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Congress extends the renewable investment tax credit: What now

The extension of the Production Tax Credit and Investment Tax Credit could mean a 56 percent boost to the renewable energy industry over five years.

Earlier this month, Congress passed a bill that extends the Production Tax Credit (PTC) and Investment Tax Credit (ITC) that have benefited wind and solar, respectively. This is big news for the U.S. renewable energy industry. 

According to Bloomberg New Energy Finance, the net result could be 37 gigawatts of new wind and solar capacity — a 56-percent boost to the industry over five years, catalyzing $73 billion in new investment and enabling as many as 8 million more households to access clean, renewable, affordable energy.

In exchange for the tax credit extension, Congress has lifted the 40-year ban on crude oil exports that began with the 1970s Oil Embargo Crisis.

Environmentalists and energy analysts (among others) are asking if this grand compromise is a good one. We think it is.

The costs of solar and wind power have been falling steadily and sharply for years. They are widely expected to become the cheapest way to generate power in the U.S. and most of the rest of the world by 2020, as reported by BloombergFortune and U.S. News & World Report.

But first we have to make it to 2020, and between here and there has been a potential "valley of death" as incentives expired. The 10-year, $0.023/kWh PTC already expired at the end of 2014, and the wind industry went through another disastrous boom-and-bust cycle along with it. And the 30-percent solar ITC was set to drop significantly to 10 percent next year, with many industry players predicting a consequent crash in what has been a robust and rapidly growing market.

But that has now changed.

In a display of bipartisan compromise that has been vanishingly rare in recent years, Congress has agreed to extend the solar ITC at the current 30-percent rate through 2019, after which it will fall to 26 percent in 2020, 22 percent in 2021 and 10 percent in 2022. An additional commence-construction clause will extend the credit to any project in development before 2024. And the wind PTC will be retroactively applied to 2015 and extended through 2016, after which it will decline each year until it fully expires in 2020.

Here are the key outcomes:

1. The extension gives wind and solar time to achieve parity (or better) with conventional generation without subsidy.

According to Lazard’s Levelized Cost of Energy Analysis — Version 9.0 (PDF), released in November, the LCOEs for wind and solar have fallen 61 percent and 82 percent, respectively, over the past six years. This puts unsubsidized best-in-class wind and solar on par with or better than new gas-fired generation already. With continued cost declines for both renewable technologies, by the time the extensions expire after 2020, we expect that the tipping point will have been reached where wind and solar — beyond their best-in-class onshore and utility-scale versions — are firmly in place as the cheapest kilowatt-hours around.

2. Big corporations pursuing power purchase agreements (PPAs) for large off-site wind and solar transactions will continue to see competitive prices.

This year we have seen record-low PPAs for wind and solar projects, such as Austin Energy’s recent utility-scale solar procurement at less than 4 cents per kilowatt-hour and the best wind PPAs clocking in at 2.50 cents per kWh. The PTC and ITC ensure that renewables projects continue along their historical declining cost curve — the value of the extension goes beyond the current prices of these technologies; it's about maintaining their trajectories.

The PTC and ITC extensions are thus great news for the big corporations that have been driving significant capacity additions of renewable energy in the U.S., such as through the membership of RMI’s Business Renewables Center. They’ve signed deals for more than 3 GW of new large-scale, off-site renewable capacity this year, and we’re hopeful of an even stronger 2016 thanks to continued PPA price competitiveness. And it’s not just the Fortune 500 who’ll benefit. So will low-income customers, such as RMI is working with through eLab Leap, whether via utility-scale projects that contribute to a lower-cost grid, direct subscription via mechanisms such as community solar, or other solutions.

3. Because the PTC and ITC decline gradually over a period of years, the industry can plan accordingly, avoiding boom-and-bust cycles.

In previous years, the threat of PTC/ITC expiration (or their actual expiration, before renewal or extension) has resulted in major boom-and-bust cycles, such as for wind. But now, a predictable and gradual decline over a period of years gives both renewable energy industries clear glide paths to a post-subsidy era, similar to Germany’s deliberate step down of its feed-in tariff. Five more years under the PTC and ITC allows the wind and solar industries to continue cutting costs, innovating in finance and preparing their project pipelines for the day when they can compete with the grid power incumbency totally unsubsidized.

4. Lifting the oil export ban is a small price to pay.

Many environmentalists and climate advocates have opposed lifting the 40-year-old ban on crude oil exports on the grounds that it would lead to greater carbon emissions. On balance, we believe (as does OPEC’s Secretary General) that lifting the ban will have negligible effects on emissions and commodities markets in what amounts to a zero-sum game. Lifting the ban will reduce the discount on U.S. oil relative to European grades, helping U.S. oil producers at the expense of U.S. refiners who have (until now) profited from that discount. Indeed, the spread between those benchmarks has nearly disappeared since the news of the omnibus budget deal broke. But as the ban was lifted, U.S. weekly imports of crude oil are at a two-year high as refiners seek cheaper crudes from Canada and overseas.

We do not see a significant expansion of U.S. oil production as a result of the ban being lifted. But the PTC and ITC extensions amount to a guarantee that the wind and solar industries will survive and thrive until they can fully stand and compete successfully on their own against the fossil fuel and nuclear incumbencies without any subsidies whatsoever. This is a watershed moment for renewable energy.

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