In case you missed it over the holiday, Congress passed a new federal budget, notably extending tax credits for solar, wind, and other renewable energy technologies. The extension differs from previous ones in two ways: it extends the credits for multiple years but also (as ILSR has been discussing since 2012) phases them out over time. In other words, while the expiration of the solar tax credit wasn’t doomsday (and even had a few silver linings), Congress came up with a reasonable compromise to maintain incentive parity between clean energy and fossil fuels and provide the energy market with several years of predictable policy.
Extensions with a Phase Out
Here’s what it looks like. The production tax credit (a per kilowatt-hour incentive paid over 10 years) has been extended to projects that begin construction before 2020. However, for projects that begin construction after 2016, the incentive amount paid over the 10 years will be reduced. The following chart illustrates. The solar tax credit was similarly extended, but with no decrease through 2019, and a phase out beginning in 2020. The language of the credit also shifted the deadline from “in service” to “commencing construction,” giving projects more time to access the full credit. The following chart illustrates the tax credit decrease after 2019, from 30% down to 10% (or 0% for solar projects on residential property owned by the resident).
Still Not the Optimal Policy
The upside of the tax credit extension is obvious: continuing to make the cost renewable energy favorable relative to the cost of fossil fuel power generation. The downside is that the tax credit remains a lousy way to incentivize renewable energy in an equitable manner, favoring Wall Street participation over Main Street. And promising tools for reducing the cost of financing clean energy may have to wait while the tax credit crowd continues their dominance over clean energy financing. Finally, while the phase out is smart policy design, it also raises the specter of parity: will fossil fuel subsidies be similarly reduced as clean energy incentives are reduced? At the end of the day, discounts for clean energy are a good thing, and this extension is worth cheering. But we hope that as the market matures, Congress will look for ways to give more ordinary Americans a way to buy into our clean energy future, whether they have tax liability or not.