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US Senate Democrats propose "tech-neutral" revamp of energy tax credits

22 April 2021

Saying the bill will serve as the engine of a transition to a carbon-free economy, senior Democrats in the US Senate unveiled a sweep­ing proposal to overhaul the energy tax credit system on 21 April.

The Clean Energy for America Act would consolidate more than 40 current ad hoc tax credits into three technol­ogy-neutral categories that would provide tax incentives for zero-emission power generation and storage, transmission lines, electric vehicles, and energy efficiency.

Proposed by Senate Finance Committee Chair­man Ron Wyden, Democrat-Oregon, and co-sponsored by 24 other Democrats, the bill would offer a 30% "direct-payment tax credit" to any zero- or negative-emission generator regardless of technology — meaning eligible projects would include not just wind and solar but nuclear, fossil fuel power plants fitted with carbon capture and storage (CCS), geothermal, or other clean resources.

"Energy policy is tax policy, and the federal tax code is woefully inadequate to address our energy challenges. It's a hodgepodge of more than 40 temporary credits that don't effectively move us toward the goals of reducing carbon emissions and lowering electricity bills for American families. Simply extending the status quo will not get the job done," Wyden said in a written statement.

"The Clean Energy for America Act … would both put us on the path to achieving our emissions [reduction] goals and create good-paying jobs, and should be the linchpin of our clean energy efforts as we consider President Biden's jobs package," he added.

Direct-pay credits would change how renewable power projects are incentivized when tax equity financing is used by a developer. Typically, a financial institution or corporation with a large tax bill invests in the power project and uses the tax credits to offset its tax liability — but the right investor can be hard to find.

"Direct pay eliminates the need to find an investor able to utilize tax credits because direct pay is not tied to tax liability," explained law firm Vinson & Elkins in a client memo on 6 April. "As a result, the developer would be entitled to receive a tax refund in the amount by which the available direct pay credit exceeds such developer's tax liability."

Direct-pay credit proposals are included in Biden's $2-trillion American Jobs Plan and green energy bills in the House of Representatives and Senate.

In the case of the Clean Energy for America Act, the 30% credit would extend to stand-alone energy storage facili­ties or new transmission lines developed to carry carbon-free power to often-distant population centers. It also would make roof­top solar and small wind turbines eligible for the same tax credits.

The proposed tax incentives would change the current investment tax credit and production tax credit (PTC) rules, which are mostly utilized by solar and wind, respec­tively, and are set to ramp down or phase out entirely over time.

Alternatively, developers of any new zero-emissions facility could forego the 30% credit in favor of a 2.5 cents/kWh PTC payable for 10 years.

To provide additional assurance to investors and developers, the 30% credit would be intact until the electric power sector emits 75% less carbon than 2021 levels — a level of deep cuts roughly aligned with Biden's goal of reaching carbon-free power generation by 2035.

Other aspects

Other aspects of the regulation include:

  • Extending 45Q tax incentives, which support CCS at fossil fuel plants, until ambitious emis­sion cuts have been achieved, although it would eliminate existing credits for CCS in enhanced oil recovery.
  • Making tax credits for electric and other zero-emission vehicle purchases by consumers direct payments.
  • Adding a 30% credit for electric and other zero-emission commercial vehicle purchases, including medium- and heavy-duty vehicles.
  • Creating a tax credit for transportation fuels that are at least 25% cleaner than average, up to $1.00/gallon for zero- and negative-emissions fuels.
  • Providing credits of up to $5,000 for new energy-efficient homes and up to $1,500 for energy-efficient home improvements such as installation of more efficient furnaces, water heaters, and electric heat pumps.

No Republicans signed on as co-sponsors to the bill, and observers noted that key moderate Democrats such as Joe Manchin (West Virginia), Kyrsten Sinema (Arizona), and Jon Tester (Montana) were not co-sponsors either. Given the 50-50 party split in the Senate, those lawmakers will need to sign onto the bill if no Republican support is forthcoming.

Wyden said that the technology-neutral approach should appeal to Republicans, who have said that nuclear power and fossil fuel power with CCS should compete on a level playing field with hydro­power, intermittent renewables, and other technologies.

While Republican support to date is unknown, companies and labor unions said they back the plan. "We strongly support the clean technol­ogy-neutral, business model-neutral [tax] solution [Wyden] has proposed," said Bill Fehrman, CEO of Berkshire Hathaway Energy, in a statement. "Commercial-scale energy storage, new major transmission invest­ments, and existing and future zero-carbon technologies like carbon capture, utilization and storage and advanced nuclear are all key to achieving the clean and reliable energy future we desire, while keeping cost impacts as low as possible for electricity customers, which is exactly what this bill supports."

The National Asso­ciation of Building Trades Union (NABTU) -- which has made numerous statements in the last several years to encourage expansion of the US oil and natural gas pipeline network -- said it likes a provision in the bill to require that all projects above residential size and which receive tax credits must comply with federal labor requirements for prevailing wages and apprenticeships. "This bill is a crucial first step towards strengthening labor standards for workers on clean energy job sites across the nation, and we are grateful to see it come to frui­tion," said NABTU President Sean McGarvey.

With the US upgrading its commitment this week for emissions reductions by 2030, the American Clean Power Association said this type of bill represents "the collective efforts in Congress to promote economic investment and address climate change" and "will help enable the US to remain on the cutting edge of clean power development."

Environmental Defense Fund President Fred Krupp added: "By making the tax code smarter to reward investment in clean energy while removing incentives for fossil fuels, the measure will unleash the innovation needed to slash climate pollution in our power, transportation and buildings sectors."

Contributions by Jim Day, "The Energy Daily," and Kevin Adler, Climate & Sustainability News.

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