An ITC Alternative for Any Energy Generation

As Deputy Chief of Staff for U.S. Sen. Maria Cantwell (D-Wash.), Amit Ronen was a key strategist in pushing the Senate to pass the 30 percent Investment Tax Credit (ITC) for eight years in 2008.

Based on his experience at the U.S. Department of Energy and 11 years writing renewable energy policy in the Senate, Ronen, now convinced that post-2016 ITC extension is unlikely, is now working on alternatives.

As director of the George Washington University Solar Institute (GWUSI), which advises the U.S. Congress on renewable policy, Ronen proposes a novel ITC alternative in “Softer Solar Landings: Options to Avoid the Investment Tax Credit Cliff.”

“Under this regime, you will know it won’t expire in a few years,” Ronen said. “It will be around so you can go ahead and invest.”

Rather than short-term extensions – or de facto ones like “commence construction” language – with hard deadline dates, the GWUSI proposes an ITC for any energy generation (or storage) technology — with no sunset date.

This ITC would be 45 percent of overnight installed cost in excess of $1.00 per watt, so natural reductions would be automatically triggered as each technology comes closer to market competitiveness.

"Any new energy generating technology confronts the chicken-and-egg challenge of needing to reach scale to be price competitive, but until they reach scale, they are usually too expensive for the market,” he said.

Effect of cost-based technology neutral ITC. Source: GWUSI

Steps Down like CSI

There are parallels with the automatic stepped down rebate of the $2 billion California Solar Initiative (CSI), which predictably phased out rebate levels with initially higher incentive levels to accelerate technology deployment and cost reductions as more MW of rooftop solar were installed.

"This is an interesting proposal," Joe Desmond, senior vice president of government affairs, BrightSource, said. Desmond was chairman of the California Energy Commission under Gov. Arnold Schwarzenegger.

He was instrumental in designing elements of the CSI and moving it through the state legislature, enabling the solar sector to make the necessary investment to grow the market, “even though we didn't know in 2006 what the price of solar would be in 2016,” he said.

"We wanted to avoid what happens when you extend incentives for one to two years at a time like the wind [production tax credit (PTC)], with starts and stops, peaks and valleys,” he said. “What we wanted was predictability for the business community, ease of understanding for the consumer, and ease of administration.”

CSI was successful, helping cut solar costs. Rooftop PV is now at grid parity in the state and supplied 2.4% of California’s electricity by 2015.

"What we hear from our finance people all the time is they just want certainty. They want to know if the tax credit is going to be there and for how long," Scott Clausen, policy research associate at the American Council on Renewable Energy (ACORE), said. “To the extent that this proposal would provide them with that certainty, I think it is an intriguing concept."

Certainty would be built-in with each technology’s automated phase-out based on cost, so this ITC would not depend on the vagaries of each new Congress.

Technology Neutral

Even yet-to-be invented innovations could compete for investors, since no technologies are specified.

“If you invent some new energy generating technology, you’re actually at a disadvantage right now, because even if it is clean you’re competing against technologies that are specified as eligible,” Ronen said.

Investors in early stage technologies would receive a relatively higher ITC, based on their higher cost, starting at 45 percent.

Example rates under technology neutral ITC. Source: GWUSI

For example, offshore wind, which has barely begun in the U.S., would receive a higher ITC than onshore wind. (This new technology-neutral ITC is intended to replace over 40 specific energy tax credits, including the wind PTC.)  

With no technologies specified, this doesn’t "pick winners and losers" – a major barrier to getting bipartisan renewable legislation through Congress.

It is not even restricted to renewables.

“Some senators are very supportive of nuclear technology, for example, or of coal with [carbon capture and storage (CCS)], and we wanted to show that that would work in this system as well,” Ronen said.

Under a previous technology-neutral proposal by former Finance Committee Chairman Sen. Max Baucus, eligible technologies would get an ITC rate based on greenhouse gas emissions — and failed politically.

“We purposely did not use carbon as the metric," Ronen said.

He is confident that carbon restrictions, such as regional cap-and-trade plans, renewable portfolio standards and the Clean Power Plan prevent any high-carbon invention from attracting investors.

Sliding Scale

For well-understood technologies; the IRS would publish each year’s ITC rate, like Germany’s various feed-in tariffs.

The rates are sliding-scale, depending on each developer’s overnight installed costs.

The further from $1.00/watt; the higher the rate, to a maximum of 45 percent, to ensure that the private developer still carries the majority of the cost and risk.

Once any technology’s overnight installed cost is $1/watt; its ITC rate is zero. Coal would not be eligible for any subsidy unless it included CCS, for example.

"That could be a complex formula to determine when the credit would phase down for all of the different technologies," Clausen noted.

Some factors would require careful consideration, according to Desmond.

“For example, costs for the same technology can vary geographically, by permitting jurisdiction and by applicable labor rates, while benefits will vary by avoided electricity rates,” Desmond said.

Ronen, who is looking for stakeholder input over the next year, with comprehensive tax reform likely in the 2017 Congress, said; "our role is to put ideas out there.”

“Something significant like this takes a few years to marinate and for discussions for people to fully understand the options before it can be moved,” he said.

Lead image: Lighting bulb, idea concept. Credit: Shutterstock

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