What the new tax law means for renewables

What the new tax law means for renewables

Wind turbines and solar panels
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Wind and solar power markets survived the tax law, but other renewable sources, such as geothermal power, were left out in the cold.

The final Republican tax bill that became law in December spared the wind and solar power industries from most attempts to roll back federal clean-energy incentives, but it left other renewable energy sources out in the cold, leading to calls for new legislation.

Lawmakers last month removed earlier provisions of the tax bill that would have slashed the value of wind-power tax credits and made them harder to get and would have ended tax credits for electric vehicles. 

But the law contains a new provision, called the Base Erosion Anti-Abuse Tax (BEAT), which limits companies’ use of renewable-energy tax credits to offset their foreign-transaction taxes, to 80 percent of the credits’ value, down from 100 percent previously. That change, along with the reduction in the overall corporate tax rate, to 21 percent from 35 percent  while positive for companies generally  will reduce the usefulness of renewable-energy tax credits to investors, which could increase costs for some renewable-energy developers, some analysts predict.

Meanwhile, a key item missing from the tax law is a much-needed extension of federal tax credits for fuel cells, geothermal power generators and heat pumps, combined heat and power generators (CHPs), commercial energy-efficiency improvements and other sources, which expired in 2016. These clean-energy sources inadvertently were left out of a December 2015 bipartisan deal in Congress that extended tax credits for wind and solar power for several years. Now, some lawmakers are promising new legislation that would renew those incentives, but it’s unclear whether they’ll succeed in a political environment dominated by coal and nuclear power interests.

Republicans from wind-rich states, such as Texas and Iowa, fought back efforts in the tax overhaul from their counterparts in other states to sabotage the growth of renewable energy jobs and markets in America. Now, a new fight is brewing as Republicans and Democrats seek to renew federal support for other clean-energy sources that are key to sustainability goals set by U.S. companies, states, cities and other institutions.

"While wind and solar breathed a sigh of relief with the final tax bill, it failed to provide relief for fuel cells, geothermal (power), CHP and energy efficiency," said Malcolm Woolf, senior vice president for policy and government affairs at Advanced Energy Economy, which is actively lobbying for the tax-credit extensions. "Let’s see if we can get it done."

Sen. Orrin Hatch (R-Utah) is sponsoring a bill that would extend tax credits for commercial building energy-efficiency improvements until Jan. 1, 2019, and extend credits for a long list of clean-energy sources, for various time periods.

The bill also would extend tax credits for new nuclear power plants beyond the current 2020 expiration date. That would help Southern Co. offset a chunk of the $25 billion it plans to spend on two new reactors under construction in Georgia.

Renewable energy supporters are hoping that a deal can be reached with nuclear supporters to push the tax extender legislation through Congress.

But it remains to be seen whether any deal is possible, particularly if coal supporters block the legislation and demand handouts for coal.

Meanwhile, some renewable energy developers say the new tax rules have no effect on their ability to finance new projects.

EDP Renovavais closed on $507 million of tax-equity financing for new U.S. solar and wind farms at the end of December, after the new tax law went into effect, and suggested that the new law did not create any problems. The funding will pay for the 100-megawatt Meadow Lake V wind farm in Indiana, the 99-megawatt Redbed Plains wind farm in Oklahoma, the 98-megawatt Quilt Block wind farm in Wisconsin, the 66-megawatt Hog Creek wind farm in Ohio and 60 megawatts of solar arrays in South Carolina.

Cummins signed a 15-year virtual power purchase agreement with EDP in August for a portion of the power that will be generated from an expansion of the Meadow Lake wind farm in Indiana, slated for completion in 2019.

Tax-equity investors likely contributed about $12 billion in funding for new wind and solar projects in 2017, roughly the same amount invested in 2016, according to Bloomberg New Energy Finance. The top tax-equity investors in 2016 included JP Morgan, Bank of America, General Electric, US Bank and Citigroup, according to the research firm.

The same players are likely to continue providing investment funding in exchange for renewable-energy tax credits, although at a lower level than they did before the tax law, said Keith Martin, a lawyer at Norton Rose Fulbright and an expert in tax equity.

"The percentage of tax equity in the capital stack will be smaller and developers will have to turn to other, more expensive forms of financing," Martin said. "The net effect of the tax changes will be to make renewables somewhat more expensive to build and that would translate to a slight upward pressure on prices." 

Others, such as Woolf at Advanced Energy Economy, believe developers will find other places to cut costs, to avoid raising their prices.

The tax law’s preservation of policies that provide for a gradual phase-out of wind tax credits through 2019, and a decline of solar tax credits through 2021, will help both industries prosper, according to the American Wind Energy Association and the Solar Energy Industries Association.

Power generation from all renewable sources increased by 13 percent in 2017, according to the Energy Department. Electricity from solar, wind and other renewables is expected to grow by 3 percent this year, while hydropower output is expected to drop by 12 percent. That’s because of an expected reduction in hydropower production in California and other Western states this year, compared to 2017, when abundant rain and snow allowed hydroelectric dams to supply 27 percent of the region’s power. That compares to 26 percent provided by natural gas plants.