Fitting Clean Energy into a Reformed Tax Code

Policy brief

Given the looming expiration of clean energy tax incentives and the likelihood of comprehensive tax reform, the clean energy sector should be developing pragmatic and politically attuned alternatives that fit within the context of tax reform principles. Even in the unlikely event there are last-minute, stopgap extensions or changes to existing energy incentives, these measures would only postpone their inevitable expiration for a year or two.  

The GW Solar Institute is launching a research seriesFitting Clean Energy into a Reformed Tax Code, which seeks to develop innovative policy solutions and inform policymakers on the full range of impacts that these potential options could have.

Comprehensive tax reform proposals, if enacted into law, would profoundly impact energy sector economics and deployment rates. The Institute’s first policy brief of the series finds that recent tax reform proposals (BaucusCamp, and Wyden-Coats) would increase the cost of solar energy compared to current policy by as much as 58 percent. Even the Baucus tax reform proposal, which includes a 20 percent Investment Tax Credit (ITC) for solar energy, would increase costs by 34 percent over current policy due to its significant changes to current depreciation schedules and the minimal impact from lower corporate rates. Other proposed tax systems show similar results, meaning additional energy sector policies would still be necessary to maintain solar’s economic competitiveness relative to current law.

Upcoming Research and Analyses in Research Series

There is broad agreement that well-designed and politically feasible clean energy tax incentives need to be predictable over the long term, scalable to drive investment without setting up a boom and bust cycle, and accessible to diverse user types such as distributed generators, public power, and new market entrants. Accounting for these principles, future GW Solar Institute policy briefs in this series will systematically develop and analyze potential tax policy solutions in the following areas:

  • Financing for Emerging Energy Technologies — Analyze the relative effectiveness and role of new, technology-neutral demand-pull policies in unlocking clean energy innovation and economic growth. Alternatives will include an Investment Tax Credit (ITC) based on market maturity, a production tax credit (PTC) based on regional energy diversity, and state energy credit block grants.
  • Leveling the Cost of Capital — Bringing parity to energy financing by lowering clean energy capital costs. Alternatives will include loan funds to lower the cost of debt and Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs) to lower the cost of equity.
  • Investing in Critical Sectors — Finding ways to increase the level and predictability of private-sector investments in critical national priorities. Alternatives will include research, development, and demonstration (RD&D) incentives and full expensing for priority sectors like energy and infrastructure that face chronic underinvestment.

The Institute will investigate how these policies (and various combinations thereof) would impact the electricity price and profitability for a wide range of electricity generation technologies, including solar, wind, biomass, geothermal, natural gas, nuclear, and carbon capture and sequestration. It will also consider multiple clean energy price cases within the four different tax reform scenarios, characterized as “current/no reform,” “conventional reform,” “middle-ground reform,” and “sweeping reform.” 

This research initiative will also focus on assessing the macroeconomic impacts of the potential policy solutions and the rate at which existing generation assets are replaced. A macroeconomic analysis will help determine the:

relative effectiveness of the proposed policies for overturning existing capital and deploying new electricity generation capital,

value of policy certainty and predictable incentives, and

impact on federal tax receipts.

Prior GW Solar Institute Leadership on Solar Tax Policies

Since its inception, the GW Solar Institute has provided a fresh perspective on solar incentives and tax policies: