US wind and solar tax credits mostly benefit big banks
How can countries produce renewable energy at the scale and rate needed to prevent dangerous climate change? The plan so far has been to try to make the cost of generating electricity from renewable sources cheap enough to compete with fossil fuels. Governments have also offered support to renewable energy producers in other forms, requiring utility companies to build or buy renewable energy or guaranteeing attractive prices for this power.
Monetary incentives that governments provide directly to companies that own or invest in renewable energy tend to be grants, low-cost loans, or tax breaks. These subsidies reduce part of the development cost of projects such as wind or solar farms and, therefore, make the electricity they produce cheaper.
But in a recent study, I looked at the US government’s main monetary incentive for renewable energy — a decades-old set of federal tax credits — and found it wasn’t working the way it should at all. As President Biden hopes to revive a watered down version of his administration’s Build Back Better Act, which includes tax reform and 550 billion US dollars (£409 billion) in clean energy incentives, my findings highlight the pitfalls that the climate policy of the world’s largest historical polluter should aim to avoid.
Investors who finance renewable energy projects in the United States can significantly reduce the federal taxes they are required to pay. The production tax credit allowed them to get up to $0.025 in tax relief per kWh of electricity produced by a project, while the investment tax credit allowed them to recover up to to 30% of the funds they have invested in a project. Over the past 15 years, these tax credits have helped make U.S. renewable energy major industries: From 2005 to 2020, domestic wind and solar power generation has been multiplied by almost 18.
Nevertheless, there is a fundamental problem with the design of US renewable energy tax credits. The tax breaks are supposed to go to companies that develop renewable energy projects, but those developers rarely owe taxes when they start building a wind or solar farm because most start as a new business, with no pre-existing tax bill. If developers want to take advantage of government incentives, they should try to bring in third-party financial partners — usually massive banks like JP Morgan and Bank of America.
Developers effectively sell their tax breaks to these banks in exchange for the initial funds the banks invest in a project. This practice is known as tax fairness. If wind or solar farm developers cannot attract tax fairness partners, they may never be able to use the tax credits to which they are theoretically entitled, and the project may therefore never be built.
Revolving tax credits were never intended as a backdoor subsidy for Wall Street. Yet they now offer significant tax shelters to banks; those that require very complex forms of partnership to be legal. The revolving tax capital market was worth as much as 18 billion US dollars just in 2020.
Renewable tax fairness
How did US renewable energy funding come to adopt this particular form, which is not used elsewhere? Trying to answer this question led me to the origins of tax fairness in the Reagan-era tax breaks and waves of tax-motivated investment, which included the first modern wind boom (and bust) in world in California. This boom collapsed in the mid-1980s due to allegations of unnecessary tax shelters by makeshift developers. Wall Street banks revived tax investment in renewable energy in the 2000s in the form of tax fairness.
Since the mid-2000s, developers have relied on tax fairness partnerships to make wind and solar farms viable, but have had very few partners to choose from. Tax equity partnerships are complex and expensive to set up. This means that tax fairness systematically diverts some of the federal support for renewable energy to the banks, lawyers and other intermediaries needed to close deals. In 2020, the top five tax fairness players—again, primarily the big Wall Street banks—represented as much as 80% of the market.
The pool of tax equity investors is sparse compared to the number of renewable energy projects seeking their capital. Often, banks charge developers a hefty fee for their participation. They also have inordinate power to determine which projects are developed and by which developers. Because banks profit more from big deals, they prefer larger private developers and megaprojects. The average renewable tax equity agreement is $150 millionand offshore wind developers could soon demand up to US$800 million per project. Meanwhile, smaller competitors and projects often get no deals.
Even with the additional costs developers must incur to implement tax fairness agreements, wind and solar farms are still (barely) cheaper to develop with federal grants than without. That may not be the case for long, however. Solar and wind farms are increasingly beating fossil fuels on the cost of electricity suppliedand developers can get increasingly cheap conventional private loans.
Meanwhile, tax fairness comes up against other problems. Even the biggest banks have little taxpayer money to shelter, and fast-growing renewable energy demands more and more capital than tax equity investors can provide. Significant corporate tax cuts, such as the one introduced under President Trump, may unexpectedly reduce the overall market. And having to rely on tax fairness compounds the pain of economic crises like the one caused by COVID-19 for energy developers, as corporate profits and tax bills plummet and eliminate the need for tax fairness. between banks. This leaves many projects short and allows remaining investors to charge developers even higher fees.
Meanwhile, the two federal renewable energy tax credits in the United States are set to lose value or expire unless they are reapproved by the Biden administration. This has happened frequently in the past and the tax credits have generally been maintained. But the growing controversy around tax credits and tax fairness are prompting calls for reform. Proponents of the Green New Deal envision even bigger changes in how the U.S. government supports renewable energy development, such as introducing a new era of public Power.
Developers, projects, and people that U.S. government incentives have traditionally excluded and denied all the benefits of a low-carbon energy transition stand to gain from reform. These include communities of color struggling with fossil fuel pollution and more expensive energy. They also include small private developers and community-scale projects, as well as tax-exempt entities such as non-profit organizations and public electricity authorities.
Can government incentives for renewable energy be wrested from Wall Street to instead support more egalitarian visions of decarbonization?
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