Thanks to Inflation Reduction Act, even publicly owned power companies will now have incentives to invest in clean energy

I did not know that my home state of Nebraska is the only state in the union in which 100 percent of electricity is provided not by Wall Street corporations (Investor-Owned Utilities or IOUs), but rather by publicly owned utilities.

It’s been that way since Nebraska ran the last IOU out of the state in 1949, thanks primarily to the state’s forward-thinking US Sen. George Norris. (A short history of how this happened can be found at this link.)

However, one drawback to all of this is that incentives by the U.S. government for power companies to invest in clean energy come in the form of tax credits. This has created problems, as the American Public Power Association (APPA) wrote in this June 2022 report:

Since the 1970s, Congress has used federal tax incentives to encourage certain forms of energy investments in the United States. In more recent years, Congress has expanded and extended such incentives to promote non-emitting energy resources to address climate change. Arguably, tax expenditures are the single most powerful federal tool used to incentivize wind, solar, geothermal, and nuclear power development in the United States.

However, most of these incentives do not work for public power utilities, which are, as units of state and local government, exempt from federal taxation. The American Public Power Association (APPA) believes that if Congress has market-wide policy objectives, such as addressing climate change, then tax-based energy incentives should be drafted to accommodate tax-exempt entities, including public power utilities. Congress is considering making such tax credits “refundable” beyond an owner’s tax liability and public power utilities should qualify for these credits. In addition, because this approach is novel, APPA strongly encourages Congress to enlist public power representatives in drafting such proposals to avoid unintended consequences.

Well, Congress apparently listened because the IRA takes away this roadblock to public power utilities being able to access these clean energy incentives, as noted by Ryan Cooper in his article for TAP:

The Inflation Reduction Act (IRA) has all kinds of goodies in it: tax credits for homeowners and businesses to install rooftop solar or upgrade their appliances, credits for electric vehicles, money for clean-energy research, and much more.

But there are two provisions that have largely flown under the radar in the discussion of the bill. These are “direct pay” and “transferability,” which will be two of the biggest drivers of emissions reductions in the power utility sector over the next decade. Moreover, the first provision marks a quiet break with decades of American policy orthodoxy, and a lesson in the value of public power.

Let me first review some history. There have been two major kinds of clean-energy tax credits: an investment tax credit (ITC) for installing new clean-power generators, first passed in the 1970s, and a production tax credit (PTC), first passed in the 1990s, for actually producing it. They worked just like you’d think: allowing a deduction from one’s taxes for clean-energy investment or production. And to be fair, these credits actually have driven considerable investment in clean power and therefore lower emissions.

But there were problems. Public power utilities pay no taxes. No taxes. No incentives. Because public power companies and co-ops provide nearly a quarter of American power generation, this created a large roadblock to decarbonizing the electricity sector.

Direct pay in the IRA, by contrast, now means these non-tax-paying entities can receive the credit as a cash payment—basically turning the ITC and PTC into a grant for them. It’s similar to the Earned Income Tax Credit for individuals, in which the working poor receive a “tax refund” even though they may not pay anything in federal income tax.

The new ITC base rate is 6 percent, while the PTC is 2.6 cents per kilowatt-hour produced (though you can only claim one). However, if a producer complies with wage and apprenticeship requirements, both credits are multiplied by a factor of five—a very strong motivation indeed to provide good jobs.

The more I learn about the Inflation Reduction Act, the more I love it. (Despite its drawbacks.)

You can read the rest of the TAP article at this link.

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