The American Jobs Plan and its Impact on the Power Sector
President Biden campaigned on achieving a carbon-free power grid by 2035. He does not appear to be backing down from this goal. On March 31, the White House announced the American Jobs Plan, which proposes spending nearly $2.3 trillion on infrastructure and job creation. It calls for tax incentives, federal purchases of clean energy solutions and significant research & development on clean energy initiatives. Here, we’ll look at the components of the plan that might affect the power sector.
Tax incentives for renewable energy
Over the last three years, the regulated utility sector has seen a dramatic acceleration in renewable energy development at the expense of coal generation. We believe this trend would accelerate further under the American Jobs Plan, which proposes a ten-year extension of both investment and production tax credits for renewable energy (onshore/offshore wind and solar). One of the long-standing complaints among renewable energy developers has been the lack of a long-term renewable energy investment program in the United States. For more than a decade, renewable incentives have been extended for short intervals (typically one to three years) making the formation of long-term development goals challenging. We believe extending these tax credits for another ten years would help renewable energy developers implement long-term plans.
Tax incentives for energy storage
In an attempt to address the intermittency issue associated with the transition from traditional baseload power sources to renewable energy sources, the American Jobs Plan would allow stand-alone storage to qualify for a tax credit. Today, storage only qualifies for a tax credit if it is paired with a renewable generation project. The tax credit would stimulate the development of storage, which is currently uneconomic on a standalone basis. For example, the price of a lithium-ion battery pack was $137/kWh in 2020, about twice the forward on-peak ERCOT[i] price of $66.29 for the month of July 2021.[ii] This price differential makes it difficult for stand-alone batteries to compete on a merchant basis. Bloomberg New Energy Finance forecasts the price of a battery pack will fall to $58/kWh by 2030, at which time we would expect storage to become competitive on a stand-alone basis, all else equal.[iii]
Converting tax credits to cash
Under the American Jobs Plan, tax credits could be converted to cash. Traditionally, utilities, which have minimal tax liabilities, have brought in tax equity partners. These partners provide the equity for renewable energy projects in exchange for renewable energy tax incentives. There has been some concern in the sector about the depth of the tax equity market and the potential for saturation. The plan addresses this concern, attempting to correct it before it becomes an issue.