Tax Credits and Effect on Investment in U.S. Renewable Energy Industry
By: Craig Kline and Eric Teszler
U.S. tax policies have helped kick start and sustain the renewable energy industry. U.S. renewable energy tax policies (the subject of this article), together with State Renewable Portfolio Standards, have helped create significant investment in renewable energy. These developments have brought down the cost of renewable energy technology, which has led to more investment. This virtuous circle positively impacts the economy as well as the environment. More specifically, tax expenditures like the Production Tax Credit (“PTC”) and the Investment Tax Credit (“ITC”) incentivize investments in renewable energy industries, which has in turn led to lower capital costs, efficiency, predictable energy costs for consumers, job creation, national security, and reduced levels of greenhouse gas emissions. Unfortunately, the current political climate in Washington has undermined the effectiveness of these tax expenditures—not least because Congress has allowed the PTC to expire, and the ITC is set to expire at the end of 2016. Although policymakers have expressed an interest in comprehensive tax reform over piecemeal legislation that addresses the PTC and ITC, efforts should currently be made to preserve both of these tax credits if we agree that increased renewable energy in the U.S. is a shared objective.
I. Background:
a. The Need for Corporate Tax Reform:
As Senator Orrin Hatch has put it, “[e]veryone agrees that the American tax system is broken and in need of reform. It stifles job creation, innovation, and competitiveness. It’s counterproductive, confusing, and a serious drag on the economy. . . . Tax reform is no longer an option but an obligation.”[1] Many federal policymakers agree that the statutory corporate tax rate (currently at 35%) should be lowered; that part of the revenue cost of rate reduction should, in turn, be offset by restricting or eliminating a number of corporate tax expenditures (including those relating to energy); and that the current foreign-source income tax model should be modified.[2] Outside of these broad areas of agreement, however, little progress has been made in terms of effecting substantive corporate tax reform.[3] This owes, at least in part, to the fact that policymakers often disagree on what tax credits should be limited, and to what extent. [4] Additionally, federal policymakers are particularly interested in comprehensive tax reform as opposed to piecemeal legislation addressing specific tax expenditures.[5] In this vein, Senator Chuck Grassley – the primary architect of the wind production tax credit – has stated, “[a]ny phase-out [of energy tax expenditures] must be done in the context of comprehensive tax reform, where all energy tax provisions are on the table.” [6]
b. Significant Energy-Related Tax Credits—the PTC and the ITC:
i. The PTC:
The PTC and the ITC are tax credits that provide incentives for investing in and developing renewable forms of energy.[7] The PTC was originally enacted as part of the Energy Policy Act of 1992.[8] The PTC allows “[c]ompanies that generate electricity from wind, geothermal, and ‘closed-loop’ bioenergy (using dedicated energy crops) [to become] eligible for a federal [tax credit], which provides a 2.3-cent per kilowatt-hour (kWh) incentive for the first ten years of a renewable energy facility’s operation.”[9] Accordingly, the PTC has been a “major driver of wind power development in the United States” and has thus resulted in “significant economic benefits,” including the fact that, “between 2007 and 2014, U.S. wind capacity has nearly quadrupled, representing an annual average investment of nearly $15 billion,” as well as the fact that the “cost of generating electricity from wind has fallen by more than 40 percent over the past three years.”[10]
Congress has extended the PTC on six occasions, but has also allowed it to expire on six occasions.[11] In periods where the PTC is not subject to short-term expiration, the wind industry experiences strong growth, which, in turn, promotes a form of clean, renewable energy as well as job creation.[12] Figure 1 demonstrates the significance of the wind industry’s impact on U.S. power capacity spanning from 2008 to 2013:
Refer below to Figure 1 (measuring U.S. power capacity between 2008 and 2013)[13]
However, the “on-again/off-again status” of the PTC—due to Congress’ allowing the PTC to expire after periodically reinstating it—has yielded a measurably negative impact on the wind industry:[14]
Refer below to Figure 2:[15]
Short-term extensions of the PTC negatively impact the wind industry in part because the planning and permitting process for new wind facilities can take two or more years to complete.[16] As a result, “many renewable energy developers that depend on the PTC to improve a facility’s cost effectiveness may hesitate to start a new project due to the uncertainty that the credit will still be available to them when the project is completed.”[17]
Regarding its current status, the PTC expired on December 31, 2014.[18] Furthermore, some members of Congress are currently working to eliminate the PTC altogether. For example, U.S. Congressmen Kenny Marchant and Mike Pompeo recently introduced H.R. 1901: “The PTC Elimination Act”. This legislation “would phase out and repeal the [PTC].”[19] In support of his bill, Congressman Marchant has stated that “[s]ince its creation in 1992, the PTC has ballooned from a temporary boost for energy innovation into a massive special interest handout for the now multi-billion dollar wind industry. Today the wind industry regularly produces more energy than the market demands while hardworking taxpayers shell out billions of dollars each year in PTC support.”[20] Responses to these claims shall be taken up in Section II. (“Proposed Solution”).
The ITC:
The ITC was enacted in 2005 as part of the Energy Policy Act, which created a thirty-percent investment tax credit for commercial and residential solar energy systems effective from January 1, 2006 to December 31, 2007.[21] The Tax Relief and Health Care Act of 2006 extended these credits for an additional year.[22] The Emergency Economic Stabilization Act of 2008 “provided an eight-year extension of the commercial and residential solar ITC, eliminated the monetary cap for residential solar electric installations, and permitted utilities and companies paying the alternative minimum tax (AMT) to qualify for the credit.”[23]
In much the same way that the PTC has had a significant impact on the wind industry, the ITC has had a significant impact on the solar industry. SEIA touts the ITC as “one of the most important federal policy mechanisms to support the deployment of solar energy in the United States.”[24] As evidence of this claim, the SEIA states that “[s]ince the multi-year extension of the credit in 2008, solar prices have consistently fallen year after year while installation rates and efficiencies have continued to climb. The continued success of the ITC demonstrates that a stable, long-term incentive can drive growth, reduce prices and create jobs in solar energy.”[25]
These remarks are consistent with the findings displayed in Figure 2: like the PTC, the ITC is able to support substantial growth in the energy industry when there is no threat of short-term expiration. But unlike the PTC, the ITC has not yet expired, and will not expire until December 31, 2016.[26] Yet it is far from clear as to whether the ITC will be phased out (or outright eliminated) after its expiration date is reached.
SEIA spokesman, Ken Johnson, has noted that “SEIA’s top priority is winning an extension, although [Johnson] says [SEIA] hasn’t made any decision on what it wants that extension to look like or how long it would last.”[27] Johnson added that “[w]e’re looking at every possible scenario . . . [a]t this point, our stated goal is to ask for an extension, not a permanent extension, not an unreasonable extension, but something that will allow developers to make firm plans four, five, six years into the future.”[28] If the ITC were to expire without receiving an extension from Congress, the commercial tax credit—currently set at 30 percent—would be reduced to 10; the residential rate—also currently set at 30 percent—would be eliminated altogether.[29]
There is, therefore, a common theme uniting the PTC and the ITC: extensions—if not inclusions into a comprehensive energy reform bill—are required in order to assure investors and developers that their support of the wind and solar industries will not be frustrated by short-term expirations of these tax expenditures.[30] These assurances are, in turn, vital because “[t]ax policies related to renewable energy play a vital role in creating new high-wage American jobs, spurring economic growth, ensuring U.S. global competitiveness, lowering energy bills for consumers [and] businesses, and reducing pollution.”[31] These claims are borne out in the following facts with respect to the ITC: [32]
– The ITC has fueled dramatic growth in solar installations: The market certainty provided by a multiple-year extension of the residential and commercial solar ITC has helped annual solar installation grow by over 1,600 percent since the ITC was implemented in 2006—a compound annual growth rate of 76 percent.
– The ITC has fueled dramatic job creation: Solar employment has grown by 86% in the last four years and is creating jobs at a rate nearly 20 times higher than employment growth in the overall economy.
– The cost of solar for consumers has continued to fall: The existence of the ITC through 2016 provides market certainty for companies to develop long-term investments that drive competition and technological innovation, which in turn, lowers costs for consumers.
And with respect to the PTC:[33]
– Over 550 facilities across 44 states manufacture for the wind energy industry
– The price of wind power dropped 43% between 2008 and 2012, benefitting utilities and consumers.
– Annually, the wind energy industry has driven an average of $15 billion of private investment in each of the past five years.
– Over 70% of U.S. Congressional Districts have either a wind project or wind-related manufacturing facility bringing local economic development into the region.
II. Proposed Solution:
In light of the foregoing facts, it seems clear that both the PTC and the ITC ought to be preserved. Ideally, both would be implemented into a comprehensive energy reform bill, but, given the current political climate, such a result is unlikely to occur. However, it is worth noting in this vein that “[h]istorically, comprehensive energy bills have been the legislative vehicles of choice for energy-related tax provisions.” [34] In keeping with this trend, Senator Lisa Murkowski, the newly-appointed chairwoman of the Energy and Natural Resources (“ENR”) Committee, has recently introduced a group of seventeen legislative proposals intended to revamp energy policies, which include increasing the use of renewable energy.[35] The timing might therefore be ripe for petitioning policymakers like Senator Murkowski to include PTC and ITC provisions in their attempts to pass comprehensive energy reform bills.
In the more likely scenario that neither the PTC nor the ITC will be implemented in a comprehensive energy reform bill, it would still nonetheless be a desirable result to have both tax expenditures receive extensions. But as Figure 2 suggests, it is only longer-term extensions—say, in the five-to-six year range—that best support growth in the renewable energy industry, and, in turn, the environment as well as the economy.
To reiterate an earlier point, Congressman Marchant’s claims that, “[t]oday the wind industry regularly produces more energy than the market demands while hardworking taxpayers shell out billions of dollars each year in PTC support.” [36] But it is not so evident that these are sound claims. For one thing, although it is true that corporate tax expenditures like the PTC and the ITC in at least some measure shift the tax burden onto taxpayers, Congressman Marchant’s claim overlooks the largely positive impacts that these expenditures have on the economy. Again, to return to Figure 2, periods that are unmarked by short-term expirations foster growth in the renewable energy industry, which has ultimately led the wind industry to provide approximately thirty percent of all U.S. power capacity in recent years. These developments have not only spurred the economy through job creation, they have also directly benefitted consumers by lowering their energy bills.[37] (Which is to say nothing of the fact that consumers can further lower their utility bills by taking advantage of the ITC’s thirty percent tax credit by installing approved solar systems in their homes.)
Additionally, and perhaps more importantly, Congressman Marchant’s statement that “the wind industry regularly produces more energy than the market demands” seems misguided. The wind industry does not operate in a vacuum. One of the industry’s primary purposes—if not its ultimate objective—is to offer a form of renewable, clean energy. In 2013, the U.S. generated 4.1% of its electricity from the wind industry.[38] It is also theoretically and physically possible for the U.S. to generate 20% of its electricity from the wind industry.[39] Given the need for electricity, why wouldn’t we want to support an industry that can provide us with that resource using clean and renewable energy? If anything, the potential for achieving the 20% figure strongly suggests that the wind industry is not currently producing enough energy. The issue may have more to do with antiquated distribution technology, rate basing, and other regulatory hurdles to modernizing the grid, creating incentives for demand response, as well as other mechanisms for utilities to better control supply and demand. (I recommend reading the June 29, 2015 New Yorker Article, “Power to the People”, by Bill McKibben for more on this subject.[40])
In the final analysis, at a minimum, the PTC and the ITC should each receive five-to-six year extensions in order to provide sustainable growth in the wind and solar industries in the years to come. This will ensure that the virtuous circle of investment in renewable energy will continue until comprehensive tax and energy reform is successfully addressed.
[1] Orrin Hatch, It’s Time to Rebuild the Tax Code, Nat’l Review (Jan. 5, 2015, 4:00 AM), http://www.nationalreview.com/article/395693/its-time-rebuild-tax-code-orrin-hatch.
[2] Mark P. Keightley & Molly F. Sherlock, Cong. Research Serv., The Corporate Income Tax System: Overview and Options for Reform 31 (Dec. 1, 2014).
[3] See generally Jonathan Weisman, Reformers Try to Tackle the Tax Machine, N.Y. Times (Feb. 14, 2015), http://www.nytimes.com/2015/02/15/business/yourtaxes/reformers-try-to-tackle-the-tax-machine.html?_r=0.
[4] See Davis Burroughs, Energy Tax Provisions Struggle to Find a Home, Morning Consult (May 15, 2015), http://morningconsult.com/2015/05/energy-tax-provisions-struggle-to-find-a-home/.
[5] Id.
[6] Senator Chuck Grassley, Remarks at the American Council on Renewable Energy Policy Forum (Apr. 23, 2015).
[7] See Am. Wind Energy Ass’n. (“AWEA”), PTC Fact Sheet: The American Wind Industry Urges Congress to Extend the PTC & ITC as Quickly As Possible, available at http://www.awea.org/Advocacy/Content.aspx?ItemNumber=797 (last visited June 27, 2015) [hereinafter, “PTC Fact Sheet”].
[8] See Union of Concerned Scientists , Production Tax Credit for Renewable Energy, available at http://www.ucsusa.org/clean_energy/smart-energy-solutions/increase-renewables/production-tax-credit-for.html#.VY9t903bKUk (last visited June 27, 2015) [hereinafter, “Union of Concerned Scientists”].
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] PTC Fact Sheet, supra note 7.
[14] Union of Concerned Scientists , supra note 8.
[15] PTC Fact Sheet, supra note 7.
[16] Union of Concerned Scientists, supra note 8.
[17] Id.
[18] See AWEA , Advocacy, available at http://www.awea.org/Advocacy/Content.aspx?ItemNumber=797 (last visited June 27, 2015).
[19] Press Release, Representative Marchant, Marchant Introduces Bill to Eliminate Special Interest Tax Handout (Apr. 22, 2015), available at http://marchant.house.gov/news/documentsingle.aspx?DocumentID=398126 [hereinafter, “Press Release”].
[20] Id.
[21] See Solar Energy Indus. Ass’n. (“SEIA”), Fact Sheet: The Solar Investment Tax Credit (ITC), available at http://www.seia.org/policy/finance-tax/solar-investment-tax-credit (last visited June 27, 2015) [hereinafter, “ITC Fact Sheet”].
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Geoff Koss, CQ Roll Call: Expiring Solar Tax Credit to Face a “Slugfest” in Congress, SEIA (Apr. 21, 2015), available at http://www.seia.org/news/cq-roll-call-expiring-solar-tax-credit-face-slugfest-congress.
[28] Id.
[29] ITC Fact Sheet, supra note 21.
[30] Koss, supra note 27.
[31] SEIA, Solar Investment Tax Credit (ITC), available at http://www.seia.org/policy/finance-tax/solar-investment-tax-credit (last visited June 27, 2015) [hereinafter, “Solar Investment Tax Credit”].
[32] Id.
[33] PTC Fact Sheet, supra note 7.
[34] Davis Burroughs, Energy Tax Provisions Struggle to Find a Home, Morning Consult (May 15, 2015), http://morningconsult.com/2015/05/energy-tax-provisions-struggle-to-find-a-home/.
[35] U.S. Sen. Comm. Energy Natural Res., Sen. Murkowski Introduces 17 Targeted Bills to Modernize America’s Energy Policies (May 7, 2015), available at http://www.energy.senate.gov/public/index.cfm/2015/5/sen-murkowski-introduces-17-targeted-bills-to-modernize-america-s-energy-policies.
[36] Press Release, supra note 19.
[37] Solar Investment Tax Credit, supra note 31.
[38] PTC Fact Sheet, supra note 7.
[39] Id.
[40] Bill McKibben, Power to the People: Why the Rise of Green Energy Makes Utility Companies Nervous, New Yorker (June 29, 2015), http://www.newyorker.com/magazine/2015/06/29/power-to-the-people.
