Renewable Energy Tax Credits Will Play a Critical Role in the Clean Power Plan

This post was written in collaboration with my colleagues, Ben Longstreth and Starla Yeh.

The renewable energy industry has been growing at a truly remarkable rate over the past decade, as costs have declined and with support from critical federal tax credits for wind and solar projects. Unfortunately, investments in the wind industry have been hampered by significant uncertainty around these tax credits, with Congress allowing the credits to expire several times over the past decade. These expirations and the associated uncertainty have resulted in a boom-bust cycle within the industry, making it harder to sustain a robust manufacturing and installation base. That uncertainty is now over. In December, Congress finally made the smart move of passing multi-year extensions of the tax credits and creating a predictable glide path for the wind and solar industries.

Although the Supreme Court recently made the unfortunate decision to temporarily pause the Clean Power Plan, NRDC is confident that the rule will ultimately be upheld on the merits, and many states and power companies have already signaled that they will continue to move ahead in their transitions to clean energy and a lower-carbon future. As part of the Clean Power Plan, the Environmental Protection Agency also proposed a new initiative called the Clean Energy Incentive Program (CEIP), intended to support early investments in renewables and energy efficiency in low-income communities. As part of our comments on the proposed federal plan and model trading rules, NRDC offered some recommendations to improve the CEIP, in order to drive additional renewable energy projects and strengthened emissions outcomes. Let's start with a quick overview of the basics:

How do the clean energy tax extensions affect the Clean Power Plan?

These renewable energy tax credits are a key complement to the Environmental Protection Agency's Clean Power Plan, which sets the first-ever limits on carbon emissions from power plants, the country's largest source of the pollution driving climate change. Under the Clean Power Plan, the power sector can meet its emissions limits in part by relying more on new zero-carbon electricity sources, like wind and solar. In this way, the Clean Power Plan will provide a boost to renewables, but a boost that may not have been felt for several years.

A recent analysis by the Rhodium Group found that, without the extension of the tax credits, the renewables industry was at risk of facing "a cliff that could inflict permanent damage to the industry's manufacturing and installation base" because of the expiration of the last tax credit extensions and the lag before the beginning of the Clean Power Plan. The recent clean energy tax extensions solve this problem, serving as a "bridge" to the 2022 start date. As Rhodium Group's analysts explain, "Tax extenders change the game for CPP compliance...The combination of the extenders and the CPP now has the industry positioned for growth well into the next decade..."

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Source: Rhodium Group

Clean energy comes with a host of economic, environmental, and public health benefits - such as job growth, bill savings, and cleaner air - and NRDC has been urging states and utilities to prioritize renewable energy and energy efficiency under the Clean Power Plan. The recent tax extensions for wind and solar energy not only ensure that the power sector will be well positioned to meet or exceed the Clean Power Plan emissions reductions, but also will accelerate progress towards meeting our longer-term climate goals.

What is the Clean Energy Incentive Program, and how does it work?

The Clean Energy Incentive Program, as the name suggests, is designed to encourage the development of clean energy - specifically, wind and solar energy, and energy efficiency programs in low income communities. The EPA included this program in the Clean Power Plan (CPP) in order to provide credit to utilities, renewable energy developers, and energy efficiency providers for investments made prior to the start of the Clean Power Plan compliance period. The program is also designed to help remove market barriers that would prevent or delay the development of clean energy in the years before the Clean Power Plan officially begins. Smart, early investments in clean energy have multiple benefits and can help states make progress towards the CPP goals by ensuring continued momentum in the shift to a lower-carbon electricity sector. (Note: This post will focus on the renewable energy portion of the CEIP, but NRDC is also strongly supportive of the incentives for energy efficiency in low-income communities and looks forward to continuing to work with communities, efficiency providers, and other stakeholders to maximize the benefits of this program.)

For simplicity, let's assume a state implements a mass-based compliance program, in which it distributes a fixed number of allowances (a permit to pollute one ton of CO2) based on its Clean Power Plan emissions budget. If that state chooses to participate in the CEIP, it would earn extra allowances from the EPA for building eligible renewable energy projects in proportion to the amount of carbon pollution reduced in 2020 and 2021. More specifically, the state grants the project half an allowance and EPA awards the project a "matching" half of an allowance from outside of the Clean Power Plan emission budgets. For example, if an eligible wind project is projected to reduce 1 million tons of CO2 between 2020 and 2021, then it receives 500,000 allowances from the state's budget, and 500,000 additional allowances from the EPA. In the first few years of the Clean Power Plan (2022-2024), more allowances are available for fossil plants to purchase from the wind developer, leading to 500,000 additional tons of CO2 pollution. If the wind project would not have been built in the absence of the CEIP, then the net result of the CEIP is 500,000 tons of carbon pollution reductions: 1 million tons of CO2 reduced prior to 2022, and 500,000 tons of additional CO2 emitted after 2022. The converse is also true - if a project would have been built in the absence of the CEIP but is still credited, then the net impact is higher CO2 emissions.

The Clean Energy Incentive Program can and should be improved to strengthen the incentives for renewable energy

When the CEIP was initially conceived, the federal renewable tax credits had not been extended. These tax credit extensions represent a huge climate win because they will drive significant growth in clean energy, and, for perhaps the first time in the industry's history, the tax extensions will also provide investors and developers with multi-year certainty and transparency that will ensure sustainable, continued momentum towards our clean energy and climate goals. NRDC firmly supports the goals of the Clean Energy Incentive Program, but it is important to consider whether the CEIP should be restructured in light of the tax credit extensions.

As described above, under the CEIP, if the EPA rewards too many extra allowances to projects that would have happened anyway, the cumulative emissions reductions of the Clean Power Plan could be significantly diminished, which in turn would weaken the longer-term drivers of renewable energy demand. It is critical that EPA take steps to ensure that allowances are primarily awarded to new projects - those that would not have been built absent the state's participation in the CEIP. There are changes EPA can make to increase the effectiveness of the incentives for new projects and strengthen overall emissions reductions. In our comments, we suggested that EPA consider adjusting the level of CEIP support to reflect the level of the tax credit received under the PTC and ITC. As the value of the tax credits phase down, the value of the CEIP credit could increase. This would provide stronger incentives for new, additional projects and ensure that we continue to build on the clean energy momentum provided by the tax extensions. Since the CEIP is still under development - EPA recently requested and received initial comments on its design, and is planning a new notice and comment period - EPA has an important opportunity to update and modify the program.

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Coupled with the Clean Power Plan, the renewable energy tax credit extensions provide much needed additional market certainty for renewable energy investors and developers, and accelerate our progress towards the low-carbon future we need to achieve - but we still have a long way to go. The Clean Energy Incentive Program is another great policy tool to spur clean energy, and NRDC has recommended a number of ways the EPA could improve the CEIP as a driver of additional renewable energy projects and strengthened emissions outcomes. To combat climate change, we'll need to maximize the effectiveness of every weapon in our arsenal.

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