EDITORS' PICK | Dec 21, 2020, 

08:44am EST | 26,439 views

Big Stimulus For Clean Energy: Covid

Relief Bill To Include Bipartisan
Support For Green Tax Credits
Allan Marks Contributor
Energy
Allan Marks is a partner at Milbank LLP and lecturer at UC Berkeley.

Senate Majority Leader Mitch McConnell of Ky., arrives for a news conference with other Senate ... [+] ASSOCIATED

PRESS

In a bipartisan boost from Congress, tax credits for solar and wind energy (ITC
and PTC), carbon capture and biofuels appear set to be extended.

Congressional leaders agreed Sunday, December 20, 2020 on a $900 billion

bipartisan pandemic relief bill bundled with a $1.4 trillion omnibus government
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spending package. The legislation contains several provisions designed to boost
investment in clean energy. The new package, which is subject to final votes in the
Senate and House expected today, would extend federal tax credits that incentivize
construction of new wind and solar power plants, as well as tax credits for carbon
capture, biofuels and alternative fuels, fuel cells and energy efficiency. At least in
that respect, it may fairly be called a stimulus bill, not just a relief.

Renewable Energy Tax Credits

The energy provisions have been attached to must-pass legislation to continue

funding government operations until the end of the fiscal year and to provide
economic relief during the ongoing pandemic. The bill has the support of the
leadership of both parties, in both the Senate and the House of Representatives. By
extending renewable energy tax credits, the new COVID-19 pandemic relief and
government spending bill should prolong the renewables building boom. The tax
credit extensions also mitigate the effects on developers of disrupted supply chains,
force majeure claims, permitting delays and labor disruptions due to the pandemic,
allowing extra time to meet the new deadlines to qualify for the credits.

The looming deadline to commence construction of renewable power facilities

before the end of this year to avoid missing these tax incentives has spurred massive
investments in renewable energy generation over the past couple of years.
According to a report by BloombergNEF, the $55.5 billion invested in U.S.
renewable energy capacity projects last year (second only to China globally)
represented an increase of 28% over 2018 in large part due to the race to preserve
access to tax credits slated to expire or step down by the end of 2020. And 2020
looks set to surpass 2019 in the dollar amount of new investment and total
megawatts of new renewable generating capacity.

The tax credits on which developers and owners of renewable energy projects rely
are routinely designed by Congress to phase out and expire, creating a strong but
temporary incentive to build projects as quickly as possible. Permanent credits lack
urgency; credits soon to expire attract too little interest. So to be most effective,
many energy tax credits are available for projects that come online, or start
construction, over a period of five years or less. That medium-term window creates
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enough incentive to expedite investments while allowing time for land to be
acquired, contracts agreed, permits obtained and financing raised. Still, the
recurring uncertainty about whether and on what terms the credits might be
extended tends to create an artificial boom-and-bust cycle, with periods of intense
investment and debt financings in the year or two before each scheduled expiration
or reduction in the credits and a sharp drop-off in development activity and new
investments (including in domestic manufacturing capacity for wind turbine
generators or solar components) whenever the credits have lapsed in the past.

The existing tax credits have been extended several times over the past two decades.
Congress passed a one-year extension for the wind energy tax credit (but not the
solar tax credit) as part of the year-end 2019 government spending bill. In 2020,
Congress looks to be more generous to renewables, especially solar power and
offshore wind, with broad support across the aisle.

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Specifically, under the proposed new law, according to sources on the Hill, the
existing 26 percent Investment Tax Credit (ITC) available for solar power projects
that commence construction before the end of 2020 would be extended by two
years, to year-end 2022. The amount of the credit would step down to 22 percent for
projects that start construction before the end of 2023 (as opposed to stepping down
in 2021 under current law), with further reductions and a phase-out to zero
thereafter.

Other environmentally beneficial energy investments are likewise encouraged in the

bill. The two-year ITC extension and gradual phase-out would apply to eligible
investments in new fuel cells. The ITC would also become available for investments
in waste heat energy recovery property, to encourage power generation using
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exhaust heat that would otherwise be wasted from buildings or equipment. In
addition, energy efficiency improvements to commercial buildings today benefit
from a tax deduction, which would become permanent under the new law with the
cap of $1.80/square foot indexed to inflation.

Under current law, the Production Tax Credit (PTC) provides for a credit of 1.5 cents
per kWh (or 60% of the PTC of 2.5 cents per kWh enacted in 2016, which has since
stepped down) to owners of wind-powered generation facilities for energy produced
during the first 10 years after the facilities are placed-in-service, so long as
construction begins before the end of 2020 and commercial operation starts by
2024. Certain other renewable technologies (like geothermal energy and closed-loop
biomass) are also eligible for the credits. The new law would extend PTC eligibility
by one year at the current 60% level for projects that start construction before the
end of 2021.

Offshore Wind

Thanks to subsidies of varying degrees which have led to technological innovation,

increased scale and reliability of offshore wind turbines, and a rapidly falling
levelized cost of energy, offshore wind farms are expanding globally beyond mature
Northern European markets (the United Kingdom, Germany, Denmark, Belgium
and the Netherlands), which boast over 23 GW of installed capacity, or 83% of the
global offshore wind market. The European Union predicts significant global growth
of offshore wind as a key tool to combat climate change, both for power generation,
while avoiding greenhouse gas emissions, and as a power source in particular to
produce green hydrogen. A recent report by the Global Wind Energy Council noted
that offshore wind projects accounted for 10% of all new wind energy capacity
additions in 2019, with China taking the lead. The potential for offshore wind in the
United States is estimated to be as high as 24 GW, with over a dozen new projects
already proposed or undergoing permitting and environmental review.

In the new bill, Congress has given clear encouragement for offshore wind energy
development. Offshore wind farms may elect either the PTC or the ITC. Developers
of offshore wind farms, given their high cost relative to onshore wind farms,
typically elect the ITC. For offshore wind facilities, the ITC would be extended by
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five years under the new bill, giving owners of offshore wind farms the option of
electing the ITC so long as they begin construction by the end of 2025. The ITC for
offshore wind facilities would remain at 30 percent, without any step down during
the full eligibility period. Given the complexity and long lead time involved in
permitting, procurement and financing for offshore wind power projects, this five-
year extension should enhance the financial viability of the offshore wind farms,
many as large as 800 MW, currently in early stages of planning and development in
the United States.

Carbon Capture

The new bill extends the tax credits for carbon capture, utilization and storage under
section 45Q of the tax code. In 2018, Congress modified section 45Q to accelerate
the development of carbon capture facilities that reduce the amount of carbon oxide
released into the atmosphere. Projects that start operations after February 8, 2018
earn a federal income tax credit for up to 12 years for each ton of “qualified carbon
oxide” (not just carbon dioxide) that is captured at a “qualified facility” and either
disposed of (sequestered) by the taxpayer in secure geological storage
storage, or used as a
tertiary injectant in a qualified enhanced oil or natural gas recovery project and thus
disposed of in secure geological storage,
storage or used by the taxpayer in a permissible
alternative use that results in permanent disposal of the carbon oxide.

To qualify today, the carbon capture project must commence construction by the
end of 2023. The new law, once enacted, would allow more time, extending the
deadline to start construction to the end of 2025. In February 2020, the Internal
Revenue Service clarified the requirements for starting construction, applying
basically the same test as used for renewable energy tax credits for carbon capture
projects commenced after March 8, 2020.

Alternative Fuels, Biofuels and Fossil Fuels

Excise tax credits for alternative fuels and the income tax credits for biofuels under
section 40 of the tax code would be extended. The $1.01 per gallon credit for second
generation biofuel is scheduled to expire at the end of December 2020 but would be
extended for another year under the new bill. The new bill also extends existing
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federal excise taxes both on mined coal to fund the Black Lung Disability Trust Fund
and on imported petroleum products and crude oil delivered to refineries to fund
the Oil Spill Liability Trust Fund.

Not all is clean and green, however. Production tax credits for coal mined on tribal
lands are being increased and extended in the bill, ironically just days after the three
775-foot tall smokestacks at the 2,400 MW Navajo Generating Station in Arizona,
decommissioned a year ago, were dramatically demolished. There appears to be no
provision in the bill granting additional subsidies or incentives for EVs (other than
two-wheeled vehicles) or for stand-alone battery storage
storage.

Nonetheless, the proposed COVID-19 relief bill and omnibus spending

authorization on the whole contain many significant provisions that have wide
support among both Democrats and Republicans to stimulate investment, reduce
greenhouse gas emissions, and increase efficiency in the generation and use of
energy in the United States.

If the bill finally passes today, optimists in this season of goodwill — and exhaustion
— may say that there is hope yet for bipartisan cooperation in Washington and that
perhaps the stars (or at least Jupiter and Saturn) have aligned.

Congress reaches agreement on omnibus spending bill and new relief package. GETTY