While United States and Chinese diplomats are working to forge cooperation between the countries on climate issues, the Chinese government’s huge clean tech investments may help that country pass the U.S. as the worldwide clean technology leader.  Could this “competitiveness crisis,” as one group terms it, have implications for the U.S. economy and the clean tech industry?  The results of this global race for dominance in the cleantech sector could significantly impact not only the national economy, but also the condition of the global environment.

Chinese Energy Investments

The Chinese are investing approximately 3% of their GDP on cleantech and renewable energy, as compared to less than half a percent of GDP in the U.S.  During early summer, the Chinese government floated plans to spend at least $440 billion in another stimulus package-all of that money going toward new cleantech investment.

The Chinese government also set a number of demanding goals for renewable energy and clean tech production and installation, including-

• Increasing renewable energy production from wind to 150GW by 2020, from an earlier goal of 100GW, and solar production from 1.8GW to 20GW by the same year
• Increasing production of plug-in hybrid electric vehicles to 500,000 by the end of 2011, up from 2,100 in 2008
• A raft of transportation spending initiatives and policy reforms, including $1 trillion for increased railway infrastructure, tax programs to incentivize the purchase of fuel-efficient cars and increased fuel economy standards
• Strict energy-efficiency standards in building codes, home appliances and amongst China’s top 1000 energy consuming businesses.

China is also moving full speed ahead in the race to dominate nanotechnology research, a likely source for many of the cleantech industry’s future breakthroughs.  These investments, combined with what some see as a willingness to use border measures and anti-competitive bidding practices to discourage foreign participation in the Chinese cleantech market, position Chinese manufacturers to be a dominant player in the global cleantech market.  Indeed, China’s rise in the cleantech space has prompted some U.S. analysts to question the wisdom of investing in domestic cleantech manufacturing capacity, versus simply ceding manufacturing to China and focusing on domestic installation of less expensive Chinese equipment. 

When Cleantech Doesn’t Mean Cleanup

While China has made significant strides in cleantech investment and implementation, it has continued to resist international calls for binding emissions caps or reductions.  Instead, citing its prerogative as a developing nation, China has focused its pledges on reducing energy intensity-a measure of carbon emissions in relation to GDP.  This poses several challenges for international efforts to stabilize carbon levels.  First, with China becoming the world’s largest net emitter of CO₂, internationals effort to freeze global emissions will be an exercise in futility without China (and other large developing countries) making binding commitments.  Second, even under China’s current emissions-rate based goals, China has yet to meet any of the benchmarks necessary to achieve its efficiency goals of reducing emissions 20% by 2010.

China’s aggressive investment in the cleantech sector, combined with its continued refusal to reduce its net emissions, illustrates a major flaw in the assumption that investment in clean energy infrastructure and manufacturing capacity will automatically lead to both a cleaner environment and more robust national economies.  If, as some critics argue, China has opted for the robust economy while leaving the cleaner environment to others, China could reap disproportionate economic benefits from global cleantech investment, while shifting a disproportionate economic and environmental burden to other counties.  This, in turn, could undermine other countries’ efforts to fund today’s environmental cleanup efforts through long-term economic growth in their domestic cleantech industries. 

American cleantech companies are poised between a radical expansion of their potential markets into China and other cleantech-hungry developing countries and the specter of foreign companies, energized by concerted investment in their home nations, outcompeting them both overseas and at home.  This high-stakes race for cleantech hegemony will be hard fought, with China and the U.S. just two of the countries competing.  The race to be a global leader in actual emissions reductions, however, remains any country’s to win.

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Last year, Swedish Company Vattenfall announced its plans to go on-line with a major pilot program to test carbon capture and sequestration at a coal-fired power plant.  The company recently acknowledged that permitting snags fueled by local opposition render it unable to commence geologic sequestration of captured CO2.  Vattenfall intended to begin capturing CO2 at its 30-megawatt Schwarze Pumpe facility, located in Spremberg, Germany, and sequestering it in the nearby Altmark depleted gas field by March or April 2009. Residents of the host-city, however, have expressed concerns about the safety of geological sequestration, preventing the final permitting approval for the site and creating questions about when - or if - the site could be available for any CCS operations. 

Vattenfall’s experience at this project is not an isolated incident.  Vattenfall reported delays in obtaining approvals for one of its Danish storage projects pointing, in part, to public opposition by local stakeholders.  In June, German news sources reported that activists were protesting plans by electric utility RWE to transport captured CO2 by pipeline from a powerplant near Cologne to a sequestration site on Germany’s North Sea Coast.  The Wall Street Journal also reported in April that Royal Dutch Shell had run into challenges siting a sequestration facility in Barendrecht, Netherlands, due to grass roots opposition from local residents. 

Public opposition is likely to be a critical strategic and legal consideration for US projects.  On Friday, August 21, Battelle, the lead partner in a Midwest Regional Carbon Sequestration Partnership project announced that it was abandoning plans to participate in a $92 million public-private demonstration project to site a geological sequestration project in Western Ohio.  While the partner cited only “business reasons” for its decision, the reported public opposition to the project could not have helped. 

These setbacks illustrate the significant challenges that the siting and permit-approval process can pose, particularly in the face of public opposition, to an otherwise promising project.  This will be particularly true during the early stages of a CCS deployment.  US policymakers and investors would do well to watch and learn from these early case studies, and to ensure that they devote the legal, political and community relations resources needed to ensure that proposed projects move forward in a realistic and timely fashion.

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The Department of Treasury last week released guidance and application information on the Qualifying Advanced Energy Project Credit (”Advanced Energy Tax Credits”) available to manufacturers of certain clean technologies.  The American Recovery and Reinvestment Act of 2009 (”Recovery Act”) allocated $2.3 billion in Advanced Energy Tax Credits.  The purpose of the program is to encourage taxpayers to re-equip, expand, or establish manufacturing facilities for the production of certain advanced energy related property.Applicants seeking to receive the Advanced Energy Tax Credits are required to submit (1) a preliminary application and final application for recommendation to the Department of Energy (”DOE”); and (2) an application for certification of the project by the Internal Revenue Service (”Service”).  The pre-application deadline to the DOE for the 2009-2010 solicitation is September 16, 2009 and final applications must be received by October 16, 2009.  Application to the Service must be received by December 17, 2009.  The Service will allocate available funds to projects in based upon DOE project rankings.  If funds are not exhausted in the initial solicitation round, an additional solicitation round will be conducted for the 2010-2011 period.The Advanced Energy Tax Credits would function similar to the Investment Tax Credit utilized in renewable energy projects, equal to a tax credit of 30 percent of the basis of qualified investment once the project is placed into service.  The credit allocation is limited, however, to $2.3 billion and whether an applicant will receive credits will depend upon the results of the competitive solicitation process and Service certification.  Following certification, the taxpayer will have three years to place the qualifying project into service, or the certification is no longer valid.

Projects Must Re-Equip, Expand, or Establish a Manufacturing Facility for Eligible Advanced Energy Property

The Advanced Energy Tax Credits are available for facilities that will manufacture, re-equip, or expand production of specified advanced energy property.  Property that, after further manufacture, will become specified energy property (for example, wind turbine blades) is also eligible. Under the Treasury Guidance, advanced energy property is defined to include: (1) property designed for use in the production of energy from renewable resources; (2) fuel cells, microturbines, or an energy storage system of use with electric or hybrid-electric motor vehicles; (3) electric grids to support the transmission of intermittent sources of renewable energy, including property for the storage of such energy; (4) property designed to capture and sequester carbon dioxide and sequester carbon dioxide of emissions; (5) property designed to refine or blend renewable fuels, but not fossil fuels, or to produce energy conservation technologies; (6) new plug-in electric drive motor vehicles, qualified plug-in electric vehicles, or components designed for use with such vehicles; and (7) other property designed to reduce greenhouse gas emissions.  The project must not produce any property that is used in the blending or refining of transportation fuels other than renewable fuels.

Advanced Energy Tax Credits will not be allocated to a project with respect to any qualified investment for which a credit is allowed under certain existing tax incentives, including the Section 48 (the renewable energy Investment Tax Credit), 48A (Advanced Coal Project Credit), or 48B (Qualifying Gasification) credits.  Additionally, projects that receive payment under the Department of Treasury Grant Program established by Section 1603 of the Recovery Act will not qualify for the Advanced Energy Tax Credit.

Application Process Has Opened; the Initial Deadline to DOE is September 16, 2009

DOE will provide to the Service a recommendation and a ranking for projects if it determines the advanced energy manufacturing project has a reasonable expectation of commercial viability and merits a recommendation based on evaluation criteria.  In reviewing applications, DOE will equally weigh the following four criteria: (1) domestic job creation during the credit period (February 17, 2009 through February 17, 2014); (2) net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases; (3) greatest potential for technological innovation and commercial deployment; and (4) shortest project time from certification to completion.  The applicant must also calculate the incremental energy produced, saved, or stored due to the project.  DOE anticipates the completion of merit reviews by December 16, 2009.

Applicants must also apply to the Service for project certification before December 17, 2009.  The Service will allocate the amount of qualifying advanced energy project credit at the time the Service accepts the application for certification.  The DOE will rank projects in descending order, and the Service will allocate the full amount of Advanced Energy Tax Credit to the project receiving the highest ranking before lower-ranked projects are allocated any credits.  The same process will apply to the second and lower-ranked projects until the amount available for allocation is exhausted.  For the 2009-2010 application round, the Service will accept or reject the taxpayer’s application by January 15, 2010, and will notify the taxpayer by letter of its decision.  The acceptance letter will state the amount of the credit allocated to the project and the taxpayer will have three years to place the certified project into service or the certification will become void.

Projects that are accepted by the Service will be required to enter into an agreement and agree to provide additional information to the Service, including milestones to project completion.  Accepted projects have one year to submit supplemental information to establish that the project will be completed within three years from the receipt of the certification letter.  Within one year, accepted projects must receive all federal, state, and local permits, including environmental reviews.  In addition, the taxpayer must demonstrate has completed steps necessary in that period to place the project in service before the three-year anniversary of the certification.  Recapture rules apply to the Qualified Energy Tax Credit.

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As the Senate continues its work on a comprehensive climate and energy bill, it is drawing ideas from a broad range of sources, from the American Clean Energy and Security Act (H.R. 2454) which passed the House in late June and the various alternatives to that Bill, introduced during the 110^th  and 111^th Congress, to the work done by Senator Jeff Bingaman’s Energy and Natural Resources Committee.  To the extent that the bill will address smart grid and cleantech policy, one source which should not be overlooked is the Storage Technology of Renewable and Green Energy Act of 2009, (S.1091).That 9-page bill, introduced by Senator Ron Wyden (D-OR) on May 20, 2009, would extend the IRS energy investment credit and clean renewable energy bond programs to include investments in grid-level and residential energy storage equipment.  In doing so, the bill would fill a gap in current federal energy tax policy, which provides tax incentives for investments in a wide range of renewable (e.g., solar, wind, thermal, etc.) and low-carbon energy generation (example, carbon capture and sequestration) technologies, but not the grid level-storage necessary for these technologies to meet their full potential.

S.1091 helps to bring current tax policy in line with Congressional and Administrative energy policy, which has recognized the importance of grid-level energy storage technology to any long-term effort to reduce the carbon intensity of the domestic electric industry.  In, 2005, Congress included energy storage in its list of critical research areas for electric transmission and distribution programs under Energy Policy Act of 2005.  In 2007 the Energy Independence and Security Act provided dedicated funding for research into thermal energy storage and directed DOE to “carry out a research, development, and demonstration program to support the ability of the United States to remain globally competitive in energy storage systems.”

Most recently, Congress highlighted energy storage in the stimulus package (the American Reinvestment and Recovery Act of 2009 (ARRA)), providing the Department of Energy with funding to promote research into energy storage systems, funding demonstration projects for smart-grid energy storage technologies, and establishing a Qualified Advanced Energy Project Tax Credit for businesses that invest in manufacturing facilities to build grid-level storage equipment.  The Department of Treasury has also interpreted section 1603 of ARRA, which authorizes Treasury to issue grants in lieu of the investment tax credit for renewable energy investments, to include energy storage systems integral to the project’s operation.

These programs are important, but, with the exception of the grants-in-lieu-of tax credit guidance, they tend to focus incentives on a limited number of marquis smart-grid storage projects - important work, but not enough to move energy storage technology from the demonstration level to wider penetration in homes and on the grid.  The Wyden bill takes the next step, putting energy storage investment on an equal footing with other cleantech projects, promoting widespread commercial and residential (and in the case of renewable energy bonds provisions, public) adoption of energy storage technologies.  These investments will advance the penetration of renewable generation and storage technologies without picking winners in the storage marketplace. Increased residential and grid-level storage, in turn, provides multiple benefits to the national power system by:

• Increasing the capacity for renewable generation assets on the grid;
• Increase the reliability and stability of the electric grid;
• Reducing reliance on old, inefficient, and dirty peak-generation facilities; and
• Encouraging residential storage investment that builds distributed storage capacity.

Congress, DOE, and even the Treasury Department have acknowledged that developing the nation’s energy storage capacity is a core requirement for maximizing the nation’s clean, renewable energy capacity.  The Storage Technology of Renewable and Green Energy Act of 2009 provides Congress with a simple vehicle for incentivizing the private deployment of this much needed storage capacity.

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On August 7, 2009, the United States International Trade Commission (ITC) handed down a ruling in a dispute that could have broad repercussions for international trade in clean technology.  The case involves patent infringement allegations by General Electric (GE), the source of about 50% of the new wind capacity in the U.S. and the country’s largest domestic supplier of turbines.  The Commission’s decision may serve as an example of how the United States will continue to protect  intellectual property rights in both domestic and international climate change negotiations, as well as clear further paths for U.S. business to capitalize on the rapidly growing domestic wind energy industry—now the largest in the world.

The case involved Administrative Law Judge Carl Charneski’s determination that certain GE patents were infringed by wind turbines manufactured by Mitsubishi Heavy Industries, Ltd. and Mitsubishi Power Systems Inc.  In the ITC’s investigation, filed in February of 2008 and titled “In the Matter of Certain Variable Speed Wind Turbines and Components Thereof,” GE claimed that Mitsubishi wind turbines infringed patents directed to variable speed wind turbine technology, which allows the speed of a wind turbine’s rotor to vary with wind speeds while continuing to supply a constant current of electricity to a utility grid.

GE uses the technology covered by the patents in question in its 1.5 MW wind turbines, which are intended to provide emissions-free technology at costs lower than other renewable resources-partially closing the competitiveness gap with coal- and natural gas-fueled facilities.  GE  claimed its patents were infringed by Mitsubishi’s 2.4 MW wind turbines, as well as components of such wind turbines.  According to GE’s complaint, Mitsubishi sold its accused 2.4 MW turbines in the U.S. and had received additional “massive” orders for its wind turbines from major U.S. power generation developers.

Patents, Border Measures and the ITC

Section 337 of the Tariff Act of 1930, 19 U.S.C. §1337, makes unlawful any unfair methods of competition and unfair acts, such as patent infringement, in the importation of articles that could destroy or substantially injure an industry in the United States, or prevent the establishment of such an industry, or restrain or monopolize trade and commerce in the United States.  The ITC is an independent administrative agency in which all Section 337 proceedings are initiated and finally decided.  The remedy for a finding by the ITC that a violation of Section 337 has occurred is a general exclusion order, thereby, excluding the infringing articles from entering the United States.  Money damages for such infringement is not an available remedy at the ITC.

Not surprisingly, the ITC is an increasingly popular forum for litigating patent infringement disputes due to the relatively fast disposition of the case, the familiarity of the ITC’s Administrative Law Judges with intellectual property disputes and the formidable remedy of an exclusion order to prevent infringing goods from entering the U.S.

Next Steps

The Initial Decision by Administrative Law Judge Charneski is not a final ruling by the ITC; Mitsubishi will have the opportunity to present post-hearing arguments, as well as appeal the decision to the full ITC Commission.  Finally, the President has the ability to review the decision and could overturn any exclusion of Mitsubishi turbines “for policy reasons.”  One potential policy determination could be the current shortages of key products needed for projects authorized under this spring’s stimulus bill.  That bill contained “Buy American” provisions, which have in some places forced the shelving of projects-including an issue with a GE-produced water filter.  The significant amounts of stimulus money allocated towards energy projects could provide the President with an incentive to remove additional obstacles to such projects, including the ITC decision blocking turbine imports.

Should the decision be upheld, however, it would be a severe blow to Mitsubishi, which was trying to break into the potentially very lucrative American wind energy market.  The U.S., which overtook Germany as the world’s largest wind energy producer, is also laying the ground for even more significant wind energy expansion-billions of dollars set aside in the stimulus will go to improving the transmission grid supporting renewable energy, as well as significant funds in the Department of Energy budget to increase wind energy’s market penetration.

The Commission’s decision may serve as an example of how the United States may seek to protect  intellectual property rights in both domestic and international climate change negotiations, as well as clear further paths for U.S. business to capitalize on the rapidly growing domestic wind energy industry–now the largest in the world.

For further information about this topic, please contact Akin Gump.

With the House on their August recess, the only action will be in the Senate where committee chairs continue to lay groundwork for consideration of the House-passed legislation this fall.  The Senate Environment and Public Works Committee will examine the House legislation in preparation of a mark up when the Senate returns.  The Senate Finance Committee will also hold a hearing to assert its jurisdiction in the management and oversight of allocations.

Tuesday, August 4

The Senate Finance Committee will conduct a hearing on “Climate Change Legislation: Allowance and Revenue Distribution” at 10 a.m. in Room 215 of the Dirksen Senate Office Building.

Thursday, August 6

The Senate Environment and Public Works Committee will hold a hearing entitled “Climate Change and Ensuring that America Leads the Clean Energy Transformation” at 10 a.m. in Room 406 of the Dirksen Senate Office Building.  Secretary Ken Salazar of the U.S. Department of Interior will serve as a witness on the first of three panels.

“This Week on the Hill” will return in September after the August recess.

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