Are We Incenting The Right Energy Technologies?

Solar and wind are the lowest production cost energy sources we currently have, so why are we still subsidizing them with the Investment Tax Credit (ITC), Production Tax Credit (PTC), and Modified Accelerated Cost Recovery System (MACRS)? Is this current strategy using our federal tax dollars efficiently and effectively to advance the energy transition?

Declining Cost Of Solar and Wind Energy Generation:

We have seen marked reductions in the production cost of wind and solar since 2009 as shown in Graph 1.

Graph 1 – Levelized Production Cost of Different Energy Generation Technologies

To validate how low solar and wind energy production costs have fallen, new onshore wind now costs about $46 per megawatt-hour, while large-scale solar plants cost $45 per megawatt-hour (MWh) per IRENA’s Renewable Power Generation Costs Report, 30 June 2022. Source: https://irena.org/publications/2022/Jul/Renewable-Power-Generation-Costs-in-2021)

Since renewable energy competes with conventional, fossil-fuel generation technologies, the global weighted-average levelized cost of energy (LCOE) of new utility-scale solar PV and hydropower was 11% lower than the cheapest new fossil fuel-fired power generation option in 2021, and 39% lower for onshore wind. The global LCOE of new onshore wind projects added in 2021 fell by 15%, year‑on‑year, to $33/MWh, while that of new utility-scale solar PV fell by 13% year-on-year to $48/MWh and that of offshore wind declined 13% to $75/MWh.

The period 2010 to 2021 has witnessed a seismic improvement in the competitiveness of renewables. The global weighted average LCOE of newly commissioned utility‑scale solar PV projects declined by 88% between 2010 and 2021, whilst that of onshore wind fell by 68%, CSP by 68% and offshore wind by 60%.

I question whether continued investment of federal tax dollars will drop the energy production cost of solar and wind energy to a similar record low in the subsequent 13 years to 2035.

Cost Of Solar and Wind Tax Incentives:

Incentives from federal, state and local governments provide tax credits and incentives to encourage new job creation, job retention, and attract new capital investment, especially in the renewable energy sector.

Tax incentives are exemptions, credits, deductions, or exclusions that reduce a company's tax liability to the state or federal government in exchange for installing renewable energy projects.

Cost of the PTC:

The Joint Committee on Taxation (JCT) estimates that in 2019, foregone revenues (or tax expenditures) for the PTC were $5.1 billion. Before P.L. 116-94 was enacted, the JCT estimated that tax expenditures for the PTC would be $19.3 billion between 2019 and 2023. It was later estimated that the PTC extension in P.L. 116-94 will reduce tax revenue by an additional $2.1 billion between 2020 and 2029. (Source: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://sgp.fas.org/crs/misc/R43453.pdf)

Are we, as federal taxpayers, getting our money’s worth for these tax incentives for solar and wind energy projects?

Cost of the Solar ITC:

For 2020, the JCT estimated energy credit tax expenditures to be $6.8 billion, with the majority of tax expenditures ($6.7 billion) attributable to solar. Between 2020 and 2024, the JCT has estimated energy credit tax expenditures to be $35.5 billion, with $34.9 billion for solar. (Source: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://crsreports.congress.gov/product/pdf/IF/IF10479).

Graph 2 depicts that annual solar energy credit tax expenditures.

Graph 2 – Tax Expenditures For The Energy Credit FY 2008-FY2024

Source: Source: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://sgp.fas.org/crs/misc/R43453.pdf

Cost of the Wind PTC:

Before the 2019 extension, estimated revenue losses (tax expenditure) associated with the PTC are $19.3 billion between 2019 and 2023 (Table 3). Most of these revenue losses, $17.9 billion, are due to the PTC for wind energy.

Table 1 – Renewable Energy PTC Federal Payments 2015-2023

Source: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.ourenergypolicy.org/wp-content/uploads/2014/01/MACRSwhitepaper.pdf

MACRS Role In Supporting Marginal Energy Investments:

As is the case across industries, MACRS reduces the present value of corporate income tax liabilities for renewable project developers, thus enabling developers to place more renewable energy projects in service, and for those projects to deliver renewable energy at lower cost to consumers.

Replacing MACRS with economic depreciation would reduce the returns on new projects by about 25%. The model presumes that a 7% internal rate of return is required for an investor to put up capital for a project (which is roughly the rate that investors currently require). But holding all other factors constant, replacing MACRS with straight-line depreciation would drive down by about one-fourth the returns on a project currently yielding 7%, to around 5.25%, as shown in Graph 3.

Graph 3 – Impact Of Solar and Wind Projects ROI With & Without MACRS

Source: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.ourenergypolicy.org/wp-content/uploads/2014/01/MACRSwhitepaper.pdf

Summary:

As we see solar and wind energy being the low energy production cost alternatives, what are the newer energy technologies that we need to pursue to improve our energy efficiency, costs, and emissions performance?

We usually subsidize technologies that are initially high cost, then ween the subsidies as the technology becomes more main stream and cost effective.

An alternative to the current renewable energy status quo, why not focus our tax incentive dollars for nuclear, SMR, energy storage, and hydrogen? These are the areas that could hold the greatest promise for baseload, emissions-free energy available in a reliable and environmentally-acceptable manner.