Plus: Coal views of the Space Needle
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FEB 16, 2022

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Urgency grows for obscure clean-energy tax provision

Tucked alongside more than $300 billion worth of clean-energy tax credits pending in Congress is an obscure but important provision whose supporters span the corporate gamut.

Utilities, renewable energy developers and cleantech startups alike are uniting behind not only the tax credits, but a policy called direct pay that helps them better monetize those credits.

Originally part of the House-passed Build Back Better Act, which has stalled in the Senate, the suite of nearly 20 tax credits is considered vital to accelerating America’s clean-energy transition to the pace scientists say is needed to prevent the worst impacts of a warming planet.

In an earlier edition, Cipher looked at the big picture of why more government action is needed to tackle climate change. This week, we’re diving deeper into one proposal and its importance across the clean-energy landscape.

Direct pay would allow tax credit recipients to access credits by receiving cash payments from the Treasury Department instead of seeking tax-equity financing from a bank. (Tax-equity financing allows developers to effectively “sell” the tax credit to a bank, which then can use the credit to offset their own taxes. This transaction allows developers to shift the tax credit to another partyin this case banksin exchange for cash.)

Financial institutions typically charge a commission of 15% to 20% of the credit value for these transactions, according to Maria Martinez, manager for U.S. policy and advocacy at Breakthrough Energy (which supports Cipher).

This type of clean-energy financing is not done elsewhere in the world, according to a report by Sarah Knuth, assistant professor at Durham University in the United Kingdom.

Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee with jurisdiction over tax policy, said direct pay is particularly important to what he calls “under-served communities”—in this instance startups looking to jumpstart new technologies since they don’t yet have the tax liability to get tax equity from banks.

“It’s hugely important to under-served communities that they get these funds in a way that makes it easier for them to get their projects off the ground,” Wyden told Cipher in an interview last week. “They don’t have to go out and get waltzed around by these big financial interests who can skim off more of the money.”

Some banks have resisted the direct pay provision, according to Wyden and several other experts interviewed for this article.

Bank of America and JP Morgan Chase account for roughly 50% of the renewable energy tax-equity market, according to law firm Norton Rose Fulbright.

“I think they [banks] have had trouble finding allies for their cause,” Wyden said. “There’s no question they’re not having a rally for this provision.”

A JPMorgan Chase spokesperson told Cipher: “We do not oppose the direct pay option.” Spokespeople for Bank of America and the American Bankers Association, a trade association representing U.S. banks, declined to comment.

Wind and solar electricity are growing so fast the tax-equity market hasn’t kept pace. That’s why The American Clean Power Association, a U.S. association representing clean-energy developers, supports direct pay.

“Tax equity supply is already constrained and will cripple the market in the absence of an alternative mechanism to monetize tax credits,” says an ACP fact sheet viewed by Cipher.

For utilities, direct pay frees up capital and “takes it out of a more expensive equity market, which provides savings for customers,” said Eric Grey, vice president of government relations at the Edison Electric Institute, a trade group representing investor-owned utilities.

As for the “under-served communities” Wyden mentioned, direct pay would help level the playing field “between startups and incumbent companies that can access the credits right away because they generate profits that the credits can offset,” said Jonas Murphy, government affairs manager of the National Venture Capital Association.

Direct pay would be an option for 13 out of approximately 16 tax credits in the Build Back Better Act, including those supporting clean hydrogen, transmission power lines and electricity storage, according to Breakthrough Energy.

What’s more, developers using direct pay for certain credits would need to satisfy new domestic content requirements, pleasing unions but irking some renewable energy groups, according to Jason Walsh, executive director of the nonprofit BlueGreen Alliance, which is a group comprised of environmental groups and labor unions.

The differences over an obscure tax proposal reflect the clean-energy transition’s complexity. All these interests—renewable energy groups, labor unions, environmental groups, banks and startups—support the shift to cleaner energy. Yet policy inevitably shifts fault lines.

The outlook for approving any clean-energy tax credits soon is murky.

With inflation levels at historic highs, more lawmakers are joining Sen. Joe Manchin (D-W.Va.), expressing concern about more big government policy.

If Congress waits until after the midterm elections to consider “tax extenders”—a suite of existing tax credits often renewed close to year-end—direct pay may fall to the wayside because it’s a new provision, Grey said.

Wyden demurred when asked about that.

“I’m not going to speculate on something like that,” Wyden said. “I want to have this done long before we get to extenders season.”

Amy’s Lunchtime Reads
and Hot Takes

Biden Administration Promises to Buy ‘Clean’ Industrial Materials The New York Times
My take: The government’s role is central in helping bring down the green premium—the cost between an incumbent dirty technology and its cleaner counterpart—for these industries where little profit motive exists to shift from, say, dirty cement to clean cement.

In Clampdown on U.S. Methane Emissions, Belching Cattle Get a Pass The Wall Street Journal
My take: Whoa, even Rep. Ro Khanna (D-Calif.) doesn’t support a direct regulation on agriculture methane emissions. That shows just how little appetite lawmakers have for regulating this politically powerful sector.

People balk at paying more for green flightsPOLITICO
My take: Aw, yes, the “intention-behavior” gap, where people say they support something but then don’t. I don’t think we’ll ever overcome this with individual consumers and climate change, which is why governments, investors and companies need to step up.

Form Energy announces partnership with Georgia Power to test 100-hour iron-air battery Utility Dive
My take: It’s cool to see this once deeply coal-intensive utility embracing new climate technologies.

France to build 6 nuclear reactors as part of climate goals AP News
My take: Some environmental groups say France should instead prioritize wind and solar. The sheer size of the projected clean electricity growth demands this be an “and” not “either/or” discussion.

Is the California Coalition Fighting Subsidies For Rooftop Solar a Fake Grassroots Group? Inside Climate News
My take: Alternative, more accurate headline of what is an important story about the role of corporate influence: Utilities help fund grassroots group, prompting debate about their influence.

Venture Capital Is Flowing to Climate Software and Hardware Bloomberg (paywall)
My Take: I love the simple delineation between climate software—emissions measuring, etc.—and climate hardware—the physical technology behind cutting emissions. They’re both important, but software is nothing without hardware.

More of what I'm reading:
  • Startup promises green steel by 2025 as decarbonisation race heats up — ABC News (Australia)
  • BlackRock’s Larry Fink Meets Big Oil and Its Foes to Navigate Climate Fight — Bloomberg (paywall)
  • Major breakthrough on nuclear fusion energy — BBC News
Clean-energy tax credits offer affordable climate policy: study
Source: University of Chicago's Energy Policy Institute and the Rhodium Group • The social cost of carbon is a monetary metric reflecting the damages from the release of an additional ton of CO2. These figures reflect the central cost estimates the report used for electric-generating technologies from the National Renewable Energy Laboratory’s Annual Technology Baseline and additional research by Rhodium.

Costs for wind and solar electricity have dropped so much over the past decade that tax credits supporting them are a wildly affordable way to tackle climate change, a new study said.

The benefits from lower carbon emissions are roughly three to four times greater than the costs of clean-energy tax credits, according to a study by the University of Chicago’s Energy Policy Institute and the Rhodium Group, an independent research organization.

"This reflects the progress that has been made in reducing the cost of low-carbon energy sources," said Michael Greenstone, economics professor at the University of Chicago and executive director of the institute.

The study analyzed production and investment tax credits available to new zero-emitting electricity generating resources available through 2031. It also examined a tax credit supporting existing nuclear power plants, which are often cheaper to keep running than building new power plants.

These provisions are similar to several tax credits included in the stalled, House-passed Build Back Better bill.

Greenstone, who prefers a carbon price over subsidies or mandates, said tax credits are filling an important role given Washington’s lack of interest in passing legislation to put a price on a carbon.

Coal views of the Space Needle
Remember the coal train photo last month with my family’s dog in Eastern Washington? I snapped this photo recently of the same track going through Seattle's Olympic Sculpture Park with the same type of coal coming from Wyoming and Montana to export terminals in Canada.
Each week, we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to
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