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Breaking News: Solar ITC Extension Through 2023

Breaking News: Solar ITC Extension Through 2023

On December 21st 2020, a massive spending bill was passed that includes $35 billion in energy research and development programs. Specifically, a two-year extension on the solar investment tax credit (solar ITC).

Breaking Down The Bill

  • The final version of the bill was passed by the house of representatives and the senate as part of the $900 billion coronavirus relief package. The legislation was introduced as a 5,593-page bill. The Senate passed the bill with a 92-to-6 vote and about two hours after the House easily passed it.
  • Clean energy provisions are included in $1.4 trillion federal spending and tax extension package negotiated by congressional leaders alongside the $900 billion coronavirus relief package. Senate Minority Leader Charles Schumer (D-New York) provided summaries of the provisions, and House Speaker Nancy Pelosi (D-Calif.) highlighted them in a Sunday summary of the legislation’s contents with changes to the solar ITC being a big win for the renewable energy industry.

“Let’s be clear: Are these provisions enough to meet the demands of the science? No,” said Senate Minority Leader Charles E. Schumer (D-N.Y). “But are they a significant step in the right direction? Yes.”

The Renewable Energy Section of The Bill

The energy research, development, demonstration (RD&D) and commercialization funding in the bill is the first major energy legislation passed in a decade. Although it does not extend to the carbon emission reductions sought by the Biden-Harris administration, it does funnel billions of dollars over the next five years to advancing technology within the solar and wind power, energy storage, geothermal power, marine energy, grid modernization, energy efficiency, nuclear power, and carbon capture, utilization and storage sectors.

It endorses a multifaceted array of new renewable energy measures, importantly, extending solar ITC tax credits and introducing new research and development programs for solar, wind and energy storage. 

The legislation includes specific verbiage on “the sense of Congress” that the Energy Department must direct their focus to funding for research to power the United States with 100% “clean, renewable, or zero-emission energy sources.”

The United Nations also released a major climate report that highlighted the need for leaders to invest heavily in green infrastructure and renewable energy. If they succeed in this, the world could reduce as much as 25% from its expected 2030 emissions. 

Issues With The Bill

The main issue is R&D spending will have little impact on incentivizing the near-term growth of renewable energy projects. Projects are already experiencing financial set-backs and general delays due to Covid-19. 

Also, both the solar and wind industries failed to secure “direct-pay” provisions, which would have allowed investors to convert tax credits into direct payments from the federal government. Developers are spectating that the impact of Covid-19 will reduce demand for tax equity investments, as banks and financial institutions steer clear of credits to offset tax liabilities in a time when profits were so depressed. 

Impacts on Solar ITC

According to GTM, “the two-year extension of the federal Investment Tax Credit for solar projects will retain the current 26 percent solar ITC credit for projects that begin construction through the end of 2022, rather than expiring at the end of 2020 as they would have under existing law. The ITC will fall to a 22 percent rate for projects that begin construction by the end of 2023, and then fall to 10 percent for large-scale solar projects and to zero percent for small scale solar projects in 2024.”

solar ITC graph

Many large-scale solar developments have already secured “safe-harbor” provisions to ensure they could take advantage of the 30 percent ITC credit. Although direct-pay provisions couldn’t be secured, which will be disappointing to the smaller solar developers, Ravi Manghani, Global Head of Solar at Wood Mackenzie, notes the two-year extension is “a much better outcome than the industry had expected.”

The extension also positions solar as cost-competitive against coal-fired power worldwide and in many markets, natural-gas-fired power too. Overall the legislation is a win for the renewable energy industry as the provisions put in place can expect to induce expansion within the sector over time.

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