Clean Energy and Tax Reform
How Tax Policy Can Help Renewable Energy
Contribute to Economic Growth,
Energy Security and a Balanced Budget
US Partnership for Renewable Energy Finance
DISCUSSION DRAFT
1
1. Executive Summary
Renewable electricity sources have experienced tremendous growth over the last several
decades as a result of national and state policies intended to accelerate their large scale
deployment. In turn, key renewable electricity technologies have experienced dramatic cost
reductions, as innovation and competition have driven continual increases in efficiency across
entire supply chains. For example, photoelectric modules that cost $60 per watt when
President Jimmy Carter put solar panels on the White House roof now cost less than $1. Solar
costs are expected to continue to fall as long as there is an attractive market to drive continued
investment, innovation and competition.1 The cost of wind power has been following a
comparable path, with similar drivers based on state and federal policy and strong competition
by innovative manufacturers and suppliers.
These cost reductions are good news for the US economy and the environment. While
renewable energy sources are not yet fully able to compete directly with fossil fuels, they will
be soon -- if cost reductions associated with their large scale deployment continue. Many
analysts expect solar costs to reach levels that will compete with new fossil-fired power plants,
without subsidies on either side, by the early to mid 2020s2. Wind appears likely to reach
competitive levels even sooner. Once these technologies are competitive with fossil
alternatives, investing in them will allow the domestic power sector to diversify away from its
current dependence on fossil fuels and shield customers and investors alike from the volatile
prices and the environmental risks associated with today’s fuels, without increasing direct
costs.
The potential for renewable energy to become cheaper than natural gas-fired electricity is also
good news for those concerned about the size and integrity of the federal budget. It is widely
recognized that, sometime within the next two decades, a combination of increased tax
revenues, reduced tax expenditures and fundamental reform of key nondiscretionary
government programs will be needed to maintain the federal budget at a sustainable
percentage of GDP.3 Our findings indicate that a carefully designed policy that would extend
and then phase down key tax benefits for renewable energy sources over a period of up to ten
years should help the US realize the benefits of fully competitive renewable energy, while
bringing current renewable energy technologies to a level of maturity where they can
1
See, e.g., Lester, R. and Hart, D. (2011). Unlocking Energy Innovation: How America Can Build a Low-Cost, LowCarbon Energy System, Page 27. Cambridge: The MIT Press.
2
See, for example, Jenkins, J., Muro, M., Nordhaus, T., Shellenberger, M., Tawney, L., and Trembath, A. (2012).
Beyond Boom & Bust: Putting Clean Tech on a Path to Subsidy Independence, Page 27. Accessed May 16, 2012 at
http://www.brookings.edu/research/papers/2012/04/~/media/Research/Files/Papers/2012/4/18%20clean%20inv
estments%20muro/0418_clean_investments_final%20paper_PDF.PDF
3
Bartlett, B. (2012). The Benefit and the Burden: Tax Reform: Why We Need It and What It Will Take, Pages 185195. New York: Simon & Schuster.
2
effectively compete with fossil resources. At that time, tax and energy policies should be
comprehensively examined to determine the optimal policy approach going forward.4
This approach of smoothing the otherwise uncertain or choppy path of federal tax incentives
during a transitional “glide path” period will induce additional deployment, investment and
innovation, reducing renewable energy costs while enabling the timely reduction of federal tax
expenditures on all forms of energy. Such cost reductions from the supply side, working in
combination with continued state policies intended to augment the demand side of the
renewable energy market, are the most powerful way for the US to diversify beyond fossil fuels
in the power sector, which is currently becoming increasingly dependent on a single fuel,
natural gas.5
The smooth phase down of clean energy tax expenditures in that time period will reduce our
economy’s reliance on a single fossil fuel in the power sector, contribute to a “right-sized”
federal budget, and stimulate increased long term economic growth due to the availability of
domestic energy resources that are both cheaper and cleaner than today’s fossil fuels. To
maximize the budget savings and ensure the evolution of a level playing field for competition
between renewable and fossil fuels, the phase down of tax benefits for emerging renewable
energy technologies should be accompanied by the reduction and potentially the elimination of
tax benefits for mature fossil energy sources that have long competed successfully in the
market place.6
During the transition, additional federal policies to make the tax benefits more efficient, along
with continuing RPS and other policies to stimulate the deployment of renewable resources at
both state and federal levels, are also important to achieving the goal of fully competitive
renewable energy in the early to mid 2020s. These short term investments will pay substantial
long term dividends in terms of lower cost electricity for US businesses and consumers, with far
fewer environmental risks than our current fuel mix.
2. Scale Deployment and Cost Reductions
The dramatic reduction in the cost of renewable energy technologies has led to a broad
recognition of the relationship between their cost and the scale of their deployment. For
4
The decision to completely eliminate tax benefits for various energy sources is beyond the scope of this paper;
and should be considered carefully in light of US objectives and policy alternatives. For example, some level of
continued tax benefits even for mature clean energy may be warranted due to various market failures, including
negative externalities from fossil fuel use.
5
See the companion USPREF whitepaper “Diverse, Secure and Sustainable: The Role of State RPS Programs”.
6
See Appendix for a comparison of recent and historical federal subsidies for renewable and other forms of
energy.
3
example, between 1976 and 2010, the cost of photovoltaic (PV) modules decreased by a factor
of roughly 2 every time the amount deployed increased by a factor of 10 (see Figure 1 below).
In the last two years, PV cost reductions have accelerated even further, due in part to
continued reductions in the technical cost of PV panels, as well as to a dramatic increase in
investments in the supply of polysilicon relative to overall demand.
Figure 1
Source: US DOE Sunshot Vision Study, February 2012
As this historical trend suggests, scale deployment under competitive conditions is a major
driver of a variety of cost reductions. Economists identify factors such as learning by doing,
innovations to reduce cost and increase efficiency, and rationalization of supply chains and
system components as key reasons for costs to fall as a result of deployment of new
technologies at scale7. Competition among developers and manufacturers ensures that there
are strong incentives for reducing costs through these means. Indeed, scale deployment and
brutal competition among the manufacturers of polysilicon, a major input into PV modules, has
contributed to module costs falling below $1 per watt in the two years since the end of the data
series in Figure 1.
These factors have wrung so much cost out of PV modules that the remaining, non-module
costs have become the major focus for additional cost reductions. And, while the polysilicon
and module markets are now international, many of the non-module costs involve balance of
7
Lester and Hart (2011)
4
system and “soft” costs that are best addressed in the domestic supply chain markets for labor,
balance of system materials and technologies and project integration. The domestic nature of
many of these cost centers is a key reason why it makes sense for the US to extend tax benefits
for solar power for a sufficient period of time, since it is only by maturing these domestic
aspects of the supply chain that the US can achieve cost-competitive solar technology.
3. The Next Wave of Renewable Energy Cost Reductions
A variety of studies have focused on the aspects of solar energy that are most susceptible to
cost reductions in the near future, and have projected paths of additional cost reductions in the
coming years. The National Renewable Energy Laboratory (NREL) conducted such a study in
2012, and projected utility-scale solar costs of $1.71 per installed watt by 2020.8 NREL
concluded that additional cost reductions, such as those targeted by the DOE’s “Sunshot”
program, would likely require new, major technological breakthroughs (see Figure 2 below).
Figure 2
Source: Residential, Commercial, and Utility-Scale Photovoltaic (PV) System Prices in the United
States: Current Drivers and Cost-Reduction Opportunities, NREL Technical Report NREL/TP6A20-53347, February 2012
8
Goodrich, A., James, T., and Woodhouse, M. (2012). Residential, Commercial, and Utility-Scale Photovoltaic (PV)
System Prices in the United States: Current Drivers and Cost-Reduction Opportunities. Accessed May 29, 2012 at
http://www.nrel.gov/docs/fy12osti/53347.pdf . See also McKinsey and Company’s Aanesen, Krister, Heck, Stefan
and Pinner, Dickon (2012). Solar power: Darkest before Dawn. Available at
http://www.mckinsey.com/Client_Service/Sustainability/Latest_thinking/Solar_powers_next_shining
5
Continued deployment at scale in the US is the key driver of these kinds of cost reductions9.
The opportunity to deploy technologies at scale allows companies to invest in large scale
manufacturing, shipping, assembly and other supply operations, all of which lower cost due to
economies of scale and increasing competition. The need to compete to succeed in
deployment, as is typically the case in utility RPS procurement proceedings, creates powerful
incentives to increase efficiencies, lower costs, and improve performance. The prospect of a
growing market attracts innovators, entrepreneurs and venture capitalists seeking to profit
from additional cost-reducing and performance-enhancing technological and business model
innovations. And even the most prosaic aspects of the production system, from material
manufacturing to shipping, marketing, permitting and construction management, face growing
competitive incentives to increase productivity and performance while lowering costs for
domestic suppliers, developers and ultimately, US business and household customers.
Recent cost reductions in PV solar have been even more dramatic than the trend in Figure 1,
leading to the potential for competitive cost levels to be reached even sooner than anticipated
by NREL and others. Alternatively, cost reductions may flatten out for several years as the
global PV industry works through a temporary oversupply in manufacturing capability and
reduced demand. During this period, additional innovation and cost reductions may slow down
until additional breakthroughs in materials, efficiency and integration bring the market back to
a rapidly declining cost trajectory.
Facing such an uncertainty, policy makers would be wise to establish a framework that is more
likely to encourage over-performance in achieving cost reductions than under-performance.
For example, if substantial cost reductions are achieved early in the tax benefit phase down
period, the primary result would be the even more rapid deployment of clean, competitively
priced domestic energy. However, if cost structures are more stubborn or require more
significant innovations and breakthroughs, reducing tax benefits too quickly would delay or
dilute the needed innovation, learning-by-doing and supply chain rationalization. Similarly, a
smooth and predictable policy path will inspire more consistent investment, innovation and
competition than an uncertain, choppy or “on and off” policy path. Because of this, a
smoother, predictable policy phase down path that allows sufficient time for cost reductions to
be achieved offers the US economy a better path to achieve inexpensive clean energy earlier.
By supporting this outcome, such a policy will better achieve needed fuel diversity and avoid
the risks of over-reliance on a single type of fuel.
Figures 3 and 4, below, illustrate this interaction between federal tax policy alternatives and the
path of cost reductions for solar energy. Figure 3 shows the declining capital costs as projected
by NREL and the Sunshot goal as a dotted line, measured on the right hand axis. It also shows
9
Lester and Hart (2011); Jenkins, et al. (2012)
6
the levelized cost of solar energy, net of federal investment tax credits, as a solid line,
measured on the left hand axis. The solid line shows the effective impact on solar costs of the
scheduled drop in the investment tax credit, under current law, from a 30% credit to a 10%
credit at the end of 201610. The result of this dramatic reduction in tax support drives the
effective cost of solar from the projected $100 range to the $130 range practically overnight at
the end of 2016. This effective cost increase is likely to significantly dampen deployment,
directly and indirectly. The direct effect is that less solar will be selected competitively at $130
per MWH than at $100. Indirectly, the higher cost of solar is likely to make state renewable
portfolio standards more expensive or less effective, by triggering alternative compliance
provisions in those programs. Both effects will reduce the rate of deployment, perhaps
significantly.
Figure 3
Reduced deployment, with the attendant reductions in innovation and competition, should be
expected to slow the rate of underlying cost reductions due to increased efficiency, better
supply chains, and lower costs for balance of system components and “soft costs” such as
permitting and interconnection. While it is difficult to predict the actual path of such a delay,
Figure 4 illustrates the directional impact of such a slowdown.
Figure 4 illustrates this by showing two policy scenarios, again with levelized cost per MWH
declining over time in solid lines, measured on the left axis and with capital costs declining over
time in dotted lines, measured on the right axis. The first scenario (red lines) reflects current
law, which creates the massive “cost cliff” at the end of 2016 as the ITC goes from 30% to a
permanent 10%. Consistent with the concern that such a cliff will slow deployment and reduce
10
U.S. Energy Information Administration. (2012, February). EIA projects U.S. non-hydro renewable power
generation increases, led by wind and biomass. Accessed May 29, 2012 at
http://205.254.135.7/todayinenergy/detail.cfm?id=5170
7
Figure 4
the rate of cost reductions, we assume in this scenario that the underlying capital cost of solar
is less than the NREL projections of $1.71 per watt by 2027, but does not achieve the $1 per
watt goal of the Sunshot program in that time frame.
The second scenario (green lines) in Figure 4 illustrates the alternative policy of a smoothed,
transitional 30 per cent ITC that begins phasing down in 2017 and reaches 20 per cent in 2027.
Consistent with the view that predictable and consistent transitional policies will maximize cost
reductions, we assume that this policy path will lead to more rapid and effective innovation and
competition, which we illustrate in this scenario by having solar costs reaching the $1 per watt
Sunshot goal by 2027.
These considerations suggest that the most effective way to incentivize continued cost
reductions for renewable energy sources, from a federal tax policy perspective, is to avoid the
“cost cliffs” and other shocks created by tax policies with precipitous changes in tax benefits
and to replace them with a smooth, consistent policy path that phases out over an appropriate
period of time. How long this phase down period should be may best be answered by
comparing the cost of renewable electricity to the cost of electricity produced by America’s
most competitive fossil fuel, natural gas.
8
4. Natural Gas – Today’s Real Competitive Alternative for Power
It is widely recognized that the most economically attractive new electricity feedstock at this
time is natural gas11. This is largely because natural gas prices are at historic lows due to recent
major innovations like directional drilling and hydraulic fracturing to extract gas from America’s
vast shale deposits. Thus, to survive and thrive without long term government subsidies, new
renewable energy facilities must be able to compete on a cost basis with new natural gas-fired
power plants.
This is not the case today. New natural gas combined cycle plants today, due to moderate
forward market prices for gas, have a strong competitive advantage over new solar and nuclear
power and a moderate but real advantage over new wind and coal. Gas is also easier to permit
than coal and has lower emissions of carbon dioxide and other pollutants and thus fewer risks
associated with potential future carbon regulation. For these reasons, most observers predict
the vast majority of investment in new power generation equipment will be natural gas-fired
plants for the foreseeable future.
Because renewable energy sources, in effect, substitute capital for fuel, they can only compete
with gas if their capital equipment costs decline or if the price of natural gas increases. As
discussed above, the capital cost of renewable energy is decreasing, and appropriate short term
government policies can sustain this important trend of falling costs. On the other side of the
equation, natural gas prices are poised to increase independent of policy drivers, since they are
at their lowest level in decades.
Natural gas prices are at these record lows for a variety of reasons, including lingering effects of
the Great Recession and an extremely mild winter in 2011-12. The most significant long term
drivers, however, are the dramatic proliferation of directional drilling and hydraulic fracturing in
the US, which have opened vast new resources of shale gas to production and high global oil
prices, which have induced additional production of natural gas liquids that compete with oil
along with the co-production of very large amounts of dry natural gas, which in turn further
increases the supply of natural gas relative to demand.
As reflected in the forward market prices for natural gas (Figure 5, below), there is a
widespread consensus that current low prices are substantially below the marginal cost of
exploration and production of gas, and prices are expected to recover somewhat in the near
future. Over time, additional upward price pressure is expected due to increased
11
Gold, R., Smith, R., Gilbert, D. (2012, April 10). Gas Glut Rejiggers Industry. WallStreetJournal.com. Accessed
May 30, 2012 at http://online.wsj.com/article/SB10001424052702303815404577335973150280672.html
9
Figure 5
Nominal natural gas prices ($)
16
14
Observed Daily
Forward Monthly
12
10
8
6
4
2
0
Jan 01, 1990
Jan 01, 1995
Jan 01, 2000
Dec 31, 2004
Dec 31, 2009
Dec 31, 2014
Dec 31, 2019
Dec 30, 2024
Source: NYMEX
US demand for gas for manufacturing, chemical and other non-energy uses, as well as a
dramatic shift to natural gas for power production in the domestic market and increased
natural gas exports. Current forward prices reach $6 around the end of the decade and
continue upward after that. These price expectations suggest that the LCOE of new 30 year or
longer lived resources should be evaluated against gas prices in the $5 to $7 range, rather than
against today’s unusually low spot market gas prices.
The marked contrast between the upward trend of natural gas prices and the downward trend
of renewable energy costs suggests an important opportunity for the US economy. Given the
risks of price volatility and to the entire economy created by the dependence of our entire
transportation system on oil, we should seize this opportunity to avoid a similar dependence on
a single fossil fuel for our power system. As shown below, supporting the continued cost
reduction of renewable electricity sources through the points where their declining costs cross
over the increasing costs of natural gas offers a cost-effective and clean path for avoiding this
over-dependence on a single fuel for generating electricity.
10
5. Comparing Declining and Increasing Costs: Renewable and Fossil Fuel Electricity
There are a variety of ways to evaluate the ability of clean energy resources to compete with
traditional fossil technologies. One of the simplest approaches is to calculate the “levelized
cost of energy” or LCOE for different sources of electricity. LCOE can be thought of as the
single, fixed price per megawatt-hour (MWH) for energy that would be sufficient, over the
economic life of the unit, to pay for all the operating and fixed costs of a new power plant,
including the cost of the private sector capital (debt and equity investments) needed to finance
the plant. While LCOE significantly simplifies the complex issues involved in comparing power
sector investment options, it is a useful rough metric for comparing the attractiveness of
different technologies to utility and other private sector investors.12
Figure 6 (below) shows estimated current and projected LCOEs of typical combined cycle
natural gas, onshore wind, and utility-scale PV solar in the US. For simplicity, concentrating
solar power and coal are not included.13 Figure 6 shows that today, electricity from a new
combined cycle gas turbine (CCGT) plant is less expensive than either new wind or new solar,
assuming a $5.50 per thousand cubic feet (MCF) future gas price.14 But, because renewable
energy costs are declining while the price of gas is increasing, renewable electricity sources are
close to becoming cost competitive with natural gas.
12
LCOE typically does not include the transmission, ancillary service and other costs of integrating intermittent
resources such as wind and solar, nor does it include the value of energy production, which varies by time of day
and location. Thus, while LCOE analysis does not conclusively demonstrate that one technology is less costly than
another, it does provide a useful benchmark for cost comparison.
13
Typical coal LCOEs are above those of CCGT throughout the time period covered in Figure 6. Concentrating solar
power (CSP), which uses sunlight concentrated by mirrors to generate steam from water and then uses the steam
to generate electricity in state-of-the-art turbines, is projected to experience cost reductions similar to those of PV
solar. For example, the DOE Sunshot Vision Study projects LCOEs across CSP technologies falling from $204 per
MWH in 2010 to $144 per MWH in 2015 and $98 per MWH in 2020, with additional technology breakthroughs
having the potential to lower costs to $60 per MWH in the 2020s.
14
Wind capital costs used in Figure 6 are $1,800 per kW in 2012, declining by 2% per year to $1,357 per kW in
2026. CCGT capital costs are fixed at $1,100 per kW, and LCOEs are based on these costs plus expected future gas
prices that gradually increase from $5.50 currently to $7 in 2026. Solar LCOEs under current law are based on
capital costs falling from $2.30/watt today to $1.50/watt in 2026, while solar LCOEs under the two alternative
policy scenarios are based on capital costs falling to $1/watt in 2026. Capacity factors used are 60% for CCGT, 37%
for wind, and 21% for solar. No carbon cost is included in the analysis. Wind PTCs are assumed not to be renewed
or extended, consistent with current law. Eligibility for accelerated depreciation is assumed to continue per
current law.
11
Figure 6
For example, wind LCOEs, reflecting the absence of the production tax credit (PTC) after 2012,
are currently close to competitive with combined cycle natural gas in areas with good wind
regimes, and should start to become more widely competitive as soon as 2014 with only
modest improvements in capital cost and efficiency. Solar, with a later start in large scale
deployment, has the potential to become competitive with gas in the early to mid 20’s,
provided it can continue to achieve the cost and efficiency improvements associated with large
scale deployment.15
As discussed above, however, this deployment is dependent on a combination of effective state
and federal policies, including state RPS’s and predictable and sufficient tax credits. In this
context, the ITC “cliff” of 2016 has the potential to delay deployment and cost reductions,
potentially delaying the crossover point for solar and gas until gas prices are substantially
higher and a larger share of the US power sector is dependent on natural gas. By contrast,
extending and then phasing down the solar ITC, offers a path towards sustained large scale
deployment, continuous innovation and a greater likelihood of additional technology
improvements. All of these benefits should hasten the day when solar, like wind, offers a
competitive alternative to excessive reliance on natural gas in the power sector.
15
Distributed rooftop solar, which competes against delivered electricity as priced in retail electric rates rather
than directly against traditional electric generators, faces a similar challenge from the ITC “cliff” and would
similarly benefit from enhanced deployment. See the Appendix for a version of Figure 6 that includes projections
for residential solar costs under both the current and the smooth phase down policy scenarios.
12
Such a smooth phase down of tax benefits for renewable energy sources offers clear benefits
for the economy and the national interest compared to the current shorter term, on-and-off
approach to tax benefits for renewable energy. It provides a stable and reliable investment
framework that supports the rational, competitive and sustained deployment of domestic
investment and other resources needed to achieve competitive cost performance of clean
energy resources. At the same time, it avoids the twin pitfalls of excessive or insufficient
incentives and subsidies in the energy sector.
In this way, it significantly helps reduce the risk of excessive dependence on natural gas in the
power sector by nurturing alternatives that can compete head-to-head with natural gas,
conserving the new-found domestic resource of shale gas as a long-term driver of comparative
advantage for the US economy and protecting it from the risk of high prices. Finally, it is
consistent with and helps achieve an overall program of tax and other fiscal policy reform
needed to maintain the federal budget at a sustainable percentage of GDP, while providing
appropriate government services.
6. Complementary Supply-Side Policies
Additional policies can help boost the effectiveness of the smooth phase down of tax benefits
outlined above. Most relevant to this paper are policies to increase the efficiency of tax
benefits, primarily by making it easier for their recipients to utilize the value of those benefits in
the event they do not earn enough profits to pay income taxes equal to or greater than the
value of the tax benefits. Because many renewable energy project developers are start-up
companies or others with low or zero levels of taxable income, it is necessary today for a large
share of renewable energy developers to use the so-called tax equity market to receive any
benefit from their renewable energy tax credits.
“Tax equity” refers to arrangements whereby entities that have large amounts of taxable
income invest in renewable energy projects in return for most or all of the tax credits. While
this sharing of the risks and benefits of the project is mutually beneficial to the developer and
the tax equity investor, most tax equity deals are highly complicated and involve significant
fees, restrictions and other costs that divert much of the value of the tax credits away from
reducing the cost of the renewable energy project itself. In addition, due to the complexity and
specialized nature of these transactions, there is a limited supply of such tax equity in the US
market. Both of these factors – high costs and limited supply – make any renewable tax credit
13
program less efficient, in terms of the amount of large scale renewable deployment achieved
per dollar of federal tax expenditures.16
Accordingly, the goals of accelerating cost reductions in renewable technologies and reducing
the cost to the federal budget would both be served by policies that make it easier for project
developers to realize the full value of their tax credits. This goal, in turn, can be achieved
through direct or indirect means.
a. Direct means to address tax equity constraints: refundable tax credits
Direct measures that Congress could enact include a refundable tax credit, which could be
converted to cash by recipients that are not able to apply the credit against their own income
taxes. Ideally, such a refundable credit would include features that make it easy to administer
and that incent its use only by those who do not have adequate tax appetite to use the tax
credits. An appropriately structured refundable tax credit is likely to be the simplest, most
efficient and most effective adjunct to the three stage tax benefit policy outlined in this paper.
b. Indirect means to address tax equity constraints: MLP status and investment rule changes
Indirect means include measures Congress could enact that would allow investors in renewable
energy projects to share more readily and more fully in the project’s tax benefits. Commercial
enterprises that are treated as master limited partnerships (MLPs) under the tax code enjoy this
ability to a degree, and it could moderately increase the ability of renewable projects to
monetize tax benefits if they were made eligible for MLP status. To fully address the tax equity
shortage and cost challenges through providing renewable energy projects MLP status,
however, Congress would also have to relax the at-risk and passive loss investment rules, at
least for renewable energy investments17. This would allow MLPs to fully share tax benefits
such as depreciation and tax credits with their investors. Even without changing these key
rules, MLP status for renewable energy projects offers the potential to reduce their financing
costs, which is also an important part of renewable energy’s cost structure.
While MLP status is not a substitute for the other tax policies recommended in this paper, it
could be a useful adjunct to further lower the cost of renewable energy projects. Furthermore,
since many fossil fuel companies are eligible for MLP status, extending such status to renewable
energy sources could help policy makers provide a level playing field for a competitive clean
energy future.
16
See USPREF Whitepaper Tax Credits, Tax Equity, and Alternatives to Spur Clean Energy Financing at
http://uspref.org/wp-content/uploads/2011/09/Tax-Credits-Tax-Equity-for-Clean-Energy-Financing.pdf
17
Sherlock, M. and Keightley, M. (2011). Master Limited Partnerships: A Policy Option for the Renewable Energy
Industry. Congressional Research Service. Available at
http://www.ieeeusa.org/policy/eyeonwashington/2011/documents/masterlmtdpartnerships.pdf
14
Additional policies should also be considered to accelerate research, development and
demonstration of clean energy technologies, facilitate low cost financing of clean energy
resources, and in other ways further complement the role of the recommended three stage tax
policy outlined in this paper. However, without tax benefit reforms along the lines of those
recommended in this paper, these other policies will be far less effective and potentially more
costly to the federal budget and to the US economy.
7. Conclusion
Key renewable energy sources are rapidly approaching cost levels that will allow them to
compete with established fossil fuel resources. This is an important goal for the US economy,
which is increasingly exposed to over-reliance on natural gas and other fossil fuels, and the
associated economic, environmental and national security risks. Renewable energy at costs
that are low enough to compete head-to-head with fossil fuels will reduce the overall cost of
energy to American consumers and businesses, while also avoiding the additional risks
associated with fuel prices, availability and environmental concerns.
The key driver behind the declining costs of solar and wind power is their deployment at scale,
which unleashes the market forces of innovation, competition, learning-by-doing and efficiency
up and down the supply chain. In turn, scale deployment is the result of federal and state
policies that reduce the cost of, and increase the demand for, investment in renewable energy
technologies. The most important federal policies for driving scale deployment are tax
benefits, such as production or investment tax credits, and accelerated depreciation for new
renewable energy investments.
To quickly achieve the goal of fully competitive costs for renewable energy, we recommend a
new approach to renewable energy tax credits. First, they should be extended or maintained,
for up to a reasonable period of time, to allow renewable resources to be able to compete on
an after-tax basis, with the market-leading new sources of fossil-fired electric generation. After
that, the tax benefits should phase down over a period that is long enough to spur continuous
deployment at scale and the realization of additional cost reductions. Finally, in the context of
an overall evaluation of energy and tax policy and the success of the more mature renewable
technologies in reaching competitive cost levels, it may be appropriate to end tax benefits for
these resources, provided a truly level playing field with fossil energy and other important
policy objectives are met. Under this approach, smooth and predictable paths for tax benefits
will encourage continued investment, deployment, innovation and cost reduction. In turn state
RPS programs will have lower rate impacts, spur additional deployment and cost reductions,
and produce more economic benefits when partnered with such an approach to federal tax
benefits. Finally, this approach will facilitate the important task of maintaining the federal
budget at a reasonable percentage of GDP, both by providing a timeline to phase down federal
15
tax expenditures on energy of all sorts, and by stimulating long term economic growth through
the establishment of competitive, domestic clean energy sources at costs below those of fossil
fuels.
16
Appendix
1. Residential Solar LCOE Projections
Cost and other assumptions as in Figure 6 above, with residential solar in 2012 cost per watt of $4.50
and in 2027 of $1.50, consistent with the DOE Sunshot objectives.
2. Federal Subsidies for Energy Sources, 1950-2012
1950-2010
2011
2012
Total
Oil
369.000
N/A
N/A
N/A
Natural Gas
Oil and Gas Total
121.000
490.000
N/A
2.820
N/A
2.820
N/A
495.640
Coal
104.000
1.358
1.358
106.716
Hydro
90.000
0.216
0.216
90.432
Nuclear
73.000
0.982
0.804
74.786
Renewables
74.000
12.525
9.227
95.752
Geothermal
7.000
0.273
0.273
7.546
Total
838.000
18.174
14.698
870.872
Numbers are in billions of dollars; All years are US government fiscal years
Oil and Natural Gas numbers are only available combined, not separate for 2011 and 2012
Numbers in italics indicate an assumption of 2010 funding levels remaining constant (no 2011 or 2012 data available)
Data sources:
Nuclear Energy Institute
Jenkins, J. et al.
Energy Information Administration
Nuclear Energy Institute (prepared by Management Information Services, Inc.). (2011). 60 Years of Energy Incentives: Analysis of Federal Expenditures for Energy Development.
Accessed May 16, 2012 at http://www.nei.org/filefolder/60_Years_of_Energy_Incentives_-_Analysis_of_Federal_Expenditures_for_ Energy_Development_-_1950-2010.pdf
Jenkins, J., Muro, M., Nordhaus, T., Shellenberger, M., Tawney, L., and Trembath, A. (2012). Beyond Boom & Bust: Putting Clean Tech on a Path to Subsidy Independence. Accessed
May 16, 2012 at http://www.brookings.edu/research/papers/2012/04/~/media/Research/Files/Papers/2012/4/18%20clean%20investments%20muro/0418_clean_investments_
final%20paper_PDF.PDF
U.S. Energy Information Administration. (2011, July). Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2010. Accessed May 16, 2012 at
http://www.eia.gov/analysis/requests/subsidy/pdf/subsidy.pdf
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