President proposes tax credit-driven mobilisation of ‘tens of billions of dollars’ of private capital to build world-class power network and new employment
US President Joe Biden is proposing a ten-year extension of federal tax credits for renewables and energy storage technology and creation of a “targeted” investment tax credit (ITC) to spur construction of at least 20GW of high-voltage power lines as part of a $2.3trn infrastructure plan.
“It’s not a plan that tinkers around the edges,” Biden said during a speech in Pittsburgh. “It’s a once-in-a-generation investment in America.”
The eight-year American Jobs Plan reaffirms his administration will set the country on a path toward a carbon-free electric grid by 2035 with a new clean-energy standard mandating a timetable to achieve this.
Biden wants to “mobilise tens of billions in private capital off the sidelines, right away” with a targeted ITC to encourage the buildout of 345kV and above capacity power lines, said a statement from the White House.
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“Through investments in the grid, we can move cheaper, cleaner electricity to where it is needed most.”
“The American Jobs Plan is an investment in America that will create millions of good jobs. The President’s plan will unify and mobilise the country to meet the great challenges of our time: the climate crisis and the ambitions of an autocratic China.”
The White House said the plan would be paid for over 15 years by increasing the corporate tax rate to 28% from 21% and boosting taxes on overseas earnings of companies, although Biden is open to considering other financing mechanisms from both the private sector and opposition Republicans.
Biden will also request Congress end billions of dollars of federal fossil fuel subsidies and require polluting industries pay for environmental clean-ups.
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Federal tax credits
The proposed extensions for the ITC and production tax credit (PTC) for renewables would include both a direct-payment option and a phase-down whose schedule will be published in the coming weeks. If Congress support the plan, the renewal would be the longest since the ITC and PTC were enacted in 2006 and 1992, respectively.
The proposed multi-year extension would provide investors the long-term window they have been seeking to ramp capacity expansions for both onshore and offshore wind and solar PV.
For wind, the PTC is now worth 60% of full value ($25/MWh) for delivered electricity for a project’s first decade of commercial operation. A project has the option to convert the PTC into the ITC worth 18% of capital expenditure and is claimed in the year it enters service.
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Offshore wind projects are eligible for the ITC at 30% of Capex if they began construction after 1 January 2017 or start construction through 2025 and are in operation within ten years. Large solar projects can qualify for the ITC at 26% value through the end of 2022. At present, the ITC does not apply to energy storage technology.
The direct cash pay option in lieu of the ITC and PTC would make the industry less reliant on expensive tax equity for project financing, an estimated $15bn market here for solar and wind. The goal is to enable projects with little or no taxable income to quickly monetise the credits, allowing completion of construction at lower cost and creating jobs, rather than having to carry the excess credit forward to apply to a future tax liability.
The White House did not say if direct payment would be equal to 100% of the ITC or PTC, or the Treasury will require a haircut to employ this option.
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Some smaller projects or those with less creditworthy counterparties struggled in 2020 to obtain tax equity investments from banks, financial institutions, and large companies who had smaller profits because of the Covid-induced economic downturn, leaving them with lower tax liabilities and less need for ITC or PTC benefits.
Tax equity investments comprise 20%-35% of the capital stack for a typical utility-scale solar or onshore wind project.
Extending the ITC to large-scale energy storage technology has taken on new urgency after record-cold weather last month caused power shortages and major blackouts in the main Texas electric grid.
After Congress in 2017 reduced the corporate tax rate from 35% to 21%, raising it to 28% would be bullish for renewables tax equity investment.
“It will be a huge win for renewables developers to see more tax appetite in the market and a refundable tax credit and a long-term extension. Huge wins across-the-board. Getting Republicans to go along with it, that’s tricky,” said Dan Sinaiko, partner in law firm Allen and Overy’s energy, natural resources and infrastructure practice.
The Biden plan also calls for a revived manufacturing tax credit and targeted federal grants to promote domestic battery production fed by an in-country supply chain and provision of critical elements such as lithium. The private sector will be able to leverage federal investment to accelerate a diversity of storage technologies.
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There will also be Grid Deployment Authority established at the Department of Energy that would be mandated to exert better leverage of existing rights-of-way and supports “creative financing tools” to spur additional high priority high-voltage power lines.
The wind and solar industries have been warning for years that without new long-haul transmission lines to bring abundant, low-cost electricity from remote high-resource interior regions to load centres, US renewables development will be far below its potential and hurt progress toward carbon reduction.
“Studies and experiences with power system resilience and decarbonization reveal the need to move many gigawatts of power back and forth across large geographic areas,” said Rob Gramlich, executive director of advocacy group Americans for a Clean Energy Grid.
“The transmission tax credit and other policies in the Biden infrastructure plan will enable a couple dozen large scale transmission projects to move forward in the near term.”
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Biden also wants to spend $174bn to expand the electric vehicle market including construction of 500,000 charging stations nationwide, conversion of public transit and school buses from diesel and tax breaks to encourage Americans to buy plug-in cars. The plan drew praise from clean energy lobbies.
“President Biden’s infrastructure proposal is a significant step in meeting our collective clean energy goals,” said Abigail Ross Hopper, CEO of the Solar Energy Industry Association. “The plan has a clear focus on domestic manufacturing, good jobs for all Americans and clean energy woven throughout.”
Greg Wetstone, CEO of the American Council on Renewable Energy, said: “We commend President Biden for his historic efforts to at long last get serious about tackling the climate crisis.
“The plan will move the clean-energy sector beyond the endless cycles of temporary stopgap incentives toward a stable, long-term tax platform that will put millions of Americans back to work, upgrading our outdated grid and building a 21st century renewable energy economy.”(Copyright)