IER

Supporters Admit Wind and Solar Depend on the Tax Code

In some contexts, the proponents of solar and wind power hold them up as the inevitable wave of the future, enjoying amazing breakthroughs that only Luddites could ignore. Yet whenever policymakers tinker with tax credits for renewables, their supporters warn the public that these energy sources are not ready for prime-time. We see this in the recent alarm in the renewables community concerning the Senate tax bill.

As explained in this article from Greentech Media, an obscure provision called the Base Erosion Anti-Abuse Tax (BEAT) threatened the ability of investors in renewables projects to minimize their income taxes as much as the credits initially implied.

For our purposes, the precise details of the BEAT provision are not important. What I do want to highlight is the frank admission of the people quoted in the article:

Tax equity is the renewable energy market’s “core financing tool,” said Keith Martin, a transactional lawyer at Norton Rose Fulbright who specializes in tax and project finance. It makes up 50 to 60 percent of the funds for an average wind farm and 40 to 50 percent of funds for the average solar project. [Bold added.]

Later on the article quotes Greg Wetstone, the CEO of the American Council on Renewable Energy:

On a previously scheduled…webinar on energy storage, Wetstone sounded panicked about the provision, even if the final outcome and impact remains uncertain.

“We normally don’t speak in these kinds of terms, where we talk about collapse of the tax equity market. But unfortunately that’s what we’re looking at,” he said. “Virtually every major tax equity provider would exit the space under these constraints. We’re looking at the end of the principal financing mechanism that has fostered growth of the renewable energy sector since the 1990s.” [Bold added.]

What’s “Tax Equity” Have to Do With Renewable Energy?

As the above excerpts make clear, experts and proponents of renewable energy admit that “tax equity” is the principal tool by which the sector has grown. But what exactly does this phrase mean? We can turn to the explanation given by US PREF, the U.S. Partnership for Renewable Energy Finance. In this paper it explains:

Introduction: Tax credits and the need for tax equity

Federal clean energy policies have made tax equity a critical component in the private-sector financing of clean energy projects. This is because federal tax credits and other tax benefits are among the government’s main incentives to help drive the adoption of domestic clean energy technologies

Tax credits and other tax benefits, however, can only be used by clean energy developers who are profitable enough to actually pay income taxes. Because of this, many developers, whether they are start-ups that have not yet reached profitability or are established power companies that earn most of their income in currently depressed energy markets, have little or no ability to use tax benefits themselves. Hence, they must find investment partners with enough income to benefit from tax credits, accelerated depreciation and similar policies. Investment by such tax equity partners is, in fact, one of the few financing mechanisms currently available to fund renewable energy projects. [Bold added.]

Whenever people like Paul Krugman sing the praises of renewable technology and laugh at those who doubt its imminent takeover of energy markets, we need only repeat the following sentence from the quotation above: “Tax credits and other tax benefits, however, can only be used by clean energy developers who are profitable enough to actually pay income taxes.” 

In other words, provisions such as the Investment Tax Credit (ITC) and Production Tax Credit (PTC)—which are treated differently in the House and Senate bills, as of this writing—cannot be fully claimed by the actual operators of wind and solar facilities, because these operations by themselves aren’t profitable enough. So outside companies can invest in these renewables projects, not because the projects make economic sense on their own terms, but because this gives the investors the ability to claim the associated tax credits.

In this context, then, the BEAT provision—which is intended to prevent big companies from avoiding taxation through various “loopholes” and is normally the kind of thing that progressives would typically favor—is ironically threatening to render renewables projects unattractive to multinational banks and other investors. This is one area where the ideology of American progressives leads to cognitive dissonance, because ensuring that these large institutions “pay their fair share” in this case means that they won’t invest in wind or solar.

Conclusion

To be sure, the proponents of wind and solar would retort that coal, oil, and natural gas receive an unfair advantage because of climate change. That is a large discussion which we won’t settle in this blog post, though we’ve written extensively on carbon taxes, and here is my testimony earlier this year on tax policy vis-à-vis energy markets.

In this blog post, I focused on a narrow issue that may surprise many readers: When the chips are down, the supporters of wind and solar openly admit that their industry requires not only special tax breaks, but investment from outside firms who earn enough profit to benefit from the tax breaks. If ever there were an example of an industry where the growth has been driven by the tax code, it is wind and solar in the U.S.