Certainly, the Energy Policy Act of 2005, may generate some confusion. Nonetheless, the Feds have unleashed $14 billion worth of legislation that will accelerate the growth of distributed energy industries such as solar, wind, and fuel cells. Additionally, it will have a substantial -impact on related areas such as research, development, con-servation, and energy management.

In terms of breakthroughs, the fuel cell and solar industries turned out to be the biggest winners. For the first time in history, both received federal investment tax credits of 30%. For fuel cells, the credit covers up to $1,000 for each kilowatt for the purchase of fuel-cell power plants. FuelCell Energy, one of the industry's leading manufacturers, estimates that the credit will equate to savings of roughly $0.015 to $0.02 per kilowatt-hour in typical installations. The savings could contribute a 20% to 25% cost reduction in the purchase price of FuelCell Energy's products.

The energy bill also targets some specific areas of fuel cell applications. It offers a production tax credit of $0.015 per kilowatt-hour for fuel cells operating on biomass renewable fuels such as digester gas from wastewater treatment plants, and it specifically includes telecommunications carriers among the eligible end users for the tax credit. That's good news for Plug Power.

The company recently announced an order for 35 of its 5-kW GenCore backup fuel-cell systems from its distribution partner, Tyco Electronics Power Systems Inc., for deployment to the same major US—based telecommunications provider. "We believe the tax credit will substantially strengthen GenCore's product value proposition by providing GenCore customers an opportunity for a $5,000 savings," says Dr. Roger B. Saillant, president and CEO of Plug Power.

Energy policymakers demonstrated their faith in fuel-cell technology through the authorization of $3.7 billion for hydrogen and fuel-cell research and development, demonstration, and market transition over the next 10 years. Details include enhanced public education and university research in fundamental sciences, application design, and systems concepts for materials, subsystems, manufacturability, maintenance, and safety. There is even a directive to the Energy Secretary to transfer critical hydrogen and fuel-cell technologies to the private sector and to foster the exchange of non-proprietary information.

Unlike the fuel-cell industry, the solar industry doesn't have the same worries about technology transfers. Their main concern is federal subsidies. So when the Solar Energy Industries Association (SEIA) pronounced the bill's passage as nothing less than "...the strongest national policy for solar power in two decades," there was good reason. The praise is based upon the key element the SEIA lobbied intensively for—a two-year investment tax credit of 30%, capped at $2,000 per each solar technology used on a residential project, but uncapped for commercial projects. Pool heating is -excluded from both categories.

The federal credit is a first for residential solar, and includes PV and solar domestic water heating. Businesses fared better in the past, with a 10% credit available on PV, concentrating solar power, solar hybrid lighting, and solar domestic water heating. In either market, the credit applies to the balance remaining after any state or utility incentives.

The new incentives should make for a more persuasive financial sales pitch from purchase power agreement providers such as Solar Integrated Technologies and SunEdison. "This improves the incentives for solar energy and helps us more than it does other firms," says Jigar Shah, CEO of SunEdison. "We had already raised this $60 million fund and to the extent that the incentives are increased, it allows us to do a lot more of the projects that are on a waiting list because we couldn't be sure we could finance them, but now they are getting into the pipeline."

It's not clear yet how the credit will apply to add-on systems for existing solar projects, or for used equipment. But ultimately, the incentives are a welcome boost. Even though the SEIA estimates that wholesale prices for PV systems have dropped from $5.31 a decade ago, to $3.60 per watt today, the industry still -depends upon subsidies.

The same can be said for the wind industry, and wind received the same length of time—a two-year extension on its $0.019 per kilowatt-hour production tax credit (PTC), over the first 10 years of operation. The current PTC was set to expire at the end of 2005. "This is the first time that an extension of the production tax credit for wind energy has been approved before the credit expires," notes AWEA executive director, Randall Swisher. "Following the past six years of boom and bust cycles caused by successive expirations, that is very good news for the industry." The AWEA expects about 2,500 MW of wind power projects in the US for 2005, and estimates a financial investment value of more than $3 billion for the projects, and continued momentum through 2007.

The microturbine industry fared almost as well. The bill contains a 10% tax incentive for businesses to buy microturbine generators. Additionally, it offers users of microturbine energy systems direct payments from the DOE for every kilowatt-hour they -generate.

According to John R. Tucker, CEO of Capstone Turbine Corp., his company estimates that the return on investment of a typical Southern California installation of its microturbines would be as little as two years, with applicable state and the new federal incentives. Payback would be about three years without the federal incentives. In New York, the company estimates that the return on investment of a typical installation would be reduced from three years to 28 months.

More boosts for the sales of microturbines include: a $0.015 per kilowatt-hour renewable energy production credit for biogas fueled installations, a requirement that electric utilities offer grid interconnection based on a nationwide standard, as well as other incentive programs to accelerate distributed generation and -combined heat and power.

In general, these industries can benefit from the extension and modification of renewable electricity production credit, as directed in Section 45 of the IRS code (www.irs.gov/irb/2004-17_IRB/ar09.html). The production credit is for companies that produce and sell electricity commercially. The provision extends the "placed-in-service date" by two years (through December 31, 2007) for qualifying facilities in wind, closed-loop and open-loop biomass, geothermal, small irrigation power, landfill gas, and trash combustion facilities. Hydropower and Indian coal were added as new qualifying energy resources.

The legislation addresses more than just coal and hydropower for Indians, a group that has a history of distributed energy usage. The Indian Tribal Energy Development and Self Determination Act assists tribes in the development of multiple energy resources. It provides grants, low-interest loans, loan guarantees, and technical assistance. For example, the DOE has been authorized to develop a loan guarantee program that directs the Energy Secretary to give priority to any project using new technology, such as renewable energy—based electricity generation.

The use of biomass from federal or Indian lands is encouraged by the creation of grant programs to produce electric energy or heat from biomass and to improve biomass utilization technology. To attract outside partners, the approval process for tribal leases, agreements, and rights of way have been streamlined.

The bill also streamlines multi-million dollar financial deals for an entirely different segment of the power market—the electric utility and gas industries. As in the case of net metering, the policies and actions of these industries have a direct affect on distributed energy. According to Ken Hurwitz—a former executive director of the Maryland Public Service Commission and currently the leader of the Energy and Power Practice Group for Haynes and Boone LLP, one of the largest corporate law firms in the country—the bill will encourage billions of dollars of new capital to pour into the electric and gas industries, and will lead to a wave of utility mergers and acquisitions unseen since the 1920s and 1930s.

The bill removes a long-standing restriction to investment by non-utility businesses in the electricity and natural gas industries. Now, the utilities are fair game for private equity funds, large manufacturing companies, and investment banks. In addition, geographic limits to the size of electric and gas utilities have been eliminated.

Hurwitz expects the changes to unleash a tidal wave of new gas and electric utility acquisitions and mergers, such as Warren Buffet's proposed acquisition of PacifiCorp, Duke Energy's proposed merger with Cinergy, and American Electric Power's acquisition of Central and Southwest.

"There are over a hundred utilities now," Hurwitz explains, "but it's not inconceivable that with the consolidations we could end up with 10 to 20 after 10 years. There's no reason to have a hundred different transmission systems owned by that many different companies. But competitive people will say this is a terrible deal with just a few monoliths, and the American Public Power Association says it will harm competition, but I think there are pros and cons."

One of the pros for distributed energy could come in the form of less biased decisions about the benefits of distributed generation. "If a big investment bank like Goldman Sachs acquires a Con Edison and Con Edison needs to expand or alternatively build distributed generation, an owner like Goldman might be that much more likely to force the utility to take the most efficient and economical solution," says Hurwitz. "While perhaps the current ownership that is not acting so much in a competitive world might not be as prone to do that."

Obviously, distributed energy must continue to prove itself in a competitive world, the Energy Policy Act of 2005 certainly offers tax incentives that will help. When combined with continuing state programs, the next two years bode well for continued growth in distributed energy technologies. And especially for the subsidy dependent solar, wind, and fuel-cell industries.

Moreover, distributed energy's ties to clean energy were strengthened by the positive impact the incentives have had on financial markets. At the time of the bill's passage, the WilderHill Clean Energy Index, representing clean energy stocks, experienced an increase of $2.44, for a high of $171.69. All told, the index has raised a total of $23.84 since June 2005, when the senate demonstrated that it was serious about passing the legislation. So, along with the direct results of incentives, it's likely that there are many more secondary benefits coming in the near future. DE

ED RITCHIE is a writer specializing in energy, transportation, and -communication technologies.

DE - September/October 2005