Moving the country forward often necessitates large-scale projects or the willingness to confront powerful interests. However, maintaining and repairing a defective technique with the capacity to do much more sometimes necessitates a high level of attention to detail.
In order to combat climate change, significant action and political courage will be required. If the United States is going to lower emissions enough to mitigate climate change, they need the Senate to enact the entire array of renewable energy tax credits included in the House-approved economic plan last fall. These credits will also help America attain greater energy independence and lead to job creation around the country, wherever there is sunlight or wind.
Congress has the potential to do some good by simply fixing a wasteful inefficiency in the existing system while extending these credits. The problem is how they facilitate the deployment of clean energy. Following a long period of technological lag, clean energy now has the potential to outcompete fossil fuels in terms of cost.
Unfortunately, advancement in project funding structures has lagged behind their technological potential. Unlike typical power plants, that require expensive fossil fuels to run, clean electricity costs are absorbed almost entirely at the start of a project. They require some modest upkeep, but no one needs to “fill up” the wind or the Sun. Finding the upfront funding to have projects completed is thus the difficulty.
Congress chose to assist by adopting tax credits to offset some of the costs of renewable energy plants. However, the current mechanism for delivering the tax credit is highly inefficient. During the years while the projects are being built, developers often have almost no taxable revenue. As a result, they don’t owe a lot of money in taxes and so can’t make use of the credits, which are used to reduce tax liabilities. Cooperatives that are not taxed cannot do so. Instead, they need to sell the tax credit to anyone who owes enough income tax to qualify for the credit in order to raise the funds they require.
However, it turns out that selling these tax credits is difficult. The transactions are complex, and only specific investors are permitted to participate. Only a few investors fit the qualifications, have enough tax obligation to make the transaction worthwhile, and have the experience to put the deal together. Approximately half of the market is controlled by just two huge banks.
And, as you might anticipate in a market where there are just a few enterprises providing a service on which others rely, the cost they can charge is high. Clean energy producers estimate that the cost of selling tax credits for a facility typically exceeds $3 million due to the costs of establishing compliance with tax credit standards and pleasing attorneys and accountants.
That expense is a waste of tax dollars, as it accomplishes nothing to improve our energy independence, reduce emissions, or create jobs in the United States. It also makes the tax credits essentially ineffective for smaller projects, like home solar or distributed production, where an extra $3 million cannot be found.
But that’s only the start. Because there are so few investors in this market, those who do can expect significant returns. Despite incurring absolutely no risk, some people earn more than the venture owners. Furthermore, as off-shore wind, as well as carbon capture facilities, compete for limited money through tax credit markets, investors are more likely to demand even higher returns in future years.