The 2017 Tax Reform and Its Effect on Renewables

Wind and solar energy production is growing faster in the United States and falling prices are making these sources of energy more competitive with fossil fuel sources of energy. A study conducted by Lazard in 2017 indicated that the cost of generating electricity from alternative energy sources, particularly wind and solar, has continued to decline, making alternative energy sources more competitive investments in relation to oil and gas. The gradual shift towards the use of renewable energy is important to the effort to slow down climate change by decreasing dependence on fossil fuels. However, many argue that implementing widespread use of alternative energy sources is not possible without financial support from the government, which often encompasses provisions such as tax breaks or other types of subsidies. According to one analyst at Bloomberg New Energy Finance, federal investment and production tax credits for solar and wind comprise the most important subsidies for those industries.

The major tax legislation signed into effect in December 2017, formerly known as the “Tax Cuts and Jobs Act” (TCJA), reflects the increasing political influence on the renewables industry in recent years. Indeed, for the first time, wind and solar energy accounted for more than 10% of total electricity generation in the United States. On the other hand, the scrutiny surrounding the impact of the December 2017 tax reform indicates that growth in the renewables industry still depends heavily on the political environment at the time. According to one study, solar energy development projects declined significantly in late 2017 due to “political uncertainty” surrounding the proposed tax bill. Indeed, the tax reforms that Trump signed into effect in 2017 will affect the renewables industry, although whether the net long term impact of the legislation will benefit or hurt investment in renewables remains to be seen.

Significantly, the tax legislation maintains the Production Tax Credit for wind at its current rate—2.4 cents per kilowatt—and preserves a ten percent Solar Investment Tax Credit, despite efforts by House Republicans to repeal the solar tax credit after 2027. The legislation also provides subsidies to consumers amounting to $7,500 per electric vehicle for up to 200,000 vehicles sold per manufacturer. Both the wind energy production tax credit (PTC) and solar investment tax credit (ITC) have been targets of repeals efforts in the past. Notably, the House version of the Tax Reform Act significantly scaled back the PTC and eliminated the ITC for solar projects initiated after 2027 entirely. The final version of the Act, which rejected these cuts, reflects a reluctance to undermine future investment in renewables, perhaps due to recognition of the growing political influence of the renewables industry.

However, the TCJA will likely ultimately benefit the oil and gas industry. According to an analysis by a Boston law firm focused on environmental and natural resource law, “the net effect of the tax reforms is predicted to ultimately reduce investment in renewables.” Indeed, the Act cuts the corporate tax rate by fourteen percentage points, and a report prepared by Barclays equities analysts predicts that this tax cut will add $1 billion in profits to United States oil and gas businesses. Additionally, an energy analyst at the investment firm Raymond James reported that the corporate tax cut will cause earnings per share to increase by 23% for oil refiners. Although Congress refrained from cutting down on tax credits benefitting the wind and solar industries, those tax provisions remained unchanged, meaning Congress also refused to provide additional subsidies or support to those industries. Instead, the Act contains major breakthroughs for the oil and gas industry and may even reduce investments in renewables.

One concerning provision in the TCJA is the inclusion of the Base Erosion Anti-Abuse Tax (BEAT), a provision which threatens to reduce the market for renewable energy tax credits. The BEAT aims to prevent corporations from reducing their tax liability by moving taxable income overseas. Although the Act effectively allows corporations to offset the effect of the PTC and ITC by up to eighty percent, the BEAT ultimately creates uncertainty for the wind and solar industries. The majority of both wind and solar energy projects in the United States are supported by tax equity financing, which involves selling tax credits to other investors who can use the credits to alleviate their own tax liability. By fixing a minimum tax requirement, the BEAT tax provision will reduce the demand for tax credits by overseas investors and thereby reduce financing opportunities for wind and solar energy projects. Additionally, whether the minimum tax requirement applies to a corporation and to what extent cannot be determined until the end of any given fiscal year. This means the value of the PTC or ITC to a corporation also remain uncertain until the end of any given year.

Finally, the TCJA provides a significant break for the oil and gas industry because for the first time in four decades, it permits drilling in the Arctic National Wildlife Refuge. The legislation requires the Secretary of the Interior to implement an oil and gas leasing program and place at least 800,000 acres of land up for sale in the next seven years. The provision has, predictably, received significant pushback. Senator Maria Cantwell, a Democrat serving on the Senate Committee on Energy and Natural Resource, commented, “The decision to permit Arctic Refuge drilling as part of the Republicans’ tax package is based on an unbelievable and cynical approach that believes drilling for oil can co-exist with a wildlife refuge.” Environmental groups have stated that they intend to pursue legal action in order to prevent development of drilling projects in the Arctic Refuge.

As the TCJA continues to be implemented, the wind and solar energy sectors will be key industries to watch. Most likely, the late 2017 tax legislation will dampen incentives to invest in the renewables industry. However, some analysts believe that financial institutions may find ways to adjust to the new tax provisions and continue to invest in solar and wind projects.

Suggested citation: Rucha Phadtare, The 2017 Tax Reform and Its Effect on Renewables, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Sept. 21, 2018), https://live-journal-of-law-and-public-policy.pantheonsite.io/the-2017-tax-reform-and-its-effect-on-renewables/.