“Build(ing) Back Better” in the Northeast

How the Bill (As it Stands) Could Reshape Northeast Renewable Energy Markets

On November 19, 2021, the U.S. House of Representatives passed by a 220-213 margin H.R. 5376 – Build Back Better Act, as amended by Rules Committee Print 117-18 (a manager’s amendment striking everything in the bill from the enacting clause and replacing them with the provisions in the amendment). The Sustainable Energy Advantage Policy Analytics team has been tracking this bill for over eight months for our Northeast Eyes and EarsSM regulatory, policy and legislative tracking service, and we have developed a detailed 20-page bill summary for our Eyes & Ears subscribers.

In this blog post, we summarize several key clean energy portions of the bill included in that above-mentioned summary document and assess its prospects for enactment. If ultimately enacted as currently written, the Build Back Better Act would be the most substantial and impactful piece of clean energy legislation passed in the U.S. to date at either the state or federal level.

Summary and Analysis of Key House-Passed Build Back Better Act Provisions

The main areas of the bill passed by the House likely to have a material impact on Northeast clean energy markets include:

 Extensions of Existing Investment and Production Credits for Renewable Resources: The bill increases the available ITC and PTC percentage (under current authorities) to their original full value (30% and 2.5¢/kWh, respectively) for projects beginning construction in 2022 through 2026 (rather than the 2023 and 2021, respectively). Importantly, however, receipt of the full value of the credit is contingent on project owners paying prevailing wages and meeting minimum apprenticeship hour requirements for construction.  Otherwise project owners would receive a credit set at only 20% of the total value. In addition, projects are eligible for:

  • Up to an additional 10% or 20% credit for the first 1,800 MW of solar and wind projects benefitting certain environmental justice communities; and
  • An additional 10% credit for utilizing defined minimum percentages of domestically-manufactured content (with lower percentages for offshore wind than for other types of resources).

Finally, residential renewable energy projects (including rooftop solar PV and ground-source heat pumps) would receive a 30% ITC for projects placed in service (rather than beginning construction) through 2031, which would then phase down to 26% in 2032 and 22% in 2033.

 Analysis: Though existing and/or already-committed non-residential projects in the Northeast are unlikely to benefit from these changes), these extensions will have the greatest incremental benefit for new onshore wind and residential solar PV projects in the Northeast, given that these resources will receive five- and ten-year extensions, respectively, relative to current law. However, it is unclear to us at this time if all new projects “begin(ning) construction” in 2022 and thereafter (and thus notionally eligible for these credits) would be economically viable if they were required to pay prevailing wages in the Northeast.

 New Allowances for Interconnection Property/Elimination of Placed-in-Service Deadlines: The bill would also make interconnection property for projects less than or equal to 5 MW (defined in the law as transmission or distribution property not necessarily owned by the taxpayer) newly eligible for the ITC. In addition, the bill as passed the House will eliminate all placed-in-service deadlines for ITC-eligible projects.

 Analysis: The proposed interconnection changes mean that eligible taxpayers will be able to deduct yet more of the total value of the project, which will have substantial positive impacts on the amount of distributed solar capacity currently in interconnection queues in the Northeast reaching commercial operation. This is due to the increased cost of distribution and transmission interconnection associated with higher distributed energy penetrations in the region, which have challenged the economic viability of many financially committed projects (or in some cases, partially or fully constructed) in large and complex interconnection studies. In addition, the elimination of placed-in-service deadlines would provide significant potential relief for non-residential distributed solar projects, which would otherwise face an end of 2025 deadline to reach commercial operation or otherwise lose their “safe harbor” eligibility.

Energy Storage and Transmission Eligibility for Investment Credit: The bill would also make energy storage and large high-voltage transmission projects eligible for an investment credit. Energy storage projects would be part of the extension of the existing ITC provisions described above, providing those projects commencing construction through the end of 2026 with access to the credit, whereas eligible transmission projects of 500 MW and greater beginning construction through 2031 would also receive a credit. The same prevailing wage and apprenticeship requirements would also apply for receipt of the full credit for each, and the same domestic content bonus would also be available.

 Analysis: The storage eligibility changes would, if enacted, would be likely to dramatically increase the amount of standalone energy storage deployed on the grid in the Northeast, and would likely increase the deployment of energy storage co-located and/or paired with renewable energy projects. However, in the absence of IRS regulations to update current regulations applicable to energy storage when charged by solar under the current solar PV ITC, it is unclear how these provisions might interact in the future.

The transmission ITC eligibility changes could markedly improve the economics of eligible transmission projects likely to be procured and begin construction in the next several years (including projects likely to benefit hydroelectricity from Quebec, onshore wind in Northern Maine, and offshore wind in multiple locations).

Creation of (Semi-)Permanent Clean Energy Production & Investment Credits: After December 31, 2026, the bill would allow a taxpayer that owns any new electricity generation resource with zero (or negative) emissions eligible to elect to receive either a Clean Energy Production Credit (CEPC) or Clean Energy Investment Credit of up to 2.5¢/kWh or 30% respectively. The credit would be available for projects commencing construction in 2027 and thereafter (with no statutory placed-in-service deadlines), until greenhouse gas emissions associated with the electric sector in the U.S. are 75% below 2021 levels. Once this level is achieved, the credits would phase out on a three-year schedule.

The full credit would have very similar features as the extended ITC and PTC described above, including (but not limited to):

  • Eligibility for the full credit amount if the taxpayer pays prevailing wages or meets minimum apprenticeship hour requirements for construction and operation;
  • Bonus credits for projects utilizing pre-set minimum amounts of domestically manufactured content and/or solar and benefiting environmental justice communities;
  • Eligibility for energy storage projects (but only, in the case of the CEPC and CEIC, for standalone energy storage projects);
  • Ability to include interconnection property in the basis for calculating the investment credit for projects less than or equal to 5 MW; and
  • No statutory placed-in-service deadlines.

The rules for this program would be required to be developed no later than January 1, 2027.

Though it is difficult to assess the specific impact of these provisions for each Northeast renewable energy market or driver of significance, the bill would (assuming it is not later repealed or substantially altered to weaken its effect) drive deep decarbonization of the electric sector via tax credits and project economics in tandem with state policy. Though many factors impact the pace of decarbonization, not the least of which include permitting and interconnection challenges, the levels outlined in the bill could be reached, if passed as written and implemented, by the late 2030s or early 2040s.

Elective Payments in Lieu of Tax Credits (“Direct Pay”): Another major facet of the bill as passed is the ability to elect a payment in lieu of taking the existing ITC and PTC, the successor investment and production credits, as well several other of the other credits extended in the bill, which functionally makes a number of the key tax credits affecting renewable energy projects refundable (meaning they can be taken by entities without tax liability, or with insufficient tax liability). We note, however, that the ability to take these credits is limited to projects who can meet the domestic content requirements described above, but with the possible exception that Treasury Secretary must exempt projects from the requirements if meeting such domestic content requirements would increase construction cost by 25%, or if domestic content is not available in sufficient quantity or quality.

Analysis: Assuming enactment of the above-described rules surrounding the exceptions for cost and availability, these provisions could increase the availability of capital while reducing the cost of equity, supplanting the need for tax equity for all ITC- or PTC-eligible projects in the near-to-medium term, giving participants previously shut out of tax equity deals access to said equity, and reducing competition between renewable resources and carbon capture/clean hydrogen projects seeking financing from large syndicated tax equity deals.

Existing Nuclear and Clean Hydrogen PTCs: In addition to direct incentives for renewable energy, the bill also includes new tax credits to support continued operation of existing (in 2021) nuclear units through 2026, and incentivize new clean hydrogen projects placed in service through 2028. The hydrogen credits would, if enacted, rise inversely with the degree of emissions associated with the project. The same prevailing wage and apprenticeship values would also apply for receipt of the full credit for each, and the same domestic content bonuses would also be available.

Analysis: Although these provisions do not specifically incentivize renewable energy projects, the existing nuclear credit could be utilized in the Northeast (including in the PJM Interconnection) to reduce the cost to ratepayers of state subsidies or state-granted contracts to nuclear facilities, and could potentially provide certain projects a path towards economic viability in restructured (future) wholesale markets that provide clearer price signals for clean resources. Additionally, the clean hydrogen credits could provide a substantial source of new demand for renewable electricity in the region.

Electric Vehicle and Electric Vehicle Supply Equipment Credits: Finally, the bill passed by the House provides substantial tax credits for new and used plug-in electric passenger vehicles (including both battery electric and plug-in hybrid electric passenger vehicles), as well as up to a 30% credit (or rebate, if elected) for eligible commercial light duty, medium duty and heavy duty plug-in electric vehicles, including leased passenger vehicles and fleet vehicles owned by a commercial entity. In addition, these include credits  for any taxpayer of up to 30% of the cost up to $100,000 (and 20% for any costs above $100,000) for electric vehicle supply equipment. These credits would be available through 2031 (but only for vehicles with “final assembly” in the U.S. after 2026), and (in a change from the current credit) be eligible for “on the hood” dealer rebates that can factor into the financing of the vehicle.

Analysis: Even if not all light duty, medium duty, and heavy duty vehicles in the Northeast are converted to plug-in electrics, the odds are good that these provisions, if adopted, could drive substantial load growth in the Northeast, dramatically increasing the amount of compliance demand for renewable energy. More specifically, the profusion of tax credits for both vehicles and charging will likely accelerate the shift from internal combustion to electric and other zero-emission vehicles in the Northeast.

Legislative Outlook

Though we believe that a version of the bill has an approximately 50/50 chance of passing the U.S. Senate during 2021, based on conversations with a wide variety of stakeholders close to the process, the bill – as (likely) modified in the Senate – has an 85% to 90% or greater chance of being enacted January or February 2022 without the removal of (or substantial alteration to) to the major clean energy provisions. Beyond the intra-caucus and Democratic Party dynamics that lead to our view that the bill will ultimately pass with most of the energy provisions intact, we also believe action will generally be forced as a result of certain deadlines for the continuation of the expanded Child Tax Credit and the strong desire of the House and Senate Democrats to bring debate on the bill to a close.

How to Go Deeper: Accessing Our Full Build Back Better Act Summary via Northeast Eyes and Ears

If you are currently a subscriber to Northeast Eyes and Ears, we commit to updating the detailed summary we have already provided you as the bill continues (as we expect) to advance through the process.

If you are not yet a Northeast Eyes and Ears subscriber, now is a great time to try it out through a two month, no-obligation trial for the Northeast Eyes and Ears service.  Upon signing up, we will provide you with a 20-page detailed summary of the key renewable and clean energy-relevant provisions of the 1,800+ page Build Back Better bill, as well as an update to the summary at no charge if and when the bill advances. If you do not wish to sign up for a trial, interested readers can also pay $299 to access our detailed summary of the Build Back Better bill which passed the U.S. House of Representatives, or $399 for this summary as well as any updated summaries of subsequent versions. If you choose not to continue after a two-month, no-obligation trial, you can terminate at no charge. Contact info@seadvantage.com with “Eyes & Ears Trial with BBB summary” in the subject line, and your contact info, for more information on how to sign up.

Though these times are uncertain (and in some ways, uniquely challenging) for Northeast clean energy markets, we believe these are times of great opportunity. One of the best ways to see the whole picture in a time like this is to ensure you subscribe to Northeast Eyes and Ears.