Left to market forces, commodities and industries tend to be more efficient and grow faster. This Economics 101 policy now enjoys solid bipartisan support to rejuvenate the supply chain, manufacturing and use of solar panels in renewable power plants to support the 21st century energy transition.
The marketing Solar investment is one of the most important public-private partnerships (PPPs) of the 21st century, and the recently passed Inflation Reduction Act (IRA) will support this effort. “This is one of the most important pieces of industry legislation since the new FDR deal,” says Richard Dovere, Chief Investment Officer of EDP Renewables North America Distributed Generation (EDPR NA DG), “There are several ways to support – anchor more established technologies. such as wind and solar, while providing PPP commercialization pathways for other technologies such as storage, hydrogen and carbon capture.”
Wind and solar power plants are part of the delivery 76% of new US electricity generation in 2021, creating thousands of jobs. By 2030, it is expected that the IRA cultivate 1.3 million new jobs and strengthening the US economy. The primary policy tool that has enabled this growth is the Energy Investment Tax Credit (ITC) and Production Tax Credit (PTC), which were strengthened in the 2022 IRA.
“The ITC dates back to the Kennedy administration, but was then widely applied to equipment investments, while the father of the PTC is Sen. Grassley (R-IA), who pushed it through Congress in 1992 to expand his state’s wind industry. Iowa… Post-IRA, however, these tax breaks are overloaded compared to their predecessors,” says David Burton, tax partner at law firm Norton Rose Fulbright.
These tax credits are available to businesses and certain types of individuals who invest in renewable energy systems. The tax credit amount is a dollar-for-dollar reduction in the income taxes that an eligible taxpayer owes the IRS.
Investment in renewable energy projects in the United States has grown significantly over the past 15 years. According to data from the U.S. Energy Information Administration (EIA), total investment in renewable energy projects in the U.S. has grown from about $6 billion in 2005 to about $40 billion in 2019. Over the same period, the cost of new renewable energy projects dropped sharply, with the cost of solar and onshore wind falling by more than 85% and 60% respectively over the last decade. This has made renewables the cheapest generation option in many markets and bodes well for the Biden administration. Climatic action initiative, US Energy Security and Global Environmental Health.
Energy Innovation Policy and Technology LLCnonpartisan think tank, predicts that the IRA’s $370 billion in climate and clean energy investments could help cut U.S. greenhouse gas emissions up to 43% below 2005 levels by 2030. Resources for the future projects that an IRA will save the average American household up to $220 a year on electricity bills while protecting against fluctuations in fossil fuel prices.
“These initiatives also provide price certainty,” commented Mr Dovere, “once we reach critical mass, the renewable grid will be less subject to the large price swings we’ve seen in energy over the past 10, 20 and 50 years. It will be a bumpy ride, like all transitions, but the IRA puts us on the path to a cleaner, lower-cost future.”
These legislative measures address economic and environmental problems by providing a market-based solution that is politically expedient and sustainable. From a conservative perspective, these tax breaks reduce the tax burden on businesses, while liberals appreciate the benefits of environmental policies that will accelerate the energy transition.
“The United States is somewhat unique in the world in choosing to incentivize clean energy through tax credits. The rules here are more complicated than in many countries, but the US tax system provides a suitable mechanism to encourage investment,” Mr Burton explained.
Both public and private markets welcomed these policy changes. More than $40 billion since the IRA was passed new investments in renewable energy, including $28 billion in US-based manufacturing, which also enjoys a large allocation of IRA tax credits. Despite their successes, tax credits for clean energy projects are not a panacea, and more investment is needed.
For the first time, the IRA allows for the sale of federal energy tax credits, which is called transferability. “Transportability is key for IRAs because there hasn’t been enough appetite in the traditional tax equity market to cash out all the enhanced credits. However, we are waiting for the IRS to issue rules to fill in the details that will determine how user-friendly and therefore successful transferability is as a policy,” says Mr. Burton.
Incentives in the IRA are not the only policy mechanisms that support the development of solar projects. State-level Renewable Portfolio Standards (RPS) and Renewable Energy Certificate (REC) programs also provide localized economic investment incentives. The combination and optimization of these incentive programs, together with the sale of electricity to households and businesses, provide the revenue streams necessary to return the project’s investment.
While the market shift toward renewable energy will benefit the environment and the U.S. economy, the high cost of IRAs is significant and should be implemented thoughtfully. A deadlocked new Congress is unlikely to support clean energy much, or drop improvements in the IRA or ITC/PTC. The new Congress would be well served to realize that the invisible hand of the market works best when complemented by policies that do not seek to limit corporate profits. Action by both parties is necessary to fully reap the benefits of the IRA or ITC/PTC for the American people.