Clean Power

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Decarbonizing the electricity sector is a linchpin of the United States’ long-term climate strategy — and essential to reaching the national target of reducing economywide greenhouse gas (GHG) emissions by 50%-52% by 2030. Transitioning to clean electricity is also critical to achieving emissions benefits from electrifying other end uses, including transportation and buildings.

U.S. Progress on Clean Energy to Date

Greenhouse gas emissions from the electricity sector have been falling due to the switch away from coal toward cheaper renewables and natural gas. In 2016, transportation overtook electricity as the largest source of emissions in the U.S.

Utility-scale wind and solar project costs have dropped 70%-90% since 2009 and are now cost-competitive with other generation sources. However, approximately 60% of the country’s electricity generation still comes from natural gas and coal. And while roughly 35 gigawatts (GW) of new wind and solar were installed in 2020 and 2021, studies show that annual installation rates will need to at least double to meet midcentury net zero goals. As of early 2023, the U.S. planned to add 46 GW of utility-scale solar, wind and battery storage capacity over the course of the year.

However, building these installations will require overcoming significant challenges. Some major obstacles to scaling up renewable energy include siting and permitting challenges, the need for expanded transmission capacity to integrate renewables over large balancing areas, and delays in interconnection processes.

In addition to significantly increasing the deployment of new carbon-free power generation, decarbonizing the electricity sector requires maintaining existing carbon-free power sources, including hydropower and nuclear generating units. Nuclear electricity generation has declined for two consecutive years, driven primarily by financial pressure from cheaper renewables and natural gas, while drought conditions in the western U.S. have led to unpredictability and variability in hydroelectricity generation. Recent federal legislation provides funding for retaining these legacy zero-carbon assets alongside developing and deploying newer zero-carbon technologies.

Clean Power Investments in the Bipartisan Infrastructure Law

The Bipartisan Infrastructure Law provides some funding for targeted clean power investments, focusing on grid resilience and security (see the Transmission page within WRI’s U.S. Climate Policy Resource Center for more information) and retaining or improving existing nuclear and hydropower generation. There is also funding for energy efficiency and weatherization programs and limited support for new renewable energy projects, with most funding for these coming through demonstration projects or other RD&D.

Major clean power and energy efficiency investments in the Bipartisan Infrastructure Law are as follows:

• Civil Nuclear Credit Program ($6 billion): New Department of Energy (DOE) credit program to retain existing nuclear fleet that is at risk of retirement due to economic reasons. The program will cover annual operating losses for eligible nuclear reactors for four years. 
• Maintaining and Enhancing Hydroelectricity Incentives ($553.6 million): New program in which DOE may make grants of up to $5,000,000 to hydroelectric dams for capital improvements directly related to grid resilience, dam safety and environmental impacts. The program is capped at 30% of the cost of capital improvements. 
• Clean Energy Demonstration Program on Current and Former Mine Land ($500 million): DOE will select up to five clean energy projects, at least two of which must be solar projects, to be carried out in geographically diverse regions on converted mine land. Eligible clean energy technologies include solar, geothermal, micro-grids, direct air capture, carbon capture, utilization and storage (CCUS), energy storage and advanced nuclear technologies.
• Energy Storage Demonstration Pilot Grant Program ($355 million): New DOE program that will carry out three energy storage system demonstration projects.
• Long Duration Energy Storage Demonstration Initiative and Joint Program ($150 million): New DOE demonstration program to support innovative long-duration energy storage technologies.
• Weatherization Assistance Program ($3.5 billion): Existing DOE formula grant program that will provide $3.5 billion in additional funding to improve residential energy efficiency for low-income households. Funding will flow through existing disbursement methods to states and tribal governments, who will then disperse to existing local implementers including local governments, nonprofits and community action agencies. Eligible uses for these funds include building weatherization (for example, insulation and furnace efficiency modifications), certain mechanical measures to heating and cooling systems, and replacement furnaces, boilers and air-conditioners.
• Energy Efficiency Revolving Loan Fund Capitalization Grant Program ($250 million): New DOE program that will provide capitalization grants to states to establish a revolving loan fund for residential and commercial energy efficiency audits, upgrades and retrofits.
• Building Codes Implementation for Efficiency and Resilience ($225 million): New DOE grant program for states and state partnerships to enable updated building energy codes.

Clean Power Investments in the Inflation Reduction Act

The Inflation Reduction Act is a landmark piece of climate legislation which makes substantial changes to federal policy and funding for clean energy and energy efficiency. This includes new and expanded grant programs and a suite of tax credits (see Tables 1-3). Because many of these provisions operate through new or extended tax credits, the ultimate impact on clean energy deployment and greenhouse gas reductions will depend on uptake by project entities and consumers.

About the Inflation Reduction Act’s clean energy tax credits

Many of the Inflation Reduction Act tax credits use a base and bonus credit structure. Bonuses may be given for meeting domestic content requirements and labor standards (prevailing wage and apprenticeship requirements), as well as for projects placed in service in an energy community. There is also a separate low-income communities bonus credit program that can add up to 20 percentage points to the ITC for wind and solar projects less than 5 MW that are placed in service in qualifying low-income communities (note that unlike many of the other tax credit mechanisms from the Inflation Reduction Act, this bonus is capped and specific application is required).

Finally, some of the Inflation Reduction Act’s clean energy tax credits allow for new credit monetization schemes. These reforms — direct pay and transferability — can improve the accessibility and efficiency of these tax credits and reduce the need for tax equity investors.

Direct pay — that is, the ability to receive the tax credit as a direct payment, rather than a reduction of tax liability — may be used by state and local governments, tribes, non-profits and the Tennessee Valley Authority. Tax credits eligible for direct pay under the Inflation Reduction Act include those used for renewable energy development (ITC and PTC), electric vehicle charging infrastructure (30C) and others. However, projects claiming direct pay face stricter domestic content requirements (that are typically a bonus credit), with a phasedown in overall credit value and beginning in 2026 a requirement that direct pay projects must meet domestic content requirements.  

Three of the tax credits, related to carbon capture and storage technologies, hydrogen and clean manufacturing, allow both non-profit and for-profit entities to claim direct pay for five years.

Transferability allows the entity receiving a tax credit to transfer (meaning sell) that credit to another entity. This reform may bring important changes to the financing structures that many renewable energy projects are built under by making the benefits of tax credits more widely accessible, increasing liquidity in the tax equity market for clean energy projects, and potentially reducing the need for large tax equity investors.

For instance, a renewable energy project developer may be too small and not have sufficient tax liability to claim the tax credit themselves. At the same time, they are not eligible for direct pay.  To date, the prevailing model has been to create a “special purpose entity,” which is a joint financing arrangement typically between the renewable energy project developer, the off-taker, and a large tax equity investor such as a bank that can use the reduction in tax liability. However, with transferability, rather than using the tax credit themselves or entering into a special purpose tax entity, the project developer may now transfer (sell) their tax credit directly to an interested buyer.

While further guidance from Treasury is forthcoming and will ultimately determine the impact of these reforms and any resulting markets, direct pay and transferability mechanisms are important steps to increasing the accessibility of renewable energy tax credits.

Table 1: IRA Clean Electricity Tax Credit Measures

Table 2: IRA Energy Efficiency Tax Credit Measures

Table 3: IRA Clean Energy and Energy Efficiency Funding Measures

Next Steps for Advancing Clean Energy

Steps subnational actors can take to implement and enhance these clean power measures are as follows:

• Consult existing state and local decarbonization roadmaps and clean energy procurement plans. This may include identifying existing nuclear and hydropower generation assets at risk of retirement or experiencing impacts due to droughts. State and local governments may also consider identifying existing rights-of-way and public lands that may be suitable for clean energy development.
• Strengthen planning partnerships that connect local governments, state entities and community-based organizations. These networks will be useful throughout the process of renewable energy deployment and will help ensure early and meaningful community involvement to minimize siting issues.
• Proactively engage with communities disproportionately impacted by climate change and power generation assets. For any renewable energy project, begin with planning processes and listening sessions for community needs on benefits and workforce development. Utilize state and federal environmental justice screening tools to identify projects with the most meaningful impact.
• Inventory environmental remediation sites, brownfields and other disturbed landscapes that may be suitable for renewable energy development. These sites may qualify for special funding programs and tax credit bonuses.
• Identify intergovernmental coordinators at the state, federal and local levels and establish clear communication channels and points of contact. The Bipartisan Infrastructure Law and Inflation Reduction Act include a mix of new and existing programs as well as formula and competitive grants. Some of these, such as the Climate Pollution Reduction Grants, have carve-out planning grants to encourage coordination. Entities should identify best practices for coordinating upcoming funding opportunities and monitor for upcoming program requests for information (RFIs), notices of intent (NOIs) and notices of funding opportunities (NOFOs).
• Prepare subnational agencies for an influx of funding, including any needed capacity expansion. Weatherization funding will flow through State Energy Offices, local governments, and existing implementers of energy efficiency and weatherization. To effectively deploy new funding, quickly and equitably scaling up existing programs will be key. In addition to ensuring staff and capacity readiness for these agencies, entities may consider evaluating any program modernization efforts that came out of the Energy Act of 2020. Programs may also consider shifting some of the increased funds to focus on higher-cost equipment replacements, such as heat pump installations.
• Identify financing mechanisms to further leverage federal funds. States may consider leveraging existing state green banks or other financing mechanisms to establish an energy efficiency revolving loan fund. For competitive grant programs, review existing government programs and budgets to identify state or local matching funds that can increase application competitiveness.

Overcoming Implementation Challenges

Expanded renewable energy deployment will require working across multiple regulatory jurisdictions and streamlining and coordinating existing processes. Key implementation challenges that will need to be addressed include the lack of sufficient long-distance transmission capacity and gridlocked interconnection queues; siting and permitting projects; and supply chain challenges.

Lack of transmission capacity

The lack of available transmission capacity is a major barrier to increased renewable energy development. By some estimates there will need to be a 60% expansion in transmission capacity in order to integrate the amount of renewables needed to hit stated goals. Solar, wind and battery storage make up 93% of resources in interconnection queues.

See the Transmission page within WRI’s U.S. Climate Policy Resource Center for more information.

Siting and permitting

A central challenge for renewable energy deployment under the expanded Inflation Reduction Act tax credits will be permitting and siting. State and local entities play a central role in these processes, and review of existing procedures should identify opportunities to streamline and coordinate project reviews across entities.

Siting and permitting ordinances at the state and local level can play a large factor in encouraging or prohibiting renewable energy development. Local ordinances that restrict renewable energy development may include setback requirements or outright moratoriums. Local opposition to renewable energy projects can be driven by the comparatively larger and more visible land use footprint of wind and solar projects compared to conventional fossil fuel projects. In addition, the soft costs of solar account for up to 40%-65% of the cost of installations, with the highest costs for rooftop solar. The numerous jurisdictions involved with renewable energy projects can also delay project timelines; this has led some states, such as New York, to create state-level renewable energy siting offices in an attempt to streamline the permitting process.

This review of state and local permitting processes should consider how to build early, sustained and meaningful community engagement throughout the planning and permitting process. When working with frontline and overburdened communities, including those that host environmental remediation sites, understanding local community needs is critical to equitable land use decisions and may include formulating community benefits agreements.

Cost and supply chains

In addition to these longstanding challenges, more recent obstacles include supply chain disruptions. The Biden administration has instituted a pause on any retroactive tariffs on solar panels for two years until June 2024 while a Commerce Department tariff investigation proceeds, and has also authorized the use of the Defense Production Act for domestic manufacturing of critical clean energy technologies. While these actions are vital to protecting the clean energy industry in the medium term, supply chain and critical minerals sourcing continues to be a challenge for the industry.

The cost for renewable energy projects has also risen slightly in the past year, driven by increasing prices for raw materials and freight. However, new-build wind and solar are still cheaper than new-build natural gas and coal.

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