Shock and disappointment over U.S. energy bill

"It's disappointing and surprising. The fact they were able to come together on CAFE and not tax incentives, that just blows me away."

That's how Anders Hove of Two Sigma Investments, a hedge fund, summarized his morning-after takeaway.

By a vote of 65-27 just before midnight last night, the U.S. Senate passed a new Energy and Environmental Security Act, which includes a mandated increase in the use of ethanol and new fuel-efficiency standards.

The act raises the Corporate Average Fleet fuel Efficiency (CAFE) standard 40 percent, from its current 22.7 miles per gallon to 35 mpg for cars, SUVs and pickup trucks by 2020, and would boost biofuels to 36 billion gallons by 2022, seven times the amount of ethanol produced last year.

However, an energy tax package that would have extended production tax credits for the development of wind power and other forms of renewable energy—as well as introduced numerous new financial incentives and offsets—was dropped from the bill’s final version.

Some $32 billion in incentives for renewable energy and clean fuel sources, previously approved 15-5 by the Senate Finance Committee, were to have been mostly paid for by boosting taxes to oil companies or otherwise redirecting oil industry subsidies.

"It is unfortunate that in passing this bill, the Administration and most Senate Republicans blocked an effort to require more of our nation's electricity to come from renewable sources as well as incentives to spur the production of more renewable fuels right here in America," Sen. Harry Reid, D-Nev.

Cleantech industry watchers reached by the Cleantech Group were perhaps a little less political, but just as pointed.

"I was at the Renewable Energy Finance conference yesterday, and I think people were pretty dismayed to hear the wind PTC (production tax credit) didn't go ahead. That's pretty critical to the wind space," said Two Sigma's Hove.

"It's hard to believe, because in the past, tax incentive extensions had been relatively uncontroversial and passed during Republican Congresses."

Other investors tried to find silver linings in what they otherwise characterized as a fairly dark cloud.

"Some of the provisions that were passed will help accelerate innovation in energy efficiency and energy storage, such as funding for lightweight materials research and development for vehicles. However, the loss of tax incentives was disappointing," echoed Chris Erickson of venture capital firm Pangaea Ventures.

Investors generally do not believe incentives in renewable energy are appropriate over the long term, but the demand they stimulate in the near term helps them justify investments.

The solar industry, in particular, had been expecting the extension and improvement of substantial investment tax credits. Both the House and Senate Finance Committees' draft tax packages were favorable to the solar industry.

Today, the U.S. Solar Energy Industry Association (SEIA) trade group said it was still optimistic that the government's support for solar would ultimately translate into long term meaningful policy.

"We have a strong and vocal group of solar champions in Congress," SEIA spokesperson Noah Kaye told the Cleantech Group.

"Senator [Harry] Reid and Finance Committee Chairman [Spencer] Bachus have promised that they will address the energy tax package issue in this session. SEIA is currently working with our allies to determine next steps."

A wind industry spokesperson was similarly distressed but optimistic.

"A minority succeeded in killing a pro-renewable energy tax package that had strong support on both sides of the aisle," said Christine Real de Azua of the American Wind Energy Association.

"Congress should seize every opportunity to rectify these omissions as it continues to work on the bill."

The House is working on its own version of the bill. But it could be the end of the year before it hammers out final legislation and a final energy bill reaches the president's desk, analysts said.

The White House has threatened to veto the bill because of language aimed at prohibiting price gouging by oil companies.

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