AIR CONDITIONING WIRE | A Senate budget reconciliation deal could open the door to a green power grid, a key ingredient to reducing emissions enough to meet the nation’s near-term climate ambitions.
The provisions of the power deal announced this week by Senate Majority Leader Chuck Schumer and Sen. Joe Manchin largely mirror the proposal laid out in last year’s failed Build Back Better Act. » They would expand tax incentives for renewable energy sources; provide new subsidies for technologies such as energy storage and hydrogen; and offer bonuses to clean energy developers who pay preferential wages, use domestically produced materials and build projects in communities dependent on fossil fuels.
The Inflation Reduction Act also calls for a long-term shift in how subsidies for clean electricity are allocated, moving from a specific technology standard for wind and solar power to one that provides tax credits for any technology that can produce electricity without emitting greenhouse gases. into the atmosphere.
The electricity provisions are particularly important for the country’s climate ambitions because most in-depth decarbonisation studies show that the energy sector contributes the bulk of emissions reductions by 2030 (Climate controlApril 22, 2021).
“This is something that allows us to potentially move forward and put us on track to meet our NDC targets,” said Conrad Schneider, director of advocacy for the Clean Air Task Force, referring to the United States’ national contribution to reducing emissions under the Paris Agreement. by law. climate agreement.
The United States has committed to reducing emissions by 50-52 percent from 2005 levels by the end of the decade. As talks between Manchin and Schumer appeared to break down earlier this month, experts said the US was in danger of missing the target by a wide margin. The research company Rhodium Group predicted that without action by Congress, emissions would decrease by 25 to 34 percent during that time. US emissions are currently 17 percent below 2005 levels (Climate controlJuly 14).
U preliminary analysis released Tuesday evening, Rhodium said the bill would put America on a path to cut emissions by 31 to 44 percent below 2005 levels by 2030. The research firm said the range reflects uncertainty about fossil fuel prices, economic growth and the cost of technology.
“Simply put, the IRA has the potential to be the largest climate action ever passed by Congress,” the group wrote in a research note. “However, 2030 is not so far on the horizon. Swift action in the Senate to pass the package, along with additional accelerated action at all levels of government, can help bring the US closer to the 2030 goal.”
The “Cut Inflation Act,” which includes $369 billion in energy and climate spending, aims to cut emissions by 40 percent. The bill’s electricity provisions would put the U.S. in good shape to meet and possibly exceed that threshold, Schneider said.
“What he is doing is refocusing US priorities on building a clean energy economy and transforming the energy economy on a scale that has never been seen before,” he said.
The power of tax credits
Technologies such as wind and solar power are available and commercially competitive with fossil fuels. This makes the transition to clean energy an achievable goal and a policy goal for achieving climate ambitions in the near term.
Some other sectors of the economy, such as industry, lack commercially viable environmental alternatives. Others, such as transportation, have an alternative in the form of electric vehicles, but face the problem of inventory turnover. People tend to drive their cars for years before buying a new one.
Clean electricity can further decarbonize the economy by providing a path to greener transport and space heating. That’s why climate efforts at the state and federal levels have long focused on curbing emissions from power plants, the second largest source of greenhouse gases in the US after transportation.
Energy sector emissions fell by about a third between 2005 and 2021, driven by a combination of federal wind and solar tax credits, state action, cheap natural gas, falling renewable energy costs and retirements, according to the EPA. coal.
But efforts to curb emissions in the energy sector also have a rocky history in Washington.
The cap and trade bill was repealed in 2009. A plan to pay utilities to adopt clean technologies and fine those that didn’t was dropped from Build Back Better last year over opposition from Manchin. This left clean electricity tax credits as the primary vehicle for significant emissions reductions in the near term.
The tax incentives for zero-emission electricity sources in the Inflation Reduction Act largely follow the model laid out in Better Recovery.
The new bill essentially extends existing clean energy tax credits through 2025. Like Build Back Better, it provides a base payment for the Production Tax Credit (PTC), historically used by wind farms, and an available Investment Tax Credit (ITC). to solar and other renewable sources.
The base payment for PTC — adjusted for inflation — is about 0.6 cents per kilowatt hour, rising to about 2.6 cents per kWh for developers who pay preferred wages and offer training programs. Two additional bonuses are available to developers who use domestic materials and locate their facilities in communities where a significant percentage of the population is employed in the fossil fuel industry. The maximum PTC will be approximately 3.1 cents per kWh including all bonuses. The bill also offers production tax credits for nuclear and hydrogen generators.
The base rate of ITC is 6 percent of the project cost and increases to 30 percent for developers who pay prevailing wages. Two additional 10 percent bonuses are available for projects that use domestically produced materials and are located in low-income or fossil fuel-dependent communities. The maximum ITC would be 50 percent.
There is one more important detail: solar projects will be able to claim PTC starting next year. The industry has long advocated for the move, arguing that solar developers should be able to choose which credit best suits their needs.
“We’re excited about the size and scope and the significant predictability it gives our companies to pave the way forward to meet our climate goals,” said Erin Duncan, vice president of congressional affairs for the Solar Energy Industries Association trade group. “It’s transforming the American economy.”
Variable game
Extending existing loans is only one element of the deal.
The Inflation Reduction Act would make sweeping changes to the way tax credits for clean electricity are paid starting in 2025. Starting this year, any carbon-neutral power source will be able to choose between PTC and ITC.
The move to a technology-neutral standard focused on cutting emissions has long been championed by Sen. Ron Wyden, D-Oregon, who chairs the Senate Finance Committee. Build Back Better also adopted Wyden’s proposal, but the Lower Inflation Act would have adopted it earlier.
Under Wyden’s plan, the credits would begin to phase out when energy sector emissions drop by 75 percent. If they remain above 75 percent in 2032, they will remain in place until emissions reach that threshold.
In an interview, Wyden estimated that the package of clean energy tax credits would cost about $260 billion.
“This is a fundamental change in terms of clean energy policy. We no longer pick winners and losers. It’s technically neutral,” Wyden said. “So it’s agnostic because you’re not going to be able to predict the possibilities of clean energy, because 15 years from now there could be a whole new means of reducing emissions.”
But one of the most significant provisions concerns how the subsidy is actually paid. Renewable interests have lobbied to turn the tax credit into a direct payment, saying it would save them from having to go to the tax equity markets and speed up development. But the provision was met with resistance from Manchin.
The “Inflation Reduction Act” takes something of a compromise. Tax-exempt entities, such as tribes and municipal utilities, will be able to receive direct payments, giving them access to the ITC for the first time. Other organizations will be able to transfer credit to a third party for the first time.
The change would effectively expand the pool of lenders from large banks to other entities with large tax liabilities.
“This is something that changes the game,” said Lauren Collins, a partner at Vinson and Elkins LLP.
Previously, developers had to have their own project to get a loan. But that made it more difficult for developers with limited tax liabilities to fully access the credit. Under the Inflation Reduction Act, a tax-exempt entity can transfer the credit to a third party who can take advantage of it.
“You no longer need a tax investor or your own tax capacity to monetize a loan,” Collins said.
Challenges to decarbonising the energy sector remain even if the bill becomes law. Money is important, but it takes time to locate, get permits and build projects, analysts say. The bill tries to anticipate some of these problems.
Renewable energy and fossil fuel developers have long argued that new projects in the United States are taking too long to get permits. The bill provides money for the federal government to hire new staff to work on permitting issues. The Department of Energy will receive $125 million for permitting work, the Federal Energy Regulatory Commission will receive $100 million, and the Department of the Interior will receive $150 million.
The bill also provides $2 billion in Department of Energy loans for power transmission projects and nearly $1 billion in grants to states to help locate projects.
And as concerns about global supply chains grow, the bill would offer incentives to companies to build plants to feed the clean energy industry, said Harry Godfrey, who oversees domestic manufacturing policy at Advanced Energy Economy, a clean-energy trade group.
“I would argue that this is the most significant industrial policy of this era, bar none,” he said.
Contributed by reporter Nik Sobchik.
Reprinted from E&E News Courtesy of POLITICO, LLC. Copyright 2022. E&E News provides important news for energy and environmental professionals.
