[Here’s how utilities will be decarbonized over the next
decade.]
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THE INFLATION REDUCTION ACT’S QUIET REVOLUTION ON PUBLIC POWER  
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Ryan Cooper
August 18, 2022
The American Prospect
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_ Here’s how utilities will be decarbonized over the next decade. _


Vehicles travel down Altamont Pass Road with wind turbines in the
background, in Livermore, California, August 10, 2022., GODOFREDO A.
VÁSQUEZ/AP PHOTO

 

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
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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. As this brief
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the American Public Power Association explains, entities that are
exempt from federal income tax—like nonprofit co-op utilities or
public institutions like the Tennessee Valley Authority or state-owned
utilities—weren’t eligible for these credits. 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.

_MORE FROM RYAN COOPER_ [[link removed]]

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
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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.

Transferability, meanwhile, refers to a change in the rules of these
credits. Under the prior tax policy regime, entities without enough
tax liability to claim the credits could rope in direct investors
who _did_ owe a lot in tax (called “tax equity finance”), and
therefore make some use of the credit.

But as energy analysts Jesse Jenkins and Leah Stokes explain on David
Roberts’s Volts podcast
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this practice had three problems. First, these investors—typically
large financial companies like Goldman Sachs—would eat up something
like 20 to 30 percent of the value of the credit. That’s both an
unnecessary subsidy of Wall Street and cuts down on the effectiveness
of the spending. Second, while some non-taxed electric producers could
figure out these arrangements, it is impractical for public power
utilities
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They could contract with third-party electric producers, but such
arrangements are complicated and expensive. Third, there simply
isn’t enough tax owed by Wall Street banks to drive the kind of
massive clean-power buildout we need.

“Direct pay” and “transferability” will be two of the biggest
drivers of emissions reductions in the power utility sector over the
next decade.

Now thanks to the IRA, entities can simply sell their credits
to _anyone_ with tax liability—no investment necessary. That cuts
down the buying party’s share of the proceeds to perhaps 5 percent,
and greatly expands the available bucket of tax liability that can be
used to finance new investment.

Finally, the IRA creates for the first time ten years of policy
stability. Up until now, Congress had written credits to expire after
a few years, or continually fiddled them up and down, which created
herky-jerky surges and collapses in investment
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uncertainty in the market. Now, utilities will have a full decade to
plan new projects without having to worry about Congress bothering to
re-up the credits (assuming Republicans don’t repeal them somehow).

All told, these tax credits and the way they’ve been reformed will
drive the largest portion of the IRA’s emissions
reduction—modelers estimate
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reduction of 360 million metric tons by 2030, or about 37 percent of
the total.

In some ways, the IRA approach is unfortunately typical of American
policy habits, where instead of the government just doing what needs
to be done, it provides tax incentives for private companies to do it
instead. But the direct-pay program is actually a major shift from
this tradition. Despite its pose as yet another tax credit, it is
really more like a New Deal social-democratic policy: direct
investment of public cash into publicly owned power generation.

When American electricity generation was first being established in
the early 20th century, private companies built out a crazy tangle of
utilities
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typically owned by utility holding companies that tended to skimp on
maintenance and jack prices up as high as they could. Hence a central
element
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Franklin Roosevelt’s 1932 campaign was his advocacy of strict
national regulation of power utilities to rein in these abuses, along
with direct state ownership of them as he had pioneered in New York
state as governor (particularly of hydropower). One result was the
Tennessee Valley Authority, to this day one of the best-run and most
reliable sources of electricity in the country.

Conversely, when many of the New Deal–era controls were removed
during the deregulation frenzy of the 1990s, the result was even worse
than in the 1920s—corrupt swindlers at Enron causing blackouts on
purpose
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rake in easy profits.

While the IRA credits are a huge improvement on the status quo system,
at bottom there is no reason to involve private capitalists in the
power utility business. We’ve known how to generate and transmit
electricity for well over a century. Adding renewables complicates the
picture, but not in a fundamental way. Publicly owned utilities,
managed properly, can and do create and deliver power consistently,
reliably, and without any need to cough up profits for shareholders.
If America has any sense, we will continue to build on that
foundation.

RYAN COOPER is the Prospect’s managing editor, and author of ‘How
Are You Going to Pay for That?: Smart Answers to the Dumbest Question
in Politics.’ He was previously a national correspondent for The
Week.

_Read the original article at Prospect.org._
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_Used with the permission. © THE AMERICAN PROSPECT, Prospect.org,
2022. All rights reserved._

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* Inflation Reduction Act of 2022; Climate Crisis; Fossil Fuel
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