Marketing Renewable Energy Crops by Farmers for Electricity Generation

Today we are trying something new -- asking for feedback from our Readers on a communication problem we are having in marketing "closed loop" biomass energy crops for electricity generation.

A critical point in our marketing effort for energy crops is the Section 45 Federal Tax Credit which currently provides a 2.2 cents/kWh tax credit to electricity generation companies that use "closed loop" biomass fuel. An example of "closed loop" is fast growing trees that would exclusively be used as fuel feedstock. The Tax Credit is available for 10 years.

An important concept that we've been trying (to date unsuccessfully) to explain is the dollar benefit per green ton of biomass fuel purchased. This is important marketing argument, as it plays a major factor in what an electricity generation company will pay farmers for a crop. In Table 1, we present information that the value of the Section 45 tax credit is the equivalent of reducing fuel cost by $25.38 per green ton:

Table 1Converting the Tax Credit to an Equivalent Fuel Cost Savings


In the above illustration, the argument is developed that if a company paid $25.38 per green ton for closed loop biomass fuel, that the effective cost (after the tax benefit) of the fuel would be zero. If less than $25.38 was paid to a farmer, the effective fuel cost would be negative.

While the math of Table 1 may at first seem complex (e.g., using assumptions like the heat rate energy efficiency of a power plant), the question we ark asking input from our Readers is relatively simple. The issue is whether there is a need for a gross-up factor in determining the equivalent impact of the tax credit on fuel costs.

For example, if the tax benefit of deducting interest (reduction of taxable income) on a homeloan was changed to a tax credit (reducing taxes dollar for dollar for the interest expense), wouldn't a homeowner view this as increased value?

Table 2 tries to explain this difference (where in the illustration we use a tax rate of 50%, only to simplify the math to our audience).

For Company A, fuel expenses are $100 and they take a $10 Section 45 tax credit. For Company C, fuel expenses have been reduced by $20 (i.e., the $10 tax credit divided by 1 minus the tax rate), but do not have a tax credit. The cash net income of Company A and B is the same.

So, reducing fuel expenses by $20 was the same as taking a $10 Tax Credit.

Table 2Equivalent of a Tax Credit Versus an Expense Reduction

(2) Fuel expenses only reduced $10 (value of tax credit)
(3) Fuel expenses reduced by $20 ($10 credit divided by 1 minus the tax rate)

Can our Readers help us in understanding where we might be going wrong in explaining this concept in our marketing efforts?

Categories: Biomass Incentives