Renewables Industry Gears Up for ITC/PTC Step-Downs at GTM Conference

On October 29-30, renewable energy industry stakeholders (including developers, financiers, utility providers, system operators, technology vendors, regulators and consultants) gathered in Austin, Texas for Greentech Media’s 2019 Power and Renewables Summit. At the start of the conference, audience members were asked to identify the biggest challenge facing renewable energy development over the next five years. The most popular answer — besides an economic slowdown — was the impending step-down in renewable energy tax credits.

Barring last-minute intervention, two major renewable energy tax credits are slated to step down: The investment tax credit (ITC), originally enacted in 1978, and the production tax credit (PTC), originally enacted in 1992. Renewed and extended multiple times, both tax credits have played a critical role in the growth of renewable energy in the U.S. and their phase-out would likely have wide-reaching effects on the industry.

Assuming no new legislative changes, next year will be an inflection point for both tax credits. The ITC, which currently offers a tax credit for 30% of the cost of residential and commercial solar systems, steps down to 26% in 2020 and 22% in 2021. After 2021, the ITC drops to 10% for commercial solar and zero for residential solar. The PTC, which provides a per-kilowatt-hour credit for wind facilities, will no longer be available for wind facilities that begin construction after 2019. In certain circumstances, wind facilities beginning construction before 2020 may claim the ITC in lieu of the PTC.

ITC and PTC step-downs were discussed frequently during the conference in two main contexts: the near-term rush by developers to secure tax incentives and the long-term implications of phaseouts for renewable energy growth.

Presenters explained how, to maximize tax credits, developers have been aggressively “safe-harboring” new renewable energy projects by investing a minimum percentage of their total cost before the end of the year. While some panelists characterized this spending as prudent, others, like Peter Toomey of TerraForm Power, questioned whether developers and financiers, in their rush to secure tax credits, may have “bit off more than they can chew.” Speakers noted that power purchase agreement (PPA) terms have gotten shorter (10 to 15 years, down from 20+ years), leaving owners increasingly exposed to merchant pricing. As renewable assets capture a larger share of generation, many conference participants raised the possibility of zero (or even negative) electricity prices in certain areas of the grid, a risk the industry hopes to mitigate through long-term storage, transmission lines and improved market design.

Wind growth will be depressed in the intermediate term as net wind revenue falls below the cost of new entry. However, in the long term, factors like carbon taxes, rising natural gas prices and technological improvements may lift net wind revenue above the cost of new entry.

For projects being built on the eve of policy sunsets, delays have heightened economic consequences. Top of mind for wind industry participants was the federal government’s unexpected decision to conduct additional “cumulative studies” on large-scale offshore wind projects along the East Coast. The first of such projects slated to be built, an 800-megawatt facility off the coast of Massachusetts called Vineyard Wind, has already been delayed by the new requirement. Such regulatory delays could jeopardize tax benefits for many offshore wind projects (about 25 gigawatts worth, in aggregate, according to Greentech Media estimates).

Beyond the immediate burst of safe-harboring, conference participants discussed the long-term outlook for renewable energy in a world without tax credit extensions. Equipped with detailed model projections, host researchers Dan Shreve and Ravi Manghani from Wood Mackenzie (parent company of Greentech Media) proposed a narrative for wind and solar which panelists didn’t dispute. Wind growth will be depressed in the intermediate term as net wind revenue falls below the cost of new entry. However, in the long term, factors like carbon taxes, rising natural gas prices and technological improvements may lift net wind revenue above the cost of new entry. Wood Mackenzie projects U.S. wind energy demand to decline nearly 60% between 2020 and 2023 before leveling off.

On a brighter note, Wood Mackenzie expects solar demand will increase in coming decades given that utility-scale solar PPA pricing has already fallen below new-build combined-cycle natural gas costs on a per-megawatt-hour basis. A Wood Mackenzie analysis of solar economics in the west hub of the Electric Reliability Council of Texas market shows net solar revenue exceeding the cost of new entry by over 80% through 2030, assuming no changes to the ITC.

Conference participants celebrated the dramatic solar cost declines achieved within the past ten years and predicted further reductions from technological innovations (such as bifacial panels). Although many solar industry stakeholders would like the ITC to stay at 30% (or decline more gradually than currently planned), policymakers may argue that the ITC has already achieved its objective: nurturing solar development to the point that the industry can stand on its own.

Between the dialogue on big-picture changes, the conference covered some of the more esoteric implications of the tax credit step-downs. Tax equity, a financing structure by which developers can monetize tax credits to defray up-front project costs, has been “eating first” in renewable energy financings, noted Todd Glass, an attorney at Wilson Sonsini Goodrich & Rosati. As tax-equity financing fades, industry participants anticipate that debt financing will fill the void.

Other implications of tax credit phaseouts: The ITC has historically incentivized co-locating solar and storage assets. Panelists discussed the potential of stand-alone storage development as the ITC steps down. Some panelists speculated that the tax credit step-downs may discourage commercial and industrial companies from signing PPAs, potentially expanding the role of utilities in absorbing new renewable energy supply.

Conference participants broadly expressed disillusionment with the “whiplash” effect of federal tax credit expirations and renewals. Long lead times and high upfront costs make renewable energy projects particularly sensitive to the vicissitudes of federal energy policy. While some in the renewables industry would welcome tax credit extensions, greater predictability would help the industry plan for success.

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