with a cap-andtrade system than with this economically pure carbon tax approach.

There is one exception to the exemption of transportation, and

that is aviation. We are proposing to extend the emissions trading

scheme to aviation. That is a matter currently under consideration.

Senator BINGAMAN. Thank you very much.

The CHAIRMAN. Thank you, Senator.

Senator Salazar?

Senator SALAZAR. Thank you very much, Senator Baucus, for

your leadership on this issue of energy, and I look forward to working with you and Senator Bingaman and everybody else on this

issue.

Ambassador, my question to you is regarding biodiesel and asking you to elaborate further on your response to the question of

Senator Grassley. You said that there were two countries within

the EU that had made significant progress with respect to biodiesel. Can you elaborate on that and tell us a little bit more about

what it is that they have done and how it is that they have done

it?

Ambassador BRUTON. Well, it is one country really that I would

have singled out, which is Germany, where we have made major

progress in the area of biodiesel. They are using crops that are

available in Germany in quantity.

Senator SALAZAR. Can you tell us what the crops are and what

the level of production is that they currently have under way on

biodiesel?

Ambassador BRUTON. It is rapeseed, primarily.

Senator SALAZAR. Mostly rapeseed?

Ambassador BRUTON. Mostly rapeseed, but I do not think I can

give you figures on the level. It is quite high, quite high by comparison with past experience and quite high by comparison with

other European countries.

Senator SALAZAR. Do you know, Ambassador, whether those biodiesel initiatives in Germany have resulted in production that

comes from large biorefineries? Or have they come from small biorefineries that are located on farms within Germany? If you could

describe the configuration of this biodiesel initiative within Germany.

Ambassador BRUTON. I am afraid I could not, really, in any detail. But 3.7 percent of the total fuel used in 2005 in Germany was

biodiesel.

Senator SALAZAR. Three-point-seven percent?

Ambassador BRUTON. Three-point-seven percent. As to whether

they are large or small plants, I would have to make further inquiries.

Senator SALAZAR. All right. Within the EU, as you have embraced the initiatives on renewable energy, do you have any general information with respect to the kinds of initiatives that have

helped the small producer, the small refiner move forward in this

renewable energy initiative? What I have in mind, for example, is

that as we look at wind farms becoming a reality for many of us

9

in many of our States, there is a possibility that we could create

incentives out of this committee to try to make wind generation a

possibility for the farmer or for a small community with small generators that essentially use wind to produce that kind of energy or

using maybe a small cooperative that would bring farmers together

to produce their own biodiesel.

So my general question is whether or not within the EU, as you

move forward with renewable energy, there have been initiatives to

try to target these smaller levels of production.

Ambassador BRUTON. Denmark and Spain are the two countries

in Europe that have made the most progress in this area. Spain in

particular has made major progress in the area of wind energy.

And while I do not have detailed information at hand, I expect that

that has featured giving special preference to smaller producers in

order to establish a basic network and a sufficient volume of wind

energy availability. Obviously, the smaller producer needs special

help initiating it, and I imagine that that is part of the scheme in

Spain. But I will, if I may, make further inquiries and supply to

the committee more information on the precise incentives for wind

energy in Spain with respect to smaller producers.

Senator SALAZAR. Thank you very much, Mr. Chairman. Thank

you, Mr. Ambassador.

The CHAIRMAN. Thank you, Senator Salazar.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman, and I appreciate

this hearing, and I welcome the Ambassador.

Coming from a State like Michigan where we are seeing a major

focus on fuel efficiency and alternatives and biofuels and so on, we

also have companies like United Solar Ovonic which are making

the new silicon alloy solar cells and doing a lot around—we wish

we had a little more sun all around the year in Michigan to be able

to use some of those solar cells. But there are some wonderful

things going on. We are partnering with research and development

into new technologies and so on. And I am wondering, Mr. Ambassador, from an R&D standpoint how you view or how the EU views

partnering or the role of government in partnering with industry

or working with scientists and so on as it relates to research and

development into these new technologies. How do you approach

that? How do you view the appropriate role?

Ambassador BRUTON. We would believe that there is a major role

for government here, both at the level of the European Union assisting research and development and at the level of individual

member states. We would also think that there is a role for government in promoting demonstration projects to actually apply the research and development, because getting individuals to install, for

example, solar panels in their own homes or in apartment blocks

is something that requires a special encouragement because the return is relatively long-term.

I think it might be of interest to the committee to look at France,

for example, where an income tax credit worth 50 percent of the

purchase cost of solar equipment is proving particularly popular in

that country. And the structuring of that particular incentive might

be of interest to—and, obviously, when public institutions install

10

solar panels, as I understand has happened here, that has a very

important demonstration effect as well.

Senator STABENOW. Do you have any particular research programs or development programs that we might look at where universities or the government are partnering, any kind of structures

which you use with private industry around R&D?

Ambassador BRUTON. Yes, and I will obtain information for the

Senator on that matter.

Senator STABENOW. Great. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Ambassador, thank you very much. We really appreciate the time you have taken to come over here and give

us the benefits of your friendly advice. We appreciate it very much.

Thank you.

Now I will turn to our next panel. We will hear key perspectives

on America’s use of renewable power, starting with John Krenicki,

president and CEO of GE Energy. GE Energy is one of the world’s

leading companies in power production, including renewables. We

look forward to hearing Mr. Krenicki.

Then we will hear from Mr. Todd Raba, president of MidAmerican Energy. That company has a stake in a broad range of

renewable power, including transmission. I understand that Mr.

Raba will provide a real-life example of some of the challenges utilities face in dealing with section 45’s periodic expiration.

He is followed by Johan van’t Hof, CEO of Tonbridge Corporation. Tonbridge is in the process of developing a transportation line

between Great Falls, MT, and Lethbridge, Alberta. If successful,

this line will greatly augment Montana’s power to sell its abundant

wind power.

And we are also pleased to have with us Ryan Wiser, a scientist

with the Lawrence Berkeley Lab in California. He is one of the

country’s leading authorities on renewable power and will provide

the committee with perspectives on its implications.

So thank you very much, and I will start with you, Mr. Krenicki.

STATEMENT OF JOHN KRENICKI, JR., PRESIDENT AND CHIEF

EXECUTIVE OFFICER, GENERAL ELECTRIC ENERGY, ATLANTA, GA

Mr. KRENICKI. Thank you, Mr. Chairman and members of the

committee. I am John Krenicki. I am the president and CEO of GE

Energy, and I very much appreciate the opportunity to testify

today on policies that will significantly impact the growth of renewable energy in our country.

We believe that Congress should act this year to extend existing

tax credits for electricity production from wind energy and the investment credits for solar energy. Action this year well in advance

of the credits’ expiration will enable growth in the wind and solar

industries to continue undiminished by policy uncertainty.

The United States has some of the world’s best wind resources.

Although wind supplies less than 1 percent of U.S. electric generation today, the American Wind Energy Association and the Department of Energy have identified a goal of 20 percent by 2030. U.S.

wind installations have nearly doubled over the past 3 years, and

11

new unit installations are up by more than 45 times versus a decade ago.

Over the past 20 years, the cost of electricity from wind has

dropped 80 percent, today costs approximately 8 cents per kilowatt

hour, and is becoming more and more competitive with other power

generation technologies. By tapping wind’s potential as an energy

source, we are leveraging an abundant, domestic, zero carbon emissions resource and reducing overall dependence on imported energy. Wind emits zero sulfur dioxide or nitrogen oxide and consumes no water in the generation of electricity.

Consider this: a recent study conducted by GE concluded that a

100-megawatt wind farm in New York State would produce the energy equivalent of 590,000 barrels of oil per year and displace

400,000 pounds of nitrogen oxide per year, 800,000 pounds of sulfur

dioxide per year, and 260 million pounds of carbon dioxide per

year.

In order to realize this potential, three needs must be fulfilled:

number one, predictable and stable public policy; number two, additional investment in the supply chain; and, number three, continued advances in wind turbine technology. It starts with public policy, because a clear and definable policy landscape enables investment in both the supply chain and technology.

For example, there is discussion today within the industry of a

5-year Production Tax Credit extension versus a shorter-term extension, which has historically been the norm. As a wind energy

manufacturer, we believe a 5-year extension would provide greater

certainty that would encourage long-term capital investment by

suppliers and technology investment by manufacturers.

Currently, all wind turbine manufacturers are struggling with

the same global challenge: obtaining sufficient components from

their suppliers to manufacture and assemble wind turbines, particularly components that require long lead times. The on-and-off

nature of the PTC since 1999 has made it difficult for suppliers to

make the needed investments in plant and equipment to increase

the supply of these components. As a result, the industry’s ability

to add new capacity has not been able to keep pace with the demand, and this is a global phenomenon.

A 5-year PTC extension would be very impactful on the growth

of wind energy in the United States. However, such an extension

would need to include intermediate milestones, spurring continuous

investment. Without such provisions, the industry may be susceptible to a wait-and-see approach, withholding investments until the

final years of the extension. This could result in the same boomand-bust cycle that we have seen from the late 1990s through 2004.

With that in mind, the committee should consider provisions in a

5-year PTC that would require participants to attain intermediate

installation milestones.

National and/or State Renewable Portfolio Standards would also

enable continuous, consistent growth. While that may take longer

to construct and enact, fair and equitable portfolio standards would

ultimately drive the industry towards large-scale deployment of

wind-generated power. Think of the PTC as the spark and portfolio

standards as the fuel for long-term, sustainable wind energy

growth.

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Timing is just as critical to success as the strategy. By acting

this year, well in advance of the PTC’s expiration, Congress can

eliminate the uncertainty that stymies investment and growth in

renewable sources.

In summary, public policy is critical to the consistent growth and

success of renewable energy as a means to reduce emissions and

U.S. dependence on imported sources of energy. The PTC and Renewable Portfolio Standards can and should play complementary

roles.

As you consider energy-related tax policy, we urge action this

year to extend and enhance legislation that will continue to foster

growth of renewable sources in our national energy portfolio.

Thank you again for the opportunity to testify, and I would be

pleased to answer any questions at the end of the session.

The CHAIRMAN. You bet, Mr. Krenicki. Thank you so much.

[The prepared statement of Mr. Krenicki appears in the appendix.]

The CHAIRMAN. Mr. Raba?

STATEMENT OF TODD M. RABA, PRESIDENT, MIDAMERICAN

ENERGY COMPANY, DES MOINES, IA

Mr. RABA. Good morning. Thank you, Mr. Chairman, Senator

Grassley, and members of the committee. I also appreciate the opportunity to testify today. My name is Todd Raba. I am the president of MidAmerican Energy Company. MidAmerican is Iowa’s

largest electric utility.

I am proud that MidAmerican is also number one in the Nation

in ownership of wind power and electric generation among regulated utilities. We have 695.5 megawatts in operation, under construction, or under contract in Iowa. We are aggressively seeking

additional opportunities to expand. By working cooperatively with

our State, we have helped make Iowa the country’s third largest

generator of wind energy.

Our sister utility, PacifiCorp., has acquired or is planning to acquire 2,000 megawatts of renewable capacity by 2015. And then we

have MidAmerican’s independent generation company which owns

340 megawatts of geothermal energy in California, with significant

expansion potential as well.

At MEC, we are very pleased with the performance of our wind

assets. During last summer’s record-setting heat wave, our wind

projects made critical contributions to meeting our customers’

needs.

Wind and other renewables possess distinct advantages and disadvantages compared to conventional resources. Once installed,

these resources face no fuel price volatility and are comparatively

easy to site. Renewables obviously are emissions free, helping reduce the potential impacts of global climate change.

On the other hand, unlike conventional resources, wind is not

dispatchable and is geographically limited. Utilities must provide

power to consumers 24/7, which requires that we maintain reserves

with dispatchable generation resources. Renewables such as geothermal and incremental hydro are dispatchable, but they have

high capital costs and geographic limitations. Our California geoVerDate 11-MAY-2000 16:19 Aug 20, 2008 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 43872.000 SFIN1 PsN: SFIN1
13

thermal power plans, for example, lie in one of the most physically

remote parts of that State.

Overall, renewable energy has a bright future, but this depends

on actions you can take to support the development of a robust, domestic renewable electricity industry.

Two elements are really required to assure the role of renewables

here in the U.S.: certainty on financial incentives, certainly, and

transmission policies focused on the challenges of delivering renewables from their often remote locations.

Given their high up-front costs, renewables are not yet fully costcompetitive with fossil resources. However, the section 45 Production Tax Credit, or PTC, closes the gap. None of the wind investments that MidAmerican has made in the last 5 years would have

occurred without the PTC, and we would not have erected a single

turbine.

In late 2003, we announced our intention to build a 323-megawatt wind project, but the pending expiration of the PTC forced us

to delay moving forward with the installation of those turbines.

When the PTC expired on December 31, 2003, our project was frozen in place. We could not risk final acquisition and installation of

the turbines without the PTC being restored, as the project would

not have met the cost requirements of the Iowa Utility Board.

Fortunately, then-Chairman Grassley and you, Chairman Baucus, led the effort to restore the credit in September of 2004. We

moved immediately to install as many turbines as possible, and by

year-end had placed more than 150 megawatts in service. The

Northwest Iowa Clipper project was completed right at 6 p.m. on

New Year’s Eve.

Since then, Congress has twice extended the PTC, leading to an

unprecedented boom in wind development. However, demand for

turbines is far exceeding available world supply. Wind turbine

prices have nearly doubled in the last 3 years, largely as a result

of this scarcity.

Manufacturers tell us that the certainty of incentives in Europe

make that market preferable for both manufacturing and long-term

customer relationships. And in order for wind energy to reach its

full potential here in the U.S. and help lower greenhouse gas emissions, Congress must make a longer-term commitment.

With regard to geothermal, hydro, biomass, and waste-to-energy

generation, the problem is even more acute. While these resources

are more geographically limited than wind, they do function as

dispatchable resources. Building the projects is capital-intensive,

and most cannot be completed within short placed-in-service time

frames.

MidAmerican has suggested that Congress consider allowing

flexibility with regard to placed-in-service dates for projects involving base load renewables by allowing projects to opt into tax treatment that reduces the 10-year application of the PTC by an equivalent period equal to the date of expiration of the placed-in-service

date and the completion of the project. In other words, if a project

is brought on line 6 months after the expiration of the placed-inservice date, it would receive the tax credit for the remaining 91⁄2

years versus the original 10.

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However, the better answer would be a 10-year extension of the

PTC that would provide long-term certainty and solve the base load

renewable issue. It would help redistribute the PTC’s benefits from

manufacturers to end-use customers. There should be little additional budget cost from one 10-year extension versus five 2-year extensions, for example.

To address concerns regarding the cost of future extensions, Congress could couple this long-term extension with a gradual phasedown of the credit back to 1.5 cents per kilowatt hour. MidAmerican has included this proposal in a broader outline of policy

and technology measures designed to address global climate

change.

While access to transportation, transmission, and water supply

are the key factors in locating a conventional power plant, renewables are different. For the most part, we cannot choose where to

locate them. Unfortunately, nature chose to test our creativity in

making use of the resources. If you look at the attached maps in

my testimony, you will see there is almost a perfect inverse correlation between renewable potential and population distribution.

Because of this, transmission becomes a disproportionately larger

component of costs compared to conventional resources, and going

forward, this situation will become more and more pronounced.

Our Iowa projects provide an instructive example here. The first 460 megawatts that we built required $7 million in transmission

upgrades. That translates into about $15.25 per kilowatt installed.

The next 75 megawatts will require about $12 million in upgrades,

or about $160 per kilowatt.

Congress took a number of constructive actions in the 2005 Energy Policy Act to facilitate transmission investment. Taking advantage of these new opportunities, MidAmerican has joined with

American Electric Power in a partnership to invest over $1 billion

in the State of Texas in the next several years. This is primarily

to connect West Texas’s vast wind potential to the State’s population centers.

Do not turn back the clock on these changes. We have noted with

concern that one Senate bill proposes to repeal the shorter depreciation schedule provisions of EPAct 2005.

One of the key reasons that MidAmerican and AEP chose Texas

for our transmission partnership is that Texas law promotes infrastructure investments to serve renewables through CREZes, or

Competitive Renewable Energy Zones. We have seen a number of

proposals circulating in Congress to replicate these zones on a national level, and we encourage you to take a look at these proposals.

So, in summary, renewable energy can play a vital role in allowing the United States to meet its twin challenges of enhancing energy security while promoting a cleaner environment. Congress

must provide long-term certainty for the financial incentives and

promote tax and regulatory policies that support investment and

transmission to achieve this goal.

Thank you for providing me the opportunity to speak today, and

I will be happy to answer questions as well.

The CHAIRMAN. Thank you, Mr. Raba.

[The prepared statement of Mr. Raba appears in the appendix.]

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The CHAIRMAN. Mr. van’t Hof?

STATEMENT OF JOHAN VAN’T HOF, CHIEF EXECUTIVE OFFICER, TONBRIDGE CORPORATION, TORONTO, ONTARIO, CANADA

Mr. VAN’T HOF. Chairman Baucus and members of the committee, I am Johan van’t Hof, CEO of Tonbridge Power, a publicly

traded development company that intends within the next couple

of months to begin construction on a 200-mile, 240-kV merchant

power line between Lethbridge in Alberta and Great Falls in Montana.

Senator Baucus, I am especially pleased to be testifying before

you because of your well-deserved reputation in Montana, in Canada, and internationally for promoting innovative and actionable

solutions to tough problems, and that is what I think our line does.

I would also like to commend the State of Montana and Governor

Schweitzer for a can-do approach to supporting good projects.

The Montana Alberta Tie Limited, or ‘‘MATL,’’ as I will call it,

is unique because it is the first international transmission line connecting a State and a province otherwise unconnected. It is a merchant line that will provide a valuable complement to the traditional utility lines. It is the enabling infrastructure that will allow

renewable and increasingly essential energy to flow from Montana

where it is generated to serve native Montana load and meet demand in other areas.

The Senate Finance Committee is uniquely positioned to identify

and adopt policies that make clean and renewable energy supplies

feasible, as well as the policies that allow construction of the transmission highway on which green energy—and all other supply-side

resources—depends.

Green highways. Our goal is to take MATL from initiation to

completion in 21⁄2 years. This is nearly unprecedented for a transmission project, but is absolutely critical given North America’s

projected need for supply and transmission infrastructure. After its

2008 in-service date, the MATL line will be able to transmit 300

megawatts in and out of Montana. It will, thus, make a solid contribution to enhancing cross-border trade in energy and provide additional sources of stability to our respective grids. Importantly, it

also serves as a critical collection system for 600 megawatts in new

wind farms in Montana. In fact, all of the generators which currently have capacity contracts with MATL are wind projects. It is

not an overstatement to say that MATL is a ‘‘green highway.’’

As we have tackled the numerous issues associated with this

project, we have learned some lessons that are extremely germane

to the issue facing us today. How can transmission be developed

optimally and congruently with the timelines for generation development so that essential and environmentally friendly supply can

be developed and reach customers?

Almost every observer of the power sector today would concur

that new transmission development has badly lagged the growth in

general, the growth in load, and the need for transfers of energy

between markets. We are like a continent of two-lane roads with

too few interstate highways, and the highways we do have do not

interconnect us very well. The lack of adequate investment in

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transmission has led to inefficient investment decisions, regional

power prices that are often too high, and reduced reliability.

In fact, the United States Department of Energy has been sufficiently worried that it authorized a study of transmission congestion which identified areas where wind generation would require

new transmission investment. Montana and the Northwest are one

of five areas of significant congestion. Further, the North American

Electricity Reliability Council recently released an important study

of the reliability of North America’s power systems. Capacity margins are forecast to decline, while the need for transmission will

grow, with the need for new transmission to support diverse

sources. In sum, congestion will only get worse, and action is required to support investment in new transmission.

Transmission has lagged in part because linear projects are harder to permit and build than single-site facilities. In addition, there

are important challenges with factoring in positive externalities of

transmission investment and coordinating transmission planning

and investment among numerous parties. An important contributing factor has been the lack of commercial incentives in this

area. This is potentially true, although in somewhat different ways,

for utility-sponsored transmission and for merchant projects such

as MATL. Few competitive generators today contemplate an investment that requires a decade to develop, yet timelines like that are

now considered standard when it comes to developing transmission

projects. Were MATL on a 10-year plan, my investors would wish

me well and take their capital somewhere else other than a transmission project on the High Plains of North America. Their expectation is 2 years.

Lessons learned and possible actions. Our views—and they continue to evolve—are as follows: one, the value of stimulating all

kinds of transmission investments, particularly for renewable electricity projects, is something we should look at; we need incentives

for landowners to enhance the value of making rights-of-way available; three, we need commercial solutions to the problems associated with integrating renewable generation into utility operating

areas.

Stimulating transmission investment. The problem: As the demand for renewable energy, most notably wind and small run-ofriver hydro, grows, it becomes increasingly evident that the existing transmission grid was never built to connect these particular

areas. To effect the ‘‘greening’’ of power will require not only many

new environmentally appropriate generation projects but also a significant new wave of transmission development.

The solution: I believe that the tax incentives granted to renewable energy projects should be extended, on a pro rata basis, to the

investment in the transmission systems that the renewable energy

projects require.

Secondly, providing win-win right-of-way incentives to landowners. The problem is transmission developments are often blocked or

delayed by opposition to new rights-of-way. Unless rights-of-way

can be assured, transmission lines simply will not be built. Relying

on condemnation, while effective, ultimately pits landowners

against project developers, and we believe it is important to seek

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ways for landowners to share in the benefits of transmission rather

than perceive themselves as the victim.

Our proposal: MATL works hard to address the concerns of as

many landowners as possible. We pay for the right-of-way on a perpole basis. Thus, we have pledged to make annual pole rentals that

reflect the impact on land values and agricultural practices. We

suggest that these payments be made tax free to landowners and

that their property taxes be reduced to partially compensate for the

hindrances a line imposes. The new property taxes that our transmission lines will pay more than make up the difference.

Number three, integrating renewable transmission on a commercial basis. The problem is, renewable energy generation and wind

energy in particular suffers from uncontrollable variability. The

wind does not always blow when the demand rises, and this causes

considerable difficulty for those responsible for matching load and

generation.

In many jurisdictions, the system operator buys ancillary or additional generation to fill the gaps and smooth the cost of that purchase over all users. I will call this the ‘‘socialized solution.’’ This

may be more problematic as wind becomes a greater proportion of

the system.

In Montana, the system operator is asking new wind generators

themselves to firm their own wind generation profile, either by providing their own ‘‘firming’’ capacity or by contracting for it. I will

call this the ‘‘privatized solution.’’

The solution: Neither the socialized nor the privatized solution is

optimal in our view. It would be greatly preferable if all energy

generators and loads shared in the responsibility for matching

their planned use of the grid with their real-time use. When imbalances or electric volatility occur, as they always do, both generators

and loads should be encouraged to adjust their use of the grid

through that.

Only thus will the most efficient use of energy arise. Efficiency

lies behind our need for renewables, and we should not lose sight

of that on the way to building a more renewable-based electricity

sector.

Mr. Chairman, I hope that MATL will be a contributor to Montana’s ‘‘Big Sky Country’’ for years to come. I thank you for your

leadership, and I look forward to the committee’s questions.

The CHAIRMAN. I hope so, too. Thank you very much.

[The prepared statement of Mr. van’t Hof appears in the appendix.]

The CHAIRMAN. Mr. Wiser?

STATEMENT OF RYAN WISER, SCIENTIST, LAWRENCE

BERKELEY NATIONAL LABORATORY, BERKELEY, CA

Mr. WISER. Thank you, Chairman, members of the committee.

Thanks for inviting me to testify today. My name is Ryan Wiser.

I am a scientist at Lawrence Berkeley National Laboratory where

for the last 10 years I have conducted renewable energy analysis.

Now, to be clear, I will not be advocating for a specific policy position this morning, but instead will be providing and reporting on

the findings of some recent and ongoing research related to the

18

Production Tax Credit, or PTC, especially as it pertains to wind

power.

In short, this work suggests that there may be significant benefits to both a longer-term extension of the PTC and to certain revisions to the PTC. In other words, given the message from some of

the other speakers this morning, I will most certainly be beating

a dead horse a little bit. Needless to say, there are, however, costs

to the Treasury that do need to be balanced against these possible

benefits.

To begin, let me say that the PTC has clearly already helped

drive significant growth in the use of wind power in this Nation.

For example, the United States has led the world in wind power

capacity additions for the last 2 years running. And since the PTC

began in 1994, roughly $13 billion has been invested in installing

wind plants in the U.S., and for the second consecutive year, wind

power has been the second-largest new resource added to the electrical grid here in the United States, after natural gas, with the potential for future growth also being substantial.

Though it is certainly true that some wind development would

occur even without the PTC, both historical experience as well as

recent analysis results have consistently shown that, if this Nation

chooses to harness renewable resources at a significant scale and

on an accelerated basis, then longer-term policy efforts through the

PTC or through alternative policy measures will be necessary.

Since 1999, however, as we have already heard and as you are

well aware, the PTC has expired and been extended on numerous

occasions, typically for 1- to 2-year periods. As a consequence, wind

power expansion has been compressed into relatively frenzied windows of development followed by pronounced lulls in the 3 years in

which the PTC has expired. These boom-and-bust cycles in renewable energy development have led to underinvestment in domestic

manufacturing capacity and variability in equipment and supply

costs.

Given those circumstances, I would like now to discuss some key

findings from some recent research that has investigated some of

the possible shortcomings of the current boom-and-bust cycle, as

well as some of the possible benefits of a longer-term, 5- to 10-year

PTC extension.

First, we find that uncertainty in the future availability of the

PTC may and is undermining industry planning, leading to lower

levels of wind energy development than would occur if the policy

had a more stable footing. In fact, other countries have already

made strides towards using substantial amounts of wind energy by

choosing to establish aggressive, longer-term policy commitments.

Denmark, as an example, meets roughly 20 percent of its electricity

needs with wind power, while Spain is currently at 10 percent and

Germany is at 7 percent. The U.S., despite having a much more robust resource, currently meets less than 1 percent of its electricity

needs with wind.

Second, uncertainty in the future scale of the U.S. wind power

market has, so far at least, limited domestic wind turbine manufacturing. Instead, we remain heavily reliant on wind turbines and

components manufactured in Europe and, perhaps in the future,

increasingly in Asia and China as well, with only about 30 percent

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of the average cost of wind projects currently being installed in the

U.S. sourced or manufactured domestically. Many in the wind industry, on the other hand, expect that with a 10-year PTC extension, you might be able to increase this domestic manufacturing

share significantly to roughly 70 percent, bringing with it jobs and

local economic development benefits.

Third, perhaps somewhat less recognized as well, a longer-term

PTC extension may result in both higher levels of private sector

wind power R&D and greater investment in the transmission infrastructure needed to serve wind for reasons discussed in my written

testimony.

Fourth, and maybe most importantly, there is reason to believe

that the current boom-and-bust cycle is increasing the cost of wind

power. Wind project costs in this country have decreased substantially from the early 1980s to the year 2002, but since then have

risen. Recent research, however, shows that cost reductions of perhaps 15 percent may be possible under a long-term PTC extension

relative to a continuation of the current 1- to 2-year extension

cycle, with those savings expected to come in part from greater investments in supply chain infrastructure and manufacturing domestically, as well as reduced transportation costs.

Finally, in addition to describing some of these possible benefits

of a longer-term PTC extension, my written testimony does identify

for your consideration several different elements of the design of

the PTC that may deserve a close look in your deliberations.

Though I do not have time to discuss those in any detail this morning, they include: first, the PTC’s credit offset or anti-doubledipping rules, which effectively make less valuable other State and

Federal incentives provided to renewable energy, including, importantly, the USDA farm bill section 9006 grants; second, the somewhat narrow applicability of the PTC and ways to provide equivalent value to investors that are unable to take advantage of the

PTC as it is currently structured; and third, and finally, ensuring

that, if so desired, the PTC as well as other Federal tax incentives

benefit not just large-scale wind projects but also other renewable

projects as well.

With that, Mr. Chairman, I conclude my statement. I do hope

this information proves useful, and I would be happy to answer any

questions that you might have.

[The prepared statement of Mr. Wiser appears in the appendix.]

The CHAIRMAN. Well, thank you all very much.

The real question facing this committee is how to design it in a

way that makes the most sense as extending the Production Tax

Credit. We have certain budget restrictions here, but we also want

to make the Production Tax Credit work a lot better than it currently has, and the main problem being the up-and-down effect, on

and off and so forth.

So my question of you is the degree to which we could accomplish

our objectives here generally by making the Production Tax Credit

say 5, 6, 8 years or so forth, but phased down over time, and also

the degree to which—I think one of you mentioned some intermediate—I think you did, Mr. Krenicki—steps, I guess benchmarks

of some kind.

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So I just would like it if you could give us some advice as to how

we can tailor it and redesign it in a way that meets the basic objectives that we are all trying to accomplish here, but in a way that

helps us meet our budget constraints. In the past, we have just

these basic extensions. That has been kind of a shotgun effect, really. It has not been really tailored as well as it probably could be.

So your thoughts of what do we need to do here, what is the bottom line, and how would you design the bottom line here? Anybody

who wants to take a crack at it, go ahead.

Mr. KRENICKI. Well, I would say it is a three-part answer, and

it really starts with the debate on carbon policy for the country,

and energy security. I think the PTC has been proven to be very

effective on driving wind forward, but I think it needs to be married with State and Federal renewable standards.

The CHAIRMAN. Like portfolio standards?

Mr. KRENICKI. As that evolves, and then also on a bit of a longerterm basis, how does this all fit with the desired footprint of the

country and where that debate ends up. I think wind is a big part

of the answer.

The CHAIRMAN. Senator Bingaman, Chairman of the Energy

Committee, is here. I know he is working on portfolio standards.

How would you ideally marry the two or coordinate, say, portfolio

standards with the Energy Committee and the Production Tax

Credit, say, in this committee?

Mr. KRENICKI. I think maintaining the Production Tax Credit for

a period of time and then transitioning to perhaps renewable

standards at the State or Federal level from our perspective is a

workable option.

The CHAIRMAN. Why wouldn’t you just continue the Production

Tax Credit, say, 10 years to give incentives for production?

Mr. KRENICKI. That is certainly an option as well, but then it

comes back to the cost. And so that is just a view from our perspective. But in States where there are renewable standards, we see

that being effective as well. I think part of the debate will be the

time required for a fundamental discussion around fairness and

who has the resources, and that is something I think is best addressed by the Energy Committee.

The CHAIRMAN. All right. Anybody else here?

Mr. WISER. Well, if I might just jump in very quickly on the latter question, the issue of how to have Renewable Portfolio Standards (RPS) policies and Production Tax Credits integrated.

The CHAIRMAN. Right. That is the basic question.

Mr. WISER. I would just provide one piece of information, and

that is, it is quite clear based on State RPS experience that there

are teething problems or that there can be teething problems in the

design of RPS policies, especially in their early years. And so I do

think that a transition during which both are operating simultaneously could make a lot of sense, given those teething problems

that we see at the State level and the fact that it often takes several years for at least the State-level RPS policies to have really

gotten off the ground and drive new resource developments.

The CHAIRMAN. What about national RPS standards?

Mr. RABA. Well, Mr. Chairman, I would just comment, relative

to a national RPS standard, it can certainly be done, but it has to

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be done very carefully. You have to take into account the wind regimes, the ability of one State to generate wind versus another,

and MidAmerican has offered that as part of kind of a broader

package that says put a national RPS in place over a certain period

of time, connect it back to the Production Tax Credit. But, again,

there has to be a pretty robust debate on the rules around not

disadvantaging one State versus another.

The CHAIRMAN. Could you give me a better idea, just if I understand you correctly, there are greater incentives in Europe? Is that

true, basically? Or is that not true?

Mr. RABA. Certainly the manufacturers that we are working with

are telling us the environment in Europe is more healthy right now

on a long-term basis to sell their product in versus the U.S. And

I think a lot of that has to do with that boom-and-bust cycle.

Mr. KRENICKI. As a manufacturer, this year we will manufacture

a little over 2,500 wind turbines; 2,000 will go to the U.S. And I

just think Europe is certainly bigger because they have been at it

longer in a more consistent fashion, but the U.S. is gaining. So the

2-year PTC that is in place is, you know, preferentially serving the

U.S. market now.

The CHAIRMAN. Where are we in the technology curve and improving the efficiency of turbines?

Mr. KRENICKI. What we look at is capacity factor, and in the past

few years, 3 to 4 years, it has improved about 11 percent. It is in

the mid-40s now, and a 1-percent increase in capacity is equivalent

to the electricity production to power 90,000 homes. So the technology is moving very quickly.

The CHAIRMAN. And you think there is considerable potential for

additional improvements? Or have we kind of topped out a little?

Mr. KRENICKI. There will be a theoretical limit just based on a

propeller design, but there still is room for improvement. I also

think there is lots of opportunity to maximize the reliability of

units, the availability, and the grid interconnection. So I think

wind is still a significant technological upside.

The CHAIRMAN. When I was a little kid growing up on the ranch,

we used a little windmill. Maybe it powered a light bulb, not much

more. Then I went into one of the turbines that is in Montana, and

I was stunned at the sophistication of the turbine, how computerized it was. It was really something.

Mr. VAN’T HOF. Mr. Chairman, I can give you the experience of

the developers on our line who are all wind developers and the

need for the Production Tax Credit to them. It is absolutely the

sine qua non, without which their projects would not proceed. They

use it for two reasons: one is to either drop their prices so that they

are competitive with old coal and old transmission costs, because

the market is looking for $40 to $50 per megawatt hour. The gentleman to my right is quite right that it is $70 to $80, wind, without the PTC. So they are not competitive in the market selling that

way. Or they use it to sell off and drive the equity of their projects.

There are only four or five major developers in the United States

doing wind projects. There are a number below that who do not

have the heavy balance sheets, and without this, these projects

would not proceed.

22

The CHAIRMAN. One quick question, and then I am going to have

to leave and Senator Grassley can take over here. How do you suggest we put the firm power together with the intermittent power?

Mr. VAN’T HOF. I can tell you vicariously, because we are not a

wind developer and we cannot be under the FERC rules, but we

have customers who are wind developers. There are really two

things. One is that the studies seem to show that up to 10 percent

wind portfolio, the systems can diversify out the variability and

cope. Above that, they start to have issues.

In our particular project, our wind developers are being asked by

the two system operators in Canada and in the United States,

NorthWestern Energy, to firm up their wind and to take that cost

under their own financial statement, and basically that means that

they have to have back-up generators, reciprocating gas units, or

they have to buy ancillary services in order to firm up their wind

so they have a firm profile.

Our northbound shipper has to come into Alberta firm on the

hour, and so it is quite a—the old mechanism of just, you know,

I will put wind into the system and let the system operate or diversify it out by load and so forth, as the penetration gets higher and

higher, this concept of firming is becoming more and more relevant,

because, otherwise, you get control area problems, you get fluctuation in frequency and so on.

The CHAIRMAN. Right, and you are finding not too much resistance to that requirement?

Mr. VAN’T HOF. There is some resistance because it imposes an

economic cost on them. Having said that, firm wind power sells for

more than unfirm wind power. There is also a capacity factor increase. When you have a reciprocating gas unit beside a wind farm,

they can actually bid higher because they know the gas units will

back them up if the wind is not there. So they actually can get a

3-, 4-, 5-percent capacity factor increase. So the economics do blend

out, but it is a mind-set. The view at the moment from many wind

developers is that it is for the system operator to figure out, and

the system operators are pushing back.

The CHAIRMAN. Thank you very much.

Mr. RABA. Mr. Chairman, if I could comment on that as well,

since MidAmerican is a control area operator and we have operated

upwards of over 15 percent of our load in wind. Certainly part of

it is the education process. Having utilized wind now for a couple

years, the longer we go in operating higher percentages of wind,

the better we get at managing it. And as part of a portfolio, at this

point we are pretty comfortable with upwards of 15 to 20 percent

of our capacity in wind and being able to manage it accordingly.

We have some advantages in Iowa because, frankly, our weather

is pretty predictable. The ability to forecast the wind is important.

Forecasting tools are getting better; our dispatch tools are getting

better; and the ability to manage the dispatchable load with the

wind, we are getting better and better at it. So I think there are

some positives on the horizon relative to the obvious.

Two years ago if you had asked us, we would have said 10 percent, we would start getting nervous, and we are getting more and

more comfortable.

23

Mr. VAN’T HOF. And that, Mr. Chairman, is consistent with our

experience. The experienced system operators are getting to 15 to

20. The inexperienced are stuck at 10 and not getting beyond there.

The CHAIRMAN. So, bottom line, what should this committee do

about renewables? You like the Production Tax Credit. Is that

right?

Mr. VAN’T HOF. Yes.

Mr. RABA. Absolutely.

The CHAIRMAN. And it should be continued a longer period of

time.

Mr. VAN’T HOF. And something for the landowners.

The CHAIRMAN. And do you mind if it is phased out?

Mr. RABA. Well, we do not object to phasing down. I think that

is a function of how the technology plays out. And I know it is kind

of a chicken-and-egg thing.

The CHAIRMAN. It is.

Mr. RABA. You pick a number, and, you know, from the view of

a regulated utility, what is important to us is that, by requirement,

our regulatory environment says we file what our costs are going

to be and what the impact on our customers is going to be, and we

take that economic decision into account. And without the PTC and

the basic assumptions associated with it, the economics fall apart.

So I realize the difficulty that you have in trying to predict how

to phase that number down, but the bottom line is, without it currently and based on our current forward projections over the next

couple years, if you are not at that PTC level, you cannot make the

economics work.

The CHAIRMAN. Well, I appreciate this. I think I can speak for

this committee and Congress and say that renewables are more important now to this body than when we last renewed the credit,

and we are going to try to figure out a way to make it work really

well, cognizant of the costs, but we are going to do our very best.

Thank you all very, very much. I appreciate it. I am going to

have to leave. Senator Grassley is going to take over.

Senator GRASSLEY. Mr. Raba, you presented a very interesting

comparison in the price of transmission upgrade expense measured

per kilowatt hour. MidAmerican has had 460 megawatts of wind,

and those transmissions have cost $15 per kilowatt. But the next

70 megawatts required transmission upgrades of $160 per kilowatt.

Could you discuss in more detail the price volatility in the transmission upgrades?

Mr. RABA. I can, Mr. Senator. A couple of items.

First, part of that increase is certainly raw materials. I think we

all recognize that raw material costs have increased particularly

over the last 2 years, so it is partly driven by that, but more so

it is driven by location and accessibility to the transmission.

When we look at sites for wind development, one of the key factors that we look at is the condition of the transmission system and

the distance by which we have to interconnect with the transmission system. Obviously, you balance the transmission costs associated with the distance to get there and the upgrades you have

to do with the wind regime itself, how well the wind blows in that

given geography. And you balance those two things together and

pick the most attractive site accordingly.

24

For every site you pick, what is left is a less attractive alternative, either on the availability of the wind itself or the availability of the transmission itself. So as we continue to develop

projects, I would anticipate some combination of the wind regime

being less attractive and the transmission costs being more exorbitant as a result. And that is exactly what we found between the

first 460 and the next 120, and I am sure the next 500 will—you

know, as we look at those sites, we find that same phenomenon.

Senator GRASSLEY. Do you have something you want to add? Go

ahead.

Mr. VAN’T HOF. Yes, Senator. I would also add that in our experience, we have the most benign land to go over. We are not cutting

down one tree, and we are about $300,000 a mile. We have very

significant substation costs. We have phase-shifting transformer

costs. So we are about $140 million for a 200-mile line.

What we are finding is that our costs today, which are current

costs, are being compared to the regulated cost, which is 1985 or

1975 or 1965 costs, so that the regulated rate base rate is a 20-

or 30-year-old cost which is now being compared to the current cost

of building today. And so there is a sticker shock. It is a lot like

buying a care in 1979 and then buying another one today.

Senator GRASSLEY. Mr. Raba, without going into a repeat of all

the things that you had to go through to meet the deadline of

placed-in-service, would you discuss in more detail the uncertainties of meeting such short placed-in-service deadlines like shipping

from overseas and transportation and equipment shortages, any

additional expenses?

Mr. RABA. I would just say that we do our best to negotiate

agreements with both the turbine suppliers and the contractors

that are doing the construction to take on as much of that risk as

is prudent for them. So we have pretty sophisticated contracts in

place in order to incentivize each of the folks in that chain to perform according to the appropriate schedule. So that is certainly

part of it.

Having said that, it certainly brings an element of risk into the

equation. As I said, in the State of Iowa we have a pretty good regulatory environment where we do ratemaking principles up front,

where we will set a cost cap and we will take on the risk associated

with that cost cap above and beyond that. And if we do not meet

those cost parameters, then the company takes the financial hit.

So there is an element of risk, and, you know, one of those key

elements of risk is, as I said, the potential for the PTC to expire

at a given point in time where, if you do have a shipping delay that

could cause you to miss that date, obviously the financial implications are pretty severe.

Senator GRASSLEY. Mr. Krenicki, you spoke of the Department of

Energy’s goal of generating 20 percent of the U.S. energy electricity

from wind by 2030. The Ambassador of the EU said the target was

21 percent of renewables by 2010. What can the United States do,

if anything, to meet our goals of 2010 like the EU?

Mr. KRENICKI. There are only very few countries in the EU that

will hit that objective as well by 2010, but, given that we are at

roughly 1 percent today, it is virtually impossible to get there by

2010.

25

But just to even put the DOE’s goal in perspective, it will require

us to ship a wind turbine every 15 minutes out of our manufacturing facilities for that current goal. So, again, I think the biggest

thing we can do is have longer, stable public policy, and then that

will drive investment in a supply chain to allow us to ship more

frequently than every 15 minutes.

Senator GRASSLEY. Senator Bingaman?

Senator BINGAMAN. Thank you, Mr. Chairman. Thank you all for

your good testimony. I think it is very useful.

The one real concrete thing that we can get done here in this

committee, I think, on this Production Tax Credit is to redesign it,

extend it but redesign it in a way that makes more sense. The way

it now operates, I think we have this 2-year Production Tax Credit,

so you have to have everything in service by the end of—what is

it now?—the end of 2008 in order to get 10 years of tax credit from

the date that you put the facility in service on. You get 10 years

of tax credit.

I think, Mr. Krenicki, you pointed out that, if we just do a 5-year

extension, then maybe you will have a dip in the amount of investment in new wind projects for a few years because everyone will

be looking at that 5-year deadline and saying, well, we can wait,

we do not need to make a decision yet. So you have a few years

of slack time, and maybe that is another version of the boom-andbust, even though we would have a commitment to a long-term future.

Is there a solution to that? How do we redesign it and say, what

if we just eliminated the date-in-service provision in the law and

just said for the next 10 years you have a Production Tax Credit?

If you get started right now, if you put your—or even 15 years, if

you put your facility into operation now, you can keep it going for

a period, and if you wait until 5 years to the end of that period,

you have less of a tax credit?

Mr. KRENICKI. I just see two potential issues. The first is, in

order to optimize the supply chain and get more output and lower

cost, you need level loaded production. So how does the tax policy

drive that behavior? Because that will allow people to make major

manufacturing investments on a very large scale.

The second thing to be cautious of is having units go into storage

versus actually being put in service, which is, I think, the desired

effect of getting the power on line and perhaps creating—getting

the CO2 benefit as well.

My major concern is really the level loading and manufacturing

facilities.

Senator BINGAMAN. Mr. Wiser, did you have a thought as to how

we could structure this thing so as to—I mean, the way it seems

to be structured right now, it has this sort of perverse result. What

do you think?

Mr. WISER. Well, I think the Treasury concern combined with the

fact that a longer-term extension has the possibility, if it does result in stable industry growth, to drive costs down somewhat does

suggest, to me at least, that over a longer-term basis that some

level of reduction in the PTC certainly is plausible.

I would like to raise a little bit of caution on that, however, and

that is that, again, over the last 4 years, we have seen pretty conVerDate 11-MAY-2000 16:19 Aug 20, 2008 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 43872.000 SFIN1 PsN: SFIN1
26

siderable increases in the cost of wind. Most of that has come from

the increased cost of wind turbines—manufacturing, delivery, and

installation. That cost increase makes it ever more important to

have the PTC at a higher level than at a lower level. So I think

the key caution that I would provide is that, sure, it is useful to

consider reductions in the level of the incentive over time for a variety of reasons. But if you do so too quickly, it does run the risk

of really halting the industry in its tracks just when it is ready to

explode.

Mr. VAN’T HOF. Senator, at a micro level—because I deal with

project developers doing 600 megawatts of wind—it is not possible

to find land, do the anemometer data, get banking, permits, leases,

turbines, order turbines and then have them installed and delivered in 2 years. You are looking at 3 to 4 years if you are really

good at it.

And so for somebody to make a decision about getting into a

project and then meeting a timeline for having the PTC available

to it, it is a 3- to 4-year cycle. There are about 13-, 14-month delivery delays now with most of the suppliers, and so 2 years is not

enough time for anybody to get a project on the ground.

Senator BINGAMAN. Let me just ask, we have talked mainly

about wind here. There is some testimony in here about how—I

think, Mr. Wiser, you point out, I believe, that some other types of

renewable energy resources really require longer terms and a different kind of a tax credit. We have sort of a similar Production

Tax Credit, whether you are doing solar, whether you are doing

wind, whether you are doing whatever, in the definition that we

covered.

Should we have a different one for solar? Do any of you have

enough knowledge of that to give us good advice there?

Mr. WISER. I guess I could jump in here quickly and say, first

of all, the PTC currently does not apply to solar. Solar receives a

separate investment tax credit, as you know. I think that for the

other technologies that are currently eligible for the PTC—biomass

and geothermal being the two most obvious ones, and as others on

the panel mentioned earlier, the placed-in-service deadline is a real

barrier for wind. It is a huge barrier for these other technologies

because their development time frames exceed the 12- to 24-month

extensions that we have seen recently.

So while a placed-in-service deadline extension, a longer-term extension of the PTC, would certainly be valuable for wind, I would

say that it would even be more valuable for some of the other technologies.

With respect to solar, solar does now receive an investment tax

credit, which in absolute value is higher than the PTC, which at

least from an analytic basis makes some sense. Solar is still an

emerging technology relative to the more mature wind technology,

and its costs are higher. There is great potential for significant cost

reduction over time, but it does require a slightly different tack,

and I think, appropriately so, Congress has seen fit to apply the

investment tax credit to solar to date.

Mr. RABA. Mr. Senator, I would just add, I mentioned in my testimony the issue with geothermal, for example, is a very significant

issue, because the way that PTC is created now, you actually creVerDate 11-MAY-2000 16:19 Aug 20, 2008 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 43872.000 SFIN1 PsN: SFIN1
27

ate a cliff whereby if you miss the in-service data, then you just

fall off the cliff and you lose all 10 years of the credit.

Senator BINGAMAN. Right.

Mr. RABA. So if there is some way, as we had suggested, to create

a mechanism whereby you would only give up the time that is between the in-service date and the time you actually get it on line

for capital-intensive, longer-term projects like geothermal, that

would certainly be a significant benefit.

Senator BINGAMAN. That is an interesting suggestion, building

that flexibility in with the in-service date.

Mr. VAN’T HOF. Much of the problem, Senator, is that most of

these emerging technologies are trying to find power purchase

agreements and trying to find customers in the market where they

have a competitive market where they are trying to sell and they

are trying to compete against coal and natural gas and hydro and

so forth. And everyone is trying to find 4-, 5-, 6-cent power. Solar

is 45-cent power.

And so I do not know that you can get the tax credits down to

a level where they are going to be able to compete. This is where

you get into having to have portfolio requirements where you have

1-percent solar and 10-percent wind so that there is a smoothing

effect, almost a socialized kind of blending of the thing. If you are

just asking these projects to compete in the open marketplace and

try to find a customer at the costs they are at today, wind is struggling without the Production Tax Credit, and solar will definitely

struggle.

Senator BINGAMAN. Well, thank you all very much. I think we

have run out of Senators here, so we will call it a day. Thank you.

I appreciate your good testimony.

[Whereupon, at 12:10 p.m., the committee was adjourned.]

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