There are times in life when victory is sweet and should be celebrated. That time is now for public power. After more than two decades of advocating, public power achieved a major legislative victory in getting a workable comparable energy tax incentive signed into law. The provision, a “direct pay refundable tax credit,” was included in the Inflation Reduction Act that enables not-for-profit public power utilities and rural electric cooperatives, as well as the Tennessee Valley Authority, among others, to have direct access to federal tax incentives for a myriad of energy projects.
While we have lobbied over the years to gain this parity in the tax code or through direct appropriations, previous iterations have proven to be unworkable in practice. This version, however, has precedent in the tax code and is – theoretically – simple to administer. It was included in the Inflation Reduction Act wherever the for-profit sector was given a production or investment tax credit for clean energy projects. The list of potential applications is long, but to name several: existing and new nuclear, hydropower, hydrogen, solar, wind, and carbon capture utilization and storage.
The congressional Joint Committee on Taxation estimates that previously passed production and investment tax credits for the for-profit sector have resulted in $22 billion worth of benefits annually. Public power utilities and joint action agencies have, until now, been hamstrung in the marketplace. While they might have wanted to own wind farms, community solar projects, or CCUS facilities (so that the operational control, decision-making about location, and benefits remained in their communities), they were instead forced to partner with for-profit entities. These partnerships – whether with investor-owned utilities or independent power producers – meant that public power could only indirectly access a portion of the federally subsidized tax credit for their customers. Simply put, the math often did not work for the public power entity to do it themselves. Now, once the Internal Revenue Service details how it will implement the new direct pay credit, public power entities can choose whether to build these facilities themselves or continue to partner with their for-profit colleagues, depending on what’s best for their communities. This is a sea change and a huge victory that will unleash public power’s potential in the arena of clean energy development.
How It Started
Now, a bit of historical perspective on why this took so long and how we got here. And a disclaimer: I am relaying this as someone who has been involved in advocating for public power at the federal level since early 2001, but I am coming at it through my own lens. Apologies if I leave out any details that others remember.
Business energy investment tax credits, or ITCs, were enacted in 1978 and 1980 to stimulate the development of “alternative” energy sources. The 1992 Energy Policy Act created the production tax credit, or PTC, for ”renewable” resources. During the debate on these new credits, public power advocates encouraged a comparable incentive since, as not-for-profit utilities, they did not have a federal tax liability and therefore could not take advantage of the credit. Ultimately, public power’s arguments were heard, and a program was created in 1992 through the Department of Energy called the Renewable Energy Production Incentive, or REPI, program.
Good, right? In theory, yes, but the reality was disappointing. The ITC and PTC were authorized for multiple years at whatever level the marketplace would bear – meaning, you got the credits if you invested in or produced wind, solar, or other qualifying renewable and alternative resources. That meant for-profit investors could plan on the subsidy in their feasibility studies and financial analyses. On the other hand, REPI was subject to annual appropriations by Congress, and it was a struggle to get much more than $5 million annually despite major pushes by APPA and our members to increase that average amount. Without getting too much more into the weeds, suffice it to say that when you have an overall cap on annual discretionary spending (which Congress does), increases in one program must result in decreases in another. Those headwinds meant that REPI was never able to compete with the incentives provided via the tax code.
Tradable Credits and CREBs
In the late 1990s and early 2000s, APPA began to develop an alternative idea that could be considered in the tax code. Mechanisms known as “tradable” and “transferable” tax credits had been made available for local governments and others in joint infrastructure projects with the private sector. Because of some concerns about abuses of transferable credits expressed by congressional tax staff and the U.S. Treasury Department/IRS staff, we initially homed in on the idea of a tradable credit for public power. APPA advocated for that approach for several years as Congress debated, starting in 2001, over what would eventually become the Energy Policy Act of 2005 (EPAct05). As the debate continued for several years, pushback about the tradable tax credit concept became more pronounced from the tax staff. After much research, work with our outside counsel, Ed Oswald of Orrick, and back-and-forth with tax staff and the coops, we settled on a route to enhance tax-exempt bonds. Ultimately known as clean renewable energy bonds, or CREBs, the concept was generally embraced by tax staff on both sides of the aisle and included in the tax portion of EPAct05.
During the development of CREBs in the 2004 timeframe, I got to know the staff of Rep. McDermott’s (D-WA) office, whose district included several public power utilities and who sat on the House Ways and Means Committee, which is in charge of tax policy. Rep. McDermott had some differing views from public power on things like hydropower, but as I got to know his staff, I realized he could be an advocate for CREBs. We lined up another member of Congress on the Ways and Means Committee to introduce a standalone bill on CREBs just before APPA’s Legislative Rally in early 2005, but that member backed out at the last minute. So, I called my friends in Rep. McDermott’s office and brought in Ed Oswald to brief them on the details of CREBs. Within just a few days, the Congressman introduced our CREBs bill, in time for the Rally and our members to push for its inclusion in EPAct05. That was one of the highlights of my career as a lobbyist for public power.
Unfortunately for us, to get the budgetary score of the energy bill down, the leadership put a cap on the available allotment for CREBs at the last minute of debate in August 2005, and then, as the CREBs program was implemented, the IRS put more constraints on the program such that it became too complex – and the cost/benefit didn’t pencil out – for many of our members. Despite some attempts to improve CREBs in a subsequent tax bill, congressional application of budget sequestration rules was the last nail in the coffin of the program.
On to Direct Pay
Our excellent tax lead, John Godfrey, did not rest on his laurels. He worked with congressional tax staff over several years to reinvigorate the idea of comparability and find a workable mechanism that would be satisfactory to both tax purists and the marketplace. That became the direct pay refundable credit concept. Again, with support from both sides of the aisle, and with House Ways and Means Committee Chair Richie Neal (D-MA) and House Select Revenue Subcommittee Chair Mike Thompson (D-CA) playing pivotal roles, the provision was included in various tax policy bills over the last couple of years. We kept pushing, along with the coops, and, at the request of the Tennessee Valley Public Power Association, John connected tax staff to TVA as well. Then, knowing the role Senate Energy and Natural Resources Committee Chair Joe Manchin (D-WV) would play in any bill involving energy tax, we ensured he understood the significant, positive impact this provision would have on energy policy.
To be honest, we didn’t know that things would break so positively this summer under reconciliation to become the Inflation Reduction Act. I had been placing bets on energy tax being pealed off in a lame duck session later this year – where we would have had to fight to retain our provision. But we knew to keep the pedal to the metal to set ourselves up for whatever eventuality occurred – keeping up the drumbeat during our Policy Makers Council fly-in earlier in the summer, in our interactions with media, and in urging our members to keep on advocating to their congressional delegations. While it would have been great to have some bipartisan support for the IRA, we know that our specific provision has a great deal of support across the political spectrum, and we are hopeful that support will continue as we work with Treasury/IRS on the implementation.
Thank you to all of you who have been involved over the years in advocating for this issue. To our friends at the National Rural Electric Cooperative Association, our family of Large Public Power Council/APPA joint members, Ed Oswald, and especially John Godfrey, for his tireless pursuit of this provision, and the entire government relations team at APPA, led by Des Waterhouse.