Washington, D.C. – Comprehensive tax reform proposals designed to lower individual and corporate tax rates while removing or limiting many current deductions and credits could significantly raise the levelized cost of energy (LCOE) for wind, solar and gas-fired electricity generation, according to a new staff paper released today by the American Energy Innovation Council (AEIC).
The paper uses three recent comprehensive tax reform proposals, from Rep. David Camp (R-MI) in 2014, then-Sen. Max Baucus (D-MT) in 2013 and Sens. Ron Wyden (D-OR) and Dan Coats (R-IN) in 2011, as a benchmark for analyzing potential effects of future tax legislation. Specifically, the paper considers each proposal’s changes to depreciation rules, corporate income tax rates and energy tax incentives such as production tax credits.
“When Congress eventually turns to tax reform, it will want to consider the impacts of changes to the tax code on energy pricing and innovation,” said David Garman, a senior advisor to AEIC and former undersecretary of energy. “The reality is that any new comprehensive proposal, even one that makes no changes to specific energy tax provisions, will likely have significant impacts on the energy sector and will merit close analysis due to the importance of depreciation rules to capital-intensive energy projects.”
The paper makes four key findings:
- Given the capital-intensive nature of electricity generation, changes to depreciation treatment, even if not specific to energy, can have a major impact on energy project economics.
- Changes to depreciation rules may affect the cost of wind and solar electricity generation more than conventional gas-fired generation, since wind and solar have higher capital costs.
- The same investment or production-based tax credit for renewable electric generation can have different effective values depending on the impact of other unrelated tax provisions.
- Because tax-equity financing reduces the effective value of tax credits substantially, only half of the value of production and investment-based tax credits is realized in the LCOE from wind and solar power when tax-equity financing is used.
AEIC seeks to foster strong economic growth, create jobs in new industries and re-establish America’s energy technology leadership through robust public and private investments in the development of clean energy technology.