The leadership in Congress and the Biden administration have said they will address climate change in several ways, via legislation, regulations, and administrative actions. The keystone of at least one of the bills under consideration in Congress is to extend and expand current clean energy tax incentives. If Congress wants federal incentives for clean energy investments to meet their potential, it must make such energy tax incentives available to all electric utilities, not just some of them.
Today, the most significant clean energy incentives are embedded within the tax code. The bulk of these tax incentives are direct subsidies provided in the form of credits against income tax. The congressional Joint Committee on Taxation says that, economically speaking, these tax credits are largely indistinguishable from a cash payment.
Except there is a catch — You can only use this mechanism if you have income taxes against which to offset a tax credit. And in the United States, nearly 30 percent of all electric utility customers are served by tax-exempt utilities that cannot claim energy tax credits. This includes public power utilities, which are not-for-profit, tax-exempt, local-government-owned utilities that serve close to 50 million Americans in every state except Hawaii and each U.S. territory. Rural electric cooperatives, which serve over 40 million Americans, are also tax-exempt. This federal tax-exemption enables public power utilities to provide electricity at cost.
The cost of not being able to claim these credits is significant. The production tax credit for wind power is worth $18 per megawatt hour. By comparison, wholesale electricity prices in the U.S. generally average between $30 and $50 per megawatt hour. Similarly, the energy investment tax credit is worth 26 percent of the cost of a qualified project — or $26 million for a $100 million project. In total, the Joint Committee on Taxation estimates that these tax credits are worth $15 billion a year.
Public power utilities can indirectly benefit from these credits by entering long-term power-purchase agreements with for-profit project developers. However, the transactional costs of power purchase agreements can be high. In addition, only a portion of the value of the tax credit is generally passed on to the purchaser, thus muting the incentive benefits that can be passed on to customers. Finally, this arrangement effectively denies the community the opportunity to own and operate its own clean resources to ensure future cost certainty and energy supply reliability.
Congress could borrow from the current tax code and allow public power utilities developing such projects to transfer the value of the credit to other project partners. Or it could make tax credits more like the earned income tax credit (claimed by individuals) and the alternative minimum tax credit (for corporations) by making them “refundable” beyond the amount of taxes owed. Congress could also dust off “Clean Renewable Energy Bonds” — special purpose municipal bonds used after 2009 to finance qualifying renewable energy facilities.
Giving public power utilities access to tax incentives ensures that all utilities can benefit from incentives intended to encourage critical energy investments, making the incentives fairer and more effective. Savings could be passed on to customers in the form of savings on their utility bills or to finance further investments. Moreover, encouraging cities and towns to build and own their own generation means local projects, local jobs, and local control of the decision-making.
As President and CEO of the American Public Power Association (APPA), I urge Congress to provide public power utilities with comparable incentives. You cannot get to 100 percent of anything, much less achieving ambitious greenhouse gas reduction targets, by ignoring 30 percent of utilities and their more than 90 million customers.
By giving public power utilities access to tax incentives, Congress can make it easier for the energy sector to address climate change and other policy goals while keeping costs affordable, unleashing local innovation and spurring new jobs.
Joy Ditto is the president & CEO of the American Public Power Association.