Renewable tax credits a ‘game changer’ for climate rule compliance

Source: Elizabeth Harball, E&E reporter • Posted: Friday, January 29, 2016

Congress’ decision to extend tax credits for renewable energy could fundamentally shift America’s energy mix away from natural gas and toward wind and solar at the advent of the Clean Power Plan, a new report predicts.

Congress in December agreed to extend the production tax credit (PTC) for wind and the investment tax credit (ITC) for solar through the end of the decade, a move hailed as hugely significant for the industries because it provides greater certainty to investors (ClimateWire, Dec. 21, 2015).

When the compliance period for U.S. EPA’s new climate rule begins in 2022, states are likely to rely more on renewables and less on natural gas to meet emission targets because of the tax extensions, according to an analysis released yesterday by the Rhodium Group.

“Tax extenders fundamentally change the compliance game,” said John Larsen, a director at the firm and an author of the report.

Without the extra boost from Congress, the analysis found that states were more likely to rely on low-cost natural gas generation to reduce power-sector emissions in 2022, when states have to first comply with the Clean Power Plan. In this scenario, wind and solar “play a role,” the report notes, but not until about 2025.

But the tax credit extension shifts “the economics in renewables’ favor nearly a decade earlier than they would under the CPP alone,” the Rhodium Group wrote.

“The tax extenders allow states to meet pending CO2 regulations almost exclusively with zero-emitting renewables, leaving the country well positioned for deeper cuts down the road rather than a greater reliance on fossil fuel-fired power,” the report says.

What about methane?

One caveat to note is that the analysis assumes “optimal implementation” of the Clean Power Plan, which the Rhodium Group defines as the establishment of one national cap on carbon emissions for existing and new power plants. That, in turn, also assumes that allowances are auctioned and that a broad carbon trading system is in place.

“This approach captures the most gradual, economically efficient, and easily approvable CPP implementation pathway,” the report states.

In reality, it appears unlikely that a national carbon trading system will form by 2022 because states are developing compliance plans based on individual economic and political situations (ClimateWire, Jan. 19).

Still, “while the design of actual state CPP implementation plans could lead to different outcomes, the economics are dramatically changed with the tax extenders in place,” the Rhodium Group wrote.

“No matter what choices states make in implementation, the tax credits are still the tax credits,” said Larsen. “They still put renewable energy on much better footing to compete.”

This development will likely be cheered by environmental groups, many of which are concerned about methane related to natural gas production, which could ramp up under the Clean Power Plan. Methane’s warming properties are more potent than carbon dioxide, which is why environmental groups are alarmed about a massive natural gas leak currently occuring at a California well (ClimateWire, Dec. 22, 2015).

A different report released yesterday by the nonprofit research group PSE Healthy Energy raised concerns about this issue, arguing that “reducing the climate impact of electricity generation requires a greater focus on curbing upstream methane leakage rates.”

Elena Krieger, director of the group’s renewable energy program, acknowledged that the tax credit extensions will likely encourage renewable energy generation.

But Krieger added, “Natural gas is still one of the primary tools in the Clean Power Plan that states are allowed to use to comply — that’s still a fundamental part of regulation.”

States that are serious about the Clean Power Plan’s goals shouldn’t ignore the methane issue, Krieger argued.

“As states develop plans in the next couple of years, if they really want to make a difference on the climate, they should take into account upstream methane, even if that’s not necessarily required,” Krieger said.