The effect of the pending Energy Policy Act of 2005 on businesses is mixed. In the energy technology sector, fortunes rest on the outcome of the current bill.

None of the proposals appear likely to raise or lower a typical company's utility bills substantially in the near future. (Other proposed legislation would, however, raise some companies' energy costs immediately.) Business taxes are not likely to increase by the hand of the 109th Congress, but businesses hoping for tax credits for upcoming energy-related investments should follow the debate.

Of $23 billion in proposed tax breaks for energy, the majority are in support of fossil fuels for generation and transportation. (As measured by the projected tax revenue loss incurred over the ten-year life of the policy, after taking into account the $29.6 billion in fuels taxes collected on oil and gas.)

Advancements in energy technologies most often hatch in university and government research labs. Innovations then face an awkward transition into the private sector, where they are commercialized. Their costs and risks are initially higher than for old technologies, for lack of market acceptance and economies of scale.

Companies who are developing and commercializing energy innovations depend on government contracts, research help, grants, tax credits and other subsidies. Financial support is especially important for renewable energy to achieve an equal footing in an environment of subsidized conventional sources.

US subsidizes energy, old and new
Incentives and subsidies are not unique to renewable energy. The bill that passed the House and stalled in the Senate in 2004 provided grants, research, matching funds, and a net total $23.3 billion in tax incentives for energy.

Of those tax breaks, approximately 8 percent were for energy efficiency incentives, 24 percent for renewable energy and alternative fuels combined (about three fourths were for renewable combustion-engine transportation fuels such as ethanol), 63 percent for oil, gas, coal energy and nuclear power; and the remaining 5 percent for various other programs.

Economic effect
Government focus on a specific technology has a considerable economic effect in related industries. The GE Energy business of General Electric Company, for example, is involved in wind, solar, hydropower, nuclear, and conventional energy, as well as energy-efficient lighting and HVAC.

"There's probably not a piece of that bill that doesn't touch us in some way," says Rob Wallace, GE Energy's Director of Government Programs. He is closely watching the policy discussions in three areas: nuclear, coal, and wind.

GE is a US$150 billion company operating in 100 countries. Its shares are held by four million stockholders and institutions. And GE is not watching this congressional session alone. The proposed legislation touches on almost every category of electric power; each category represents hundreds of companies, large and small. Investors, entrepreneurs and regional economic development directors are keeping an eye on all aspects of their children's inheritance -- economy, security and environment.

Nuclear power
The US was the first nuclear-powered nation to stop building nuclear plants, albeit unintentionally. Projects after the Three Mile Island accident were mired in red tape and public opposition. The US has 103 working reactors, all bought in the era before "peace with honor" first entered our lexicon.

The Department of Energy (DOE) Nuclear Power 2010 program is intended to ease steps toward issuing permits for two demonstration plants using next-generation "passively safe" nuclear reactors. The combined construction and operation license (COL) regulations aren't new -- they were enacted in 1992 -- but $500 million in fresh, federal matching funds would await applicants.

Interested utilities have formed three consortia to apply for the program, with the intention of eventually building nuclear plants. GE Energy's Economic Simplified Boiling Water Reactor (ESBWR) is a candidate design.

"All three consortia are looking at the GE Energy ESBWR reactor, so we're very interested in the vitality of the Nuclear Power 2010 program," says Wallace.

The proposed funding is modest by congressional standards, and the political support is substantial. The Senate's energy policy debate will be managed by Pete Domenici, chair of the energy committee, Republican Senator from New Mexico (home to Sandia Labs), described in a pro-nuke op-ed piece in Wired Magazine as "the patron saint of nuclear power in Washington."

Clean Coal
The "clean coal" initiatives in the current bill would boost businesses involved in efforts to reduce emissions from coal. Power generation from coal emits significant amounts of sulfur dioxide (SO₂), nitrogen oxides (NOx), mercury and carbon, contributing to numerous health and environmental concerns. The Clean Air Act of 1970 set emission standards, but existing plants were grandfathered. Today, 850 of those plants are still operating, exempt from the 1970 emission standards.

The primary clean coal technology under discussion is coal gasification. Coal, instead of being burned in its raw form, is gasified and then combusted in a combined-cycle gas turbine. This allows the coal to burn somewhat more efficiently, and allows some of the impurities in the coal to be removed before it is burned.

GE Energy last year purchased ChevronTexaco's coal gasification business and is looking at providing a commercial offering of an integrated gasification combined cycle (IGCC) facility.

"There are various opinions on what clean coal is and what it can and can't do," explains Wallace. "I think we will find ourselves involved in that debate, along with our customers who have expressed an interest in IGCC technology and would like to take it to the commercialization phase with GE equipment."

Pending air quality legislation would give the clean coal industry an extra push. If subsidies are the carrot for reducing toxic emissions from coal, separate legislation such as the proposed Clear Skies Initiative and Climate Stewardship Act would be the stick, purportedly intended to curb pollutants. Exactly which pollutants -- SO₂, NOx, particulate mercury and carbon -- is still being debated. Before utilities upgrade their grandfathered plants, they are waiting to see what will be required of them.

"The uncertainty about how to handle all four pollutants creates an impact. As soon as Congress can answer that question, there will be some more predictability for upgrades and new equipment, and what standards utilities have to meet," says Wallace.

Renewable energy
The renewable energy incentives in the proposed bill are the various tax credits and other subsidies that help renewable sources compete financially with conventional coal and natural gas.

The most talked-about incentive is the renewable energy production tax credit (PTC). PTCs encourage the development of large-scale renewable energy -- wind generating facilities, mostly -- by offsetting the higher cost of that energy with a tax credit.

Unfortunately, the PTC has been a short-term incentive, extended by each Congress. The 2002 extension lapsed at the end of 2003. Just before the 2004 election, some of the PTC extensions were moved from the stalled energy bill onto other legislation, where they were extended to the end of 2005.

That year-to-year approach plays havoc with the plans of wind project developers, such as Renewable Energy Systems, who must commit to multi-year energy contracts and start wind turbine installations amidst financial uncertainty.

"Not knowing whether we have PTCs for the next year makes it virtually impossible to negotiate anything beyond this year with any utility," company president Vic Fryling noted at a recent energy forum in Seattle.

The uncertainty also affects manufacturers and others who sell to wind developers. Decisions to locate manufacturing facilities are driven in part by the strength of the local market for products.

"Suppliers aren't willing to build multimillion-dollar facilities in the USA, when they have no idea from year to year what the demand for their turbines and towers will be," says Fryling. Europe's wind energy incentives, often cited as a model, have led to more predictability and growth in the industry there, while the viability of the US wind industry is uncertain.

"The lapse of the PTC had a pretty significant impact on our ability to deliver for our customers, because of the uncertainty of not really knowing from one month to the next whether a factory ought to be operating or not," says GE's Wallace. "It's incumbent on us to explain to policymakers how disruptive those last-minute extensions are for an industry that so many people are trying to nurture."

Some policymakers are already on board. Speaking to an audience of energy business leaders in January, Senator Maria Cantwell of Washington pointed to the uneven split of proposed incentives between fossil fuels and renewable energy, saying, "If we tackle the 65 percent that go to fossil fuels, and reduce that, we could use that money to make these tax credits permanent, and that's definitely the direction we should go."

Traded companies:
General Electric Company (NYSE:GE)