Clean energy bill next up
Clean energy and infrastructure will take center stage after the US Congress clears a $1.9 trillion COVID relief bill. The COVID bill is expected to move through Congress by March 15.
The closely divided House and Senate look like a recipe for gridlock, save for a process called budget reconciliation. The Democrats have potentially three cards to play over the next two years to put through economic measures by a majority vote. Otherwise, bills require 60 votes in the 100-member Senate to pass. The Senate is split 50-50 between Republicans and Democrats.
The Democrats are already in the process of playing one of the three cards to clear the COVID relief measure.
The Biden administration is still working out the details of what will be in the infrastructure package that will follow. No release date has been set yet, but releasing another $2 trillion spending plan at the same time Congress is debating whether $1.9 trillion for COVID relief is too much could complicate the prospects for both measures.
The Democrats on the House tax-writing committee released a “green” tax bill in early February that is part of the jostling to get into the infrastructure package.
The bill would extend deadlines for various types of renewable energy projects to qualify for tax credits, create a new 30% tax credit for standalone storage and also allow owners of renewable energy projects to use a quick refund process under section 6411 of the US tax code to be paid the cash value of the tax credits rather than have to barter them in the tax equity market.
It would restore the investment tax credit back to the full 30% for solar projects on which construction starts in 2021 through 2026, before starting to phase down again over the next two years, 2027 and 2028. It would push back the statutory deadline to complete solar projects to qualify for these outsized tax credits to the end of 2030.
This will lead developers to look for ways to take the position that solar projects on which construction started in 2020 were not under construction that year after all, since projects with 2020 construction starts would qualify for only a 26% investment tax credit.
Some developers may be feeling whiplash. Some scrambled at the end of 2019 to unwind constructions-start arrangements they had put in place that year for wind farms after Congress extended the deadline to start construction and increased the tax credit amount for wind farms that waited until 2020 to start construction. The same thing happened for both wind and solar developers at the end of 2020 after Congress extended deadlines again. This time, developers wanted to buy more time to complete projects rather than claim larger tax credits. Under IRS rules, most projects must be completed within four years after the year construction starts.
The new tax credit for standalone storage would apply not only to batteries, but also to other types of storage technologies such as pumped-storage hydropower and hydrogen storage, including electrolyzers.
Another issue lurking is to what extent Congress will couple some of the new provisions to promote clean energy and infrastructure with a requirement to use union labor and American-made products. The fossil fuel industry from which the Democrats hope to transition workers is more heavily unionized. About 6% of wind industry jobs and only about 4% of solar jobs are done by union workers.
The House tax committee bill would authorize an additional 10% investment tax credit for paying the same “Davis-Bacon” wages during construction that are paid on federal construction projects and complying during construction with a series of other federal rules. Thus, it uses a carrot rather than a stick. Not all proposals do.
The US Chamber of Commerce and Bipartisan Policy Center are hoping the infrastructure package can be enacted by July 4. A more realistic timetable is sometime in the fall.
Congress may have to include significant tax increases to help reduce the net cost below $2 trillion.
Democrats are expected to increase the corporate income tax rate to between 25% and 28%, possibly as part of the infrastructure package but with a January 1, 2022 effective date. The chairman of the House tax-writing committee, Richard Neal (D-Massachusetts), said on February 12 that he does not expect a corporate rate increase until after “we have put the pandemic and recession behind us.”
He said the infrastructure package is also expected to revive the Build America Bonds program under which tax-exempt bonds can be issued to finance public infrastructure with the bondholders having to pay taxes on the bond interest, but receiving tax credits for a fraction of the amount or else with the bond issuers receiving cash subsidy payments from the US Treasury to defray part of the interest cost. The program was available during 2009 and 2010.
The Democrats cannot afford to lose a single Democratic vote in the Senate unless they can pick up Republican votes. At least two Democrats — Joe Manchin (D-West Virginia) and Jon Tester (D-Montana) — are from fossil-fuel states. Manchin has become a key swing vote in the same way the Susan Collins (R-Maine) and Lisa Murkowski (I-Alaska) were when Republicans were in power. The Wall Street Journal reported that one Democratic Senator, while passing Manchin in the hall recently, greeted him with “Your Highness.”
A problem with using the budget reconciliation process to pass the infrastructure package is it limits what can be included to spending and tax provisions. Some Democrats would like to include a national clean energy standard. A similar proposal failed to pass the House in 2010. Some advocates say it can be set up in form to include penalties to enforce compliance to allow it to pass muster under the budget reconciliation rules.
Another issue potentially in play is some form of price on carbon. Progressives have soured on cap-and-trade plans after similar proposals failed to pass in referenda in Democratic states.
An important issue with many Democratic constituencies is environmental justice, meaning rectifying the disproportionate effects that pollution and siting of industrial facilities have had on poor communities.