Delivering an unexpected Christmas present for everyone who loves clean energy, last Friday the President and Congress agreed to a budget deal that included a huge win for renewable energy. Shocking most analysts and advocates, Congress extended tax credits for wind energy by five years and for solar energy by seven years. This comes on the heels of a major agreement of 195 nations in Paris to cut fossil fuel pollution deeply, and the August announcement by the Obama EPA of a Clean Power Plan to cut carbon pollution from coal plants by about a third within 15 years.
How the tax credits are extended
The wind energy production tax credit (PTC) has been an on-again/off-again over the past 15 years, resulting in a boom and bust nightmare for the industry. Each of the four times the tax credit expired since 2000, the industry went into a deep slump, suffering a reduction from the prior year of 75 percent twice and of 90 percent twice. It’s a hefty incentive, now offering a 2.3 cent-per-kilowatt-hour tax credit for energy produced from wind farms. The industry was expected to drop off a cliff again in 2017, with energy prices bid from new wind farms to utilities expected to jump up sharply to cover the lost revenue.
The solar energy investment (ITC) tax credit works differently. It’s a 30% tax credit on capital invested, so a home solar project costing $15,000 nets the homeowner a $4,500 credit on her tax return. A $100 million solar farm capital investment has a credit of $30 million. It was due to run through the end of 2016, and then drop off sharply to a 10 percent credit after that. What we saw in the Minnesota community solar market was true across the nation: every developer was in a race with the clock to get solar projects installed next calendar year, with no idea if 2017 would bring in new business. With this deal in place, the solar ITC stays the same for both commercial and residential projects through 2018, and then declines to 26 percent, and then to 22 percent through 2021.
Certainty is a main benefit
Imagine you ran a wind or solar business and had no clue from year to year whether a tax credit incentive would be available. How would you plan whether to expand or reduce your workforce? What if the credit was suddenly extended after you had recently laid off most employees? What would it cost you in productivity to rehire and retrain? One CEO of a large wind tower manufacturer told me after laying off and rehiring his whole workforce more than once that the tax credit was worth about what it was costing him in lost productivity.
“With predictable policies now in place, we will continue advancing wind turbine technology, driving down our costs and passing the savings on to American families and businesses in all corners of the country,” said Tom Kiernan, CEO of the American Wind Energy Association.
Phasing out the wind tax credit is a very good compromise. Although some would have advocated for its permanent extension, phasing it out over five years is much better. By giving the market a clear signal that the credit is worth less each year and that it’s unlikely to be revisited, industry players can plan their supply chains and purchase agreements, and do their own analysis of how cost improvements in out years will compare to reduced federal incentives. Utility and wind industry executives can plan better – as can private companies seeking long-term wind power purchase agreements. For the first time ever, the future structure of the market and pricing of wind is clear for the forseeable future. This deal acknowledges that the wind tax credit has done its job, and should be retired as a success. But instead of dropping off immediately, causing wind prices for new wind farms to lurch up sharply, now the credit is extended a year and tapers off in even increments until it expires in January 2020. This is smart public policy and one Fresh Energy has advocated for many years.
The solar tax credit notably is phased down over seven years. In full force at 30% for three years, then dropping to 26% and then 22%, the door is left open whether Congress will revisit solar tax credits for the years 2021.
In an interview this week, Jigar Shah argues that having an end to tax credits in sight is important for cultivation of investors such as pensions who do not have the appetite for big tax breaks. Because such a small number of financial actors have an appetite for tax equity, both the PTC and the ITC distort the financing possibilities and the ownership structure of both industries.
With levelized cost of solar energy continuing to drop in the range of 15% annually, this tax credit extension gives the solar industry enormous market clarity for years. Even with the planned reduction in the credit in the out years, rooftop solar energy will be increasingly competitive with retail power prices in more and more states, as solar expands to less sunny states with lower cost electricity. When solar energy is less than the electric bill, everyone gets interested. Additionally, as prices continue to drop and performance improves, large arrays of ground-mounted solar energy will ultimately compete head on with fossil fuels in wholesale power markets.
Indeed, a blog post yesterday by Rocky Mountain Institute makes the case that wind and solar is widely expected to become the cheapest way to generate power in the U.S. and most of the rest of the world by 2020, having fallen in price 61 percent and 82 percent over the last six years.
Making a Bridge to the Clean Power Plan
One huge benefit of having these tax credits in place between now and the first compliance period for the Clean Power Plan is that utilities and states that have been foot-dragging on renewable energy will have a chance to jumpstart their carbon reductions at low cost. There’s no excuse to wait on renewables when wind and solar are “on sale” now, because any carbon pollution reductions now will count during the 2022-2030 timeframe for Clean Power Plan. In addition, the big expansion of the solar and wind industry caused by these tax credits will drive down solar and wind prices faster than otherwise, making Clean Power Plan compliance easier.
Pushing ahead the Paris Agreement
Much has already been written about how the Paris Agreement is only a beginning phase of the incredibly rapid decarbonization of the global economy needed for any chance of reaching an upper limit of warming of 1.5 degrees C – especially recognizing that in 2015 we have exceeded 1 degree warming, and there is plenty more warming baked in already. It’s timely and useful to put these two near-term best bet technologies on steroids in the US power sector, making it easier to fulfill pledges that the U.S. made in Paris.
Another important victory for the President in the budget deal is that his first climate adaptation and mitigation investments for developing nations was also included – not as high profile a decision as the tax credit extension, but certainly a good sign that the Paris framework is moving ahead as an international obligation of the U.S.
Repealing the oil export ban
All this was possible by Senator Harry Reid understanding that lifting the ban on oil exports was a top priority for the Congressional leadership, and that an old-fashioned deal was possible. He made the calculated assumption that with oil markets weak and prices at an 11-year low, putting solar and wind on an accelerated growth path was a much bigger deal than opening new markets to US oil producers. Some environmental advocates were very disappointed by any action to expand fossil fuel markets, especially after persuading President Obama to reject Keystone XL and say out loud that to solve climate we must “keep some fossil fuels in the ground.”
But it’s clear from independent analysis that if this tax credit extension is viewed a straight up trade for lifting the export ban for crude oil, it’s a good deal for the climate. According to Michael Levi of the Council on Foreign Relations, the climate benefit of the tax credit extension is over a factor of ten larger than the climate cost of removing the oil export ban over the next five years. When considering the combination of the Clean Power Plan, the Paris Agreement, the extension of the tax credits are perhaps 50-fold more carbon pollution reduction than lifting the export ban would increase carbon pollution. Besides, top analysts have shown that the export ban was not much of a ban: it was very “leaky” since refining crude oil to gasoline and diesel is quite low-cost, and there is no ban on exports of finished petroleum products.
“This is massive.”
According to Bloomberg New Energy Finance (BNEF), extension of the solar tax credit will increase installation over business as usual by more than all solar energy panels installed in the US prior to 2015. For the US wind industry that just past 70,000 megawatts installed, Bloomberg estimates the extension will boost wind farm construction by an additional 19,000 megawatts. Combined, the two tax credit extensions will spur more than $73 billion in extra investments, enough electricity to power 8 million US homes.
Ethan Zindler, the Head of BNEF’s Americas team said, ”This is massive, in the short term, the deal will speed up the shift from fossil fuels more than the global climate deal struck this month in Paris and more than Barack Obama’s Clean Power Plan that regulates coal plants.”