As Americans reel from unprecedented fires, droughts, storms, and floods, Congress must pass the Build Back Better reconciliation package—a once in a generation opportunity to combat the climate crisis, create millions of good-paying jobs and drive clean energy innovation. At the core of this opportunity is the chance to transform and decarbonize the electricity sector over the next decade through the Clean Electricity Payment Program (CEPP) and clean energy tax incentives.
Transitioning the power sector to cleaner electricity is broadly popular across the country. Majorities in all 50 states and 429 of the 435 Congressional districts support federal action to achieve 100 percent clean electricity by 2035. The budget resolution adopted by Congress in August includes the CEPP and clean energy tax incentives that put the power sector on the path to achieve 80% clean electricity by 2030, a goal endorsed by President Biden and critical to achieving the president’s pledge to cut overall US climate pollution in half by that date. Now it is up to congressional committees and the full House and Senate to write budget legislation that fully implements that resolution.
What is the CEPP and how does it work together with tax incentives?
The CEPP is an investment by the federal government that will accelerate the transition to a carbon free grid, create millions of jobs, protect public health, and fight climate change. It is similar to a Clean Electricity Standard (CES) in that it will lead to a substantial reduction in power sector GHG emissions, but CEPP is fundamentally different in that it is a budgetary mechanism involving payments and penalties. With a traditional CES the costs of the transition would fall on the shoulders of ratepayers. In contrast, under the CEPP the federal government is providing financial incentives to drive the transition which protects ratepayers from bearing the cost of these critical investments. These differences enable it to be more responsive to the needs of working families as well as create more jobs at a faster pace.
The CEPP builds on and supports the success of existing renewable and clean energy programs at the state level. Governors, mayors, labor unions, the youth movement, consumer advocates, utilities, environmental groups, public health experts, faith leaders, community-based groups, and clean energy companies have all called on Congress to pass an aggressive CEPP this fall as part of the budget reconciliation bill.
The CEPP and clean energy tax incentives complement each other to achieve our climate and clean energy goals. The tax incentives are also critical to drive clean energy deployment and reduce the cost of renewables and other clean energy generation. Tax credits on their own can achieve 44-56% clean electricity by 2031—optimally designed tax incentives will likely achieve the upper end of that range (Rhodium Group, UC Berkeley, NRDC). The CEPP builds on the likely progress made by the tax credits and ensures that electric utilities (specifically Load-Serving Entities or LSEs) take action to achieve the necessary pace of deployment to hit an average of 80% clean power nationwide by 2030. Modeling from a variety of sources (Energy Innovation, Evolved, Rhodium, etc) indicates the total marginal capital investment needed to transform domestic electricity generation—from 40% clean today, to 80% clean by 2030—is approximately $550 billion. The tax credits and CEPP combine to support this transformation, together. Without both, the clean power transformation either will not occur, or could be placed as a burden on ratepayers.
To achieve these paramount economic, climate, and innovation benefits, the CEPP and clean energy tax incentives must be properly designed. Here are the key design parameters the reconciliation bill must include for the CEPP and tax credits.
Key Design Features of CEPP
Strong Clean Electricity Trajectory: The Congressional budget resolution includes substantial funding for CEPP that should put the power sector on a path to achieve 80% clean electricity by 2030, in line with President Biden’s commitment. The significant economic and innovation benefits of CEPP are contingent on maintaining a strong clean electricity trajectory in line with the 80% target. Achieving this trajectory means that CEPP must include an annual increase of clean electricity of at least 4-5 percentage points for each LSE. This does not mean that all LSEs must reach 80% by 2030—all LSEs start where they are and move forward at an equitable pace; those with lower levels of clean electricity are not expected to catch up to those that start with higher levels of clean electricity.
Modeling efforts across the board have found that 80% by 2030 is achievable at a reasonable cost, leads to a rapid buildout of renewable energy, creates between 500,000 and millions of net new jobs per year, and drives enormous benefits from reductions in climate-warming emissions and other harmful pollution.
At least a dozen utilities across the country already have plans to add more than 3% per year of clean electricity to their portfolios through 2030, and that is without federal measures. With the CEPP payments and new tax incentives, utilities and renewable developers will be able to add clean energy even faster.
Robust Payments to Benefit Electric Customers: Sizable payments are critical to ensure that CEPP supports utilities in the rapid deployment of clean electricity while keeping costs low for households and businesses. The payments must be large enough to cover the costs of the transition, and policymakers must ensure that 100 percent of the payments are used for customer benefit—including by lowering electricity bills, building or buying clean electricity, paying off debt on retiring power plants, and compensation for workers at plants that retire.
Robust Penalties to Support Clean Energy Benefits Everywhere: Both payments and penalties are essential elements of the CEPP. LSEs that do not achieve their targets for increasing their percentage of clean electricity must pay a penalty based on their shortfall. Penalties are an integral part of the CEPP. They are needed to: (1) ensure CEPP will deliver 80% clean energy by 2030; (2) keep existing clean resources operating; and (3) prevent utilities from misusing funds by shuffling resources (where some utilities might intentionally decide not to comply but instead to sell their clean energy “rights” to other utilities). If penalties are included, almost all utilities will choose to achieve their clean electricity growth targets in order to both receive payments and avoid penalties.
Definition of Clean: The definition of clean electricity is critical to the success of the program. Qualifying clean electricity resources must clear a low emissions threshold. The definition should:
- Not count gas-fired power plants as clean;
- Exclude forest biomass; and
- Exclude incineration/waste to energy (why incineration is bad).
Key Design Features of Tax Incentives
Clean energy tax incentives are critical to deploying clean electricity sources at the necessary pace and addressing the climate crisis, but the incentives need important upgrades to effectively support the power sector transformation.
The electric power industry is complex with a number of sub-sectors structured in various ways- investor owned utilities (IOUs), municipal utilities (munis), rural electric cooperatives (coops), and independent power producers (IPPs). The structure of each sub-sector impacts whether and how they can take advantage of tax incentives. Under current law, only some power sector entities can effectively take advantage of the tax credits and this ends up limiting the rate of progress.
The effectiveness of clean energy tax credits depends on both their magnitude and and their design. Congress should maximize the impact of the incentives by providing:
Long-term extension and availability of current and new tax incentives: Having the tax credits available for a long-term period—10 years under reconciliation—provides certainty to clean energy developers and investors and gives substantial time for supply chains to scale up to meet increased demand.
The full credit value for the production tax credit (PTC) and investment tax credit (ITC): The PTC was originally set at $25/MWH but has been reduced over the past few years and currently sits at $15/MWH and will phase down to zero in 2022. The ITC’s initial value was set at 30% of project costs, is now at 26%, and is scheduled to step down yearly, phasing out completely in 2026. Restoring both tax credits to their full initial value will spur greater development of clean energy projects.
The option to choose either the PTC or the ITC to maximize deployment: Currently, utility-scale solar can only use the ITC and utility-scale onshore wind can only use the PTC. Giving wind and solar developers the option to choose either the PTC or ITC provides them with the flexibility to decide which one best suits their project circumstances.
A 100% direct-pay option to allow more entities to access the credits: In order to take advantage of tax credits, clean energy project developers need to have tax liability or partner with an equity investor who can monetize the tax credits. This limits the ability of tax exempt utilities and other entities with no tax appetites to utilize the incentives and leaves them at the mercy of the expensive and limited tax equity market. A 100% direct-pay option will provide the full value of tax credit funds directly to clean energy project developers, rather than a tax credit that they can’t use and drive additional clean energy deployment.
Congress should also tie these incentives together with labor standards, to support good-paying jobs and expand the credit for projects in disadvantaged communities, to drive equitable economic opportunity. While this blog is focused on the power sector, tax incentives for vehicles, buildings, and manufacturing are also top priorities for NRDC and will drive the transformation of other sectors.
Congress must take action now to transition the power sector and put it on a path to 80% clean electricity by 2030 by passing an effective CEPP and enhanced clean energy tax incentives in the reconciliation bill.