Tax Policies for the Energy Transition

On March 10 and 11, industry and government leaders convened online for the American Council on Renewable Energy (ACORE) Policy Forum. Speakers included key policymakers such as Sen. Joe Manchin (D-W.Va.), Chair of the Senate Energy and Natural Resources Committee, Sen. Ron Wyden (D-Ore.), Chair of the Senate Finance Committee, and Secretary of Energy Jennifer Granholm, as well as several energy experts in the public and private sectors. Seeking ways to drive a just transition to a clean energy future, panelists discussed advancing diversity, equity, and inclusion; developing smarter tax policies; and upgrading nationwide infrastructure while repowering the economy.

Transitioning to a renewable energy economy will require an array of smart tax policies to drive investment across industries. As the path to achieving carbon neutrality by 2050 becomes increasingly narrow, several forum participants outlined key recommendations for instituting tax credits, stimulating market growth, and advancing technological research and development.

In a panel entitled “Incentives to Unleash the Renewable Energy Economy: Smart Tax Policies and What's Next,” participants from across the energy landscape emphasized the need for durable tax incentives for renewable technologies. Panelists identified key areas of common ground, where bipartisan consensus on tax policy could drive the energy transition. The solutions they offered include focusing on long-term solutions, incorporating refundability to supplement traditional tax equity incentives, and negotiating the role of technology neutrality in devising a green energy tax code.

Panelists underscored the importance of long-term tax incentives, agreeing that start-and-stop measures and a general lack of consistent tax policy have been a hurdle for the renewable energy industry. Speakers cited the GREEN Act (H.R.848) as an important first step towards ensuring predictability in the federal tax code. The GREEN Act would provide tax incentives as far as five years in the future for most renewable energy and energy efficiency projects.

However, as RWE Renewables Director of Government and Regulatory Affairs Craig Sundstrom emphasized, many renewable development projects—such as offshore wind—can take far longer than five years to complete. Projects of this nature necessitate longer-term certainty and support for developers and investors.

Panelists highlighted the need for creativity in tax policy, calling into question whether the existing tax equity structure can incentivize the enormous investments in green energy needed to achieve the Biden-Harris administration’s 2035 and 2050 emission reduction targets. In this vein, refundable credits—tax credits that can be returned to a taxpayer if their liability is below zero—presented a solution to broadening incentives.

Sundstrom recognized refundability as a clear way to incorporate direct pay into the existing tax code, bolstering growth in the industry. The panel’s moderator, Ed Zaelke, global co-head of the Energy and Project Finance Practice at McDermott Will & Emery, harked back to the 1603 Cash Grant Program (part of the American Recovery and Reinvestment Tax Act of 2009), which successfully incentivized investment in clean energy projects by reimbursing eligible applicants for a portion of the installation costs of qualifying energy projects.

Renee Eastman, Senior Director of Federal Affairs for Salt River Project, provided a public utilities perspective to the conversation on refundable credits, noting that public power largely supports the direct pay or refundability approach. The current system requires utilities to enter into power purchase agreements (PPAs), which allow investors with tax appetites to partner with utilities and use their tax credits. Though effective in some cases, Eastman noted that a direct pay model would allow utilities to significantly scale up their renewable energy facilities.

An emphasis on infrastructure also permeated discussions on bipartisan tax policy. Bobby Andres, a Senior Policy Adviser for Sen. Wyden (D-Ore.), noted that recovery efforts that emphasize infrastructure, such as President Biden’s Build Back Better campaign, can incorporate tax incentives for renewable and clean energy projects. David Bridges, who serves as Tax Counsel to Rep. Tom Reed (R-N.Y.), concurred, reiterating that longevity in tax codes is a fundamental need for clean energy infrastructure projects.

Sundstrom and Eastman mentioned that transmission would be a good place to start when it comes to federal, tax-based incentives for infrastructure projects. Transmission, the two stated, is essential to any approach to energy transition as it reduces bottlenecks on the grid.

The concept of technology neutrality was of key importance to the conversation on clean energy tax policy. As Andres explained, a tax system that is built around technology neutrality, and one that ties incentives to long-term visions, will provide the flexibility needed for more innovation in the industry. Sundstrom stated that, in order to incentivize investment in technologies such as stand-alone storage and hydrogen, a level playing field must be established. By harmonizing tax treatment through technology-neutral policies that reward reductions in carbon emissions, the innovation gap can be closed and more technologies can be brought into the market.

Speakers throughout the ACORE Policy Forum honed in on the need for smart tax policies in the country’s approach to energy transition. In his keynote speech, Sen. Wyden deemed the current tax codes obsolete and in need of a major overhaul. He emphasized technology neutrality and criticized current fossil fuel subsidies built into the tax code. Wyden expressed excitement around post-pandemic recovery opportunities that could prioritize infrastructure improvements and incentivize investments in clean energy.

Author: Hamzah Jhaveri