USA Approve Tax Credits for clean energy & $40 billion investment
The idea that commodities and industries will become more efficient and grow quicker when exposed to market forces has long been accepted, and now has the backing of both political parties. This has led to a revitalization of supply chains, manufacturing, and the use of solar panels in renewable energy sources to power the energy transition of the 21st century.
The introduction of marketization into solar power plant investments is an essential public-private partnership of the 21st century and the newly implemented Inflation Reduction Act will help speed up the process. According to Richard Dovere, Chief Investment Officer of EDP Renewables North America Distributed Generation (EDPR NA DG), "this is one of the most significant pieces of industrial legislation since FDR's New Deal." He further stated that there are numerous ways to support the advancement of established technologies such as wind and solar, while also providing commercialization pathways for other technologies such as storage, hydrogen, and carbon capture.
In 2021, wind and solar power plants contributed the majority (76%) of new electricity generation within the U.S., creating multiple jobs. By 2030, the Inflation Reduction Act (IRA) is projected to generate 1.3 million new positions and stimulate the economy. This growth was made possible by the energy investment tax credit (ITC) and the production tax credit (PTC), both of which were enhanced in the 2022 IRA.
The ITC originates from the Kennedy administration and was mainly used to fund equipment at that time. Senator Grassley (R-IA) is the founder of the PTC, which he succeeded in passing through Congress in 1992 to encourage wind power in Iowa. According to David Burton, a tax partner for Norton Rose Fulbright, these tax breaks have been amplified in comparison to their predecessors since the inception of the IRA.
Taxpayers who qualify are able to reduce the amount of their income tax owed to the Internal Revenue Service by an equal amount if they invest in renewable energy systems. Businesses and certain individuals can take advantage of this tax credit.
On August 12th, Nancy Pelosi, the Speaker of the House, posed for photos with her fellow Democrats in Washington, DC.
In the last 15 years, investments in renewable energy projects in the United States have substantially grown. According to data from the U.S. Energy Information Administration (EIA), the total investment in renewable energy projects in the U.S. has risen from approximately $6 billion in 2005 to approximately $40 billion in 2019. During this same period, the price of new renewable energy projects decreased significantly, with solar and onshore wind prices falling by over 85% and 60% respectively in the last decade. This has resulted in renewables being the most economical option to produce in many markets, which is encouraging for the Biden administration's Climate Action initiative, US energy security and global environmental well-being.
Energy Innovation Policy and Technology LLC, a non-partisan think tank, predicts that the $370 billion of investments in climatic and clean energy from the IRA can reduce U.S. greenhouse gas emissions by up to 43% relative to the 2005 levels by 2030. Additionally, Resources for the Future suggests that the IRA can save an average U.S. household up to $220 yearly on electricity costs while providing protection from the unsteady prices of fossil fuels.
Mr. Dovere noted that these initiatives create price stability, stating that once enough renewable energy is produced, there will be a reduced risk of the large price swings in energy that have been seen within the last decade, two decades and half century. He indicated that it will be a challenging journey to get to this point, as all transitions are, yet the IRA has set a course for a cleaner and more affordable future.
This legislation is politically expedient and sustainable, proposing a market-driven solution that takes into account both economic and environmental considerations. Conservatives are drawn to the tax credits it provides to businesses, while liberals enjoy the environmental policy gains it promotes in transitioning towards more sustainable energy.
Mr. Burton outlined that the US has a different approach to encouraging the use of clean energy compared to other nations, with the rules being more complex. Nonetheless, the US tax system is a useful tool to motivate investments.
Both public and private markets were pleased with the policy adjustments. Following the IRA's implementation, there were more than $40 billion of fresh investments in renewable energy sources. This included an allocation of $28 billion to US-based manufacturing, which was given tax credits under the IRA. However, it is clear that tax credits for these clean energy initiatives are not a complete solution, and further investments are necessary.
For the inaugural time, the IRA has authorized the sale of federal energy tax credits, which is known as transferability. Mr. Burton stated that this "transferability is critical for the IRA given the lack of enthusiasm in the typical tax equity market for monetizing all the increased credits. Nevertheless, we are awaiting rules from the IRS to elucidate the details that will decide how practical and, therefore, how successful transferability is as a policy."
Besides the incentives available through IRAs, localized economic investment incentives are also provided through state-level Renewable Portfolio Standards (RPS) and Renewable Energy Certificates (REC) programs. The optimal combination of these incentives along with power sales to residences and businesses help to generate the income needed to return the investment made in the project.
The transition to renewable energy sources can have a positive effect on the environment and the US economy, but the cost of the IRA should not be overlooked. With the current Congress being at an impasse, there is little chance of them doing much to propel clean energy or retract the upgrades to the IRA or ITCs/PTCs. It is important for the new Congress to understand that the invisible hand of the market functions optimally when augmented with rules that do not suppress the profits of businesses. It is essential to bring both sides together in order to take full advantage of the IRA or ITCs/PTCs for the good of the American nation.
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