Clean power industry calls on Congress to include opt-out for storage, transmission ITC in Build Back Better Act

Published on November 17, 2021 by Hil Anderson

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The tie-in between the expansion of renewable electricity and the Biden administration’s Build Back Better (BBB) Act pending in Congress involves a sobering number of moving parts plus a wrench in the tax provisions for power transmission and storage that some analysts hope won’t get lost in the shuffle.

The reconciliation work on the BBB package, which is not to be confused with the Infrastructure Investment and Jobs Act signed by President Biden on Monday, has entered the home stretch, and once passed, will help set the tone for the rapid deployment of additional renewable energy in the coming years. The BBB has thus far received favorable reviews from the clean energy industry, but there is still a tweak in the tax section that RMI, a Colorado-based non-profit focused on the clean-energy transition, says could remove one more speed bump on the road to decarbonization.

It would involve providing an opt-out provision to the “tax normalization” requirement in the BBB’s current language, which RMI said this month has the effect of making new transmission and storage projects more expensive and less attractive to investor-owned utilities (IOUs). The House version of the BBB includes the opt-out provision, but so far it has not been added to the Senate version even as the industry waits anxiously.

“There is a chance it will get updated when the Senate finally releases its reconciliation text, but it is not there right now, and it is really in flux whether it will be in the final bill,” said Alisa Petersen, senior associate at RMI.

Tax advantages for different types of energy have more than once been a source of political conflict over the idea of the federal government favoring one source of energy over the other, but there has not been a particular outcry over the tax normalization requirement, leading some observers to fear it has been lost in the shuffle as Congress considers the bill with the holiday recess closing in.

“When it came to tax normalization, there was a concern there would be some lack of competitive advantage for independent power producers,” RMI Associate Russell Mendell told Daily Energy Insider. “But this is not about generation technology, this is about grid reliability so those issues shouldn’t come into play; it’s a little confusing as to why it wasn’t included.”

Clean Energy Means Jobs is an organization advocating for the normalization opt-out for the storage and transmission investment tax credit (ITC) in the Build Back Better Plan.

“The normalization opt-out is critical to accelerating our clean energy transition. One simple tax fix could create tens of thousands of clean energy jobs, lower emissions and drive lower costs for customers,” said Katie Wright, spokesperson for Clean Energy Means Jobs.

Energy storage has a lot riding on the tax issue. As a fairly young technology, it requires a major buildout if it is going to fill the major role in grid reliability that advocates have envisioned. Jason Burwen, interim CEO of the U.S. Energy Storage Association (ESA), told Daily Energy Insider that industry estimates see the pace of storage deployment increasing as much as 25 percent under the BBB’s investment tax credit. The BBB would also provide the long-term demand signal required by major investors.

“Beyond just the cost reductions from the credit, the ability for companies and households to elect direct payment of the credit would ensure every storage owner can easily benefit from the credits, regardless of their own tax liability or availability of tax equity financing,” Burwen said.

In a nutshell, the opt-out would clear the path for IOUs to get behind transmission lines and storage projects that don’t produce power on their own but are nevertheless critical to the expansion of the green generation sources that do, such as wind and solar farms. Specifically, the regulations need to shift storage and transmission from the current production tax credit regime to an investment tax credit. The House BBB does indeed make that adjustment, although it still includes a “normalization” requirement.

That’s where it can get sticky for IOUs who don’t want to burden their customers with higher rates for renewable power while, under the law, also providing higher payouts to their investors.

“Normalization requires regulated utilities to keep some of the financial benefit of the ITC exclusively for its shareholders,” RMI said in a briefing on the issue. “This means they can only pass along a portion of the tax savings to customers, in small increments and over a long period of time.” The RMI analysis estimated that the opt-out option could reduce the lifetime cost of a transmission or storage project by about 15 percent, which translates to a 15 percent increase in costs if the opt-out option is left out.

The danger is that raising the bottom line of a project by 15 percent could dampen the enthusiasm of Wall Street and the utility industry for new renewable generation projects that will require transmission lines and robust storage to increase reliability of its supply. The same issue could be expanded to other newer power technologies, such as hydrogen.

“It’s not that a particular technology won’t make it, but there is a huge transmission issue,” Petersen said. “If you want to do a utility-scale wind or solar project in the Midwest, there isn’t the transmission to support it. We know we need to build-out transmission quickly if we want to get to this 100 percent clean energy goal, and knowing we are on a very quick timeline, we need to deploy as quickly as possible and get the most bang for our buck on everything we spend.”

“So, if 80 percent of our transmission capacity is from IOUs, and for IOUs that can’t accomplish a tax normalization opt-out, it essentially results in about 15 percent higher costs that trickles down and impacts the customers,” Petersen said.

Mendell added that while it was unclear why the opt-out provision had not yet been penciled into the new version of the BBB, it would benefit the nation’s entire renewable energy strategy.

“This is a key piece of the puzzle that will allow everything that is in the Build Back Better package to do its work,” Mendell said.

The recognition that tax policy will be an important component of the nation’s climate has lined up the influential environmental community and organized labor behind the opt-out provision. “The framework calls for groundbreaking investments, including through clean energy and transportation tax credits, which would make a significant difference in getting more clean energy on the grid and electrifying vehicles of all sizes,” said Johanna Chao Kreilick, president of the Union of Concerned Scientists.

The International Brotherhood of Electrical Workers recently sent a letter to congressional leaders reminding them that IOUs employ large numbers of union workers who would lose opportunities if private infrastructure developers had a tax advantage over regulated utilities. “If an opt-out provision is not included,” the letter said, “the developers will have an unfair competitive advantage that threatens union work and the prevailing wages that IBEW workers rely on.”