March 01, 2016 Categories: Uncategorized

Better Together: How Renewable Energy Tax Incentives and the Clean Power Plan Combine to Transform America’s Electricity System

New analyses released last week from the National Renewable Energy Laboratory (NREL) and the Rhodium Group (RhG) predict a robust future for renewable electricity. The analyses show that the combination of wind and solar tax credits and implementation of the Clean Power Plan will significantly accelerate our transition to clean energy. The NREL analysis projects that the combination will result in installation of 95 gigawatts (GW) of renewables over the next five years, including 28 GW of solar and 60 GW of wind. Installations through 2030 would total 270 GW, including 143 GW of solar and 113 GW of wind. RhG’s analysis, using a different model, projects similar results in the near term and somewhat less growth in the longer term: 86 GW of wind and solar added over the next five years and 163 GW through 2030.

Under the Environmental Protection Agency’s (EPA) final Clean Power Plan (CPP), states have until 2018 to submit plans and power companies have until 2022 to meet emission targets–and even then they have a great deal of leeway to phase in emission cuts. The Obama Administration recognized that policies were needed to fill the gap between now and the CPP’s implementation in 2022. At the end of last year, in a rare outbreak of bipartisan cooperation, Congress passed and the President signed a multi-year extension and phase-down of the Production Tax Credit (PTC) for wind and the Investment Tax Credit (ITC) for solar.

Prior to passage, White House policy experts made clear that the tax incentives would be important to meeting the U.S. target to reduce carbon pollution 17 percent below 2005 levels by 2020. The tax incentive extension also filled the gap left by the protracted compliance schedule in the Clean Power Plan, avoiding the risk of a hiatus in clean energy policies.

The logic of extending the renewable energy tax incentives while waiting for the Clean Power Plan to kick in was clear from the beginning: the latter discourages the use of polluting power plants, while the former encourages the deployment of clean energy. When clean energy sources are a relatively small part of the market, as they currently are despite recent rapid growth, targeted incentives are a relatively inexpensive way to promote them. But as their market share grows this approach starts to become a larger budget item. Once renewable technologies hold a large enough market share, limitations on pollution from older, dirty sources become a more attractive way to level the playing field, and the transition to a clean energy economy can happen rapidly. So the Clean Power Plan and the tax extenders make a great pair: they work better together than either can on its own.

The EPA had delayed the first compliance deadline for the CPP until 2022, at least in part, to undermine any argument to stay the rule pending litigation over whether it complies with the requirements of the Clean Air Act. EPA’s approach worked in the DC Circuit, which rejected polluters’ petitions to stay the Clean Power Plan on January 21st, and scheduled an argument on the merits for June 2nd. In an unprecedented move, however, the Supreme Court stepped in on February 9th and reversed the DC Circuit in a 5 to 4 decision, having taken only a few days to review hundreds of pages of highly-technical filings. Four days later Justice Scalia died, leaving the remaining justices evenly split on whether the stay is justified.

While a protracted legal battle over the Clean Power Plan was anticipated by all sides, legal scholars are quite confident that effective carbon pollution standards for power plants will eventually prevail in court. And whether or not the CPP is upheld in its current form, the Supreme Court has already ruled clearly on EPA’s authority and responsibility to regulate dangerous carbon pollution. The era of unlimited carbon pollution is still over, whether polluters and their allies like it or not.

In the aftermath of the Supreme Court’s decision to stay the Clean Power Plan some commentators were tempted to suggest that renewables have so much momentum that their progress will continue apace regardless of what the courts ultimately decide. Rhodium’s analysis shows that the tax extenders will indeed drive continued growth in wind and solar capacity over the next five years with or without the Clean Power Plan, although the rate is somewhat slower if investors are not also planning for CPP compliance. But after 2020 the CPP makes a dramatic difference. The tax extenders plus CPP package results in the installation of almost twice as much renewable energy capacity from 2021 through 2030 as would occur with the tax extenders alone.

The combination also cuts emissions more than either policy on its own and sets the stage for even greater reductions beyond 2030. The RhG analysis shows this very clearly (Figure 1). If the CPP were implemented by itself (left panel), power generators would respond mostly by replacing coal with gas. If the renewables tax extenders were implemented by themselves (middle panel) the primary response is to replace gas with renewables. We get the biggest bang for the buck when the CPP and the tax extenders work together (right panel), resulting in renewables replacing coal.  

Picture1

The conclusion is clear: The wind PTC and solar ITC extensions enacted at the end of 2015 ensure that these industries will continue to grow over the next few years, but the Clean Power Plan’s carbon pollution standards are needed to sustain that growth, and to ensure that renewables growth results in maximum emission reductions by displacing generation from the dirtiest power plants. Fortunately the Clean Power Plan rests on a solid legal foundation and is likely to prevail when the courts have the opportunity to fully consider its merits.

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