SRP PHOTO
Public utilities generate about a quarter of American electricity.
This article appears in the February 2023 issue of The American Prospect magazine. Subscribe here.
The Inflation Reduction Act (IRA) will certainly be remembered as a major accomplishment of the Biden administration and the Democratic Congress. One of its most significant parts is an innocuous-sounding provision called “direct pay.” This refers to a change in how renewable-energy tax credits are administered. Before the IRA, publicly owned utilities or nonprofit power cooperatives were not directly eligible for these credits, because they had no tax liability. The only way to get some of the benefit was to contract with private developers, which is both cumbersome and inefficient, since much of the value of the credits is then taken up by the developer. But now, public agencies and nonprofits can get the credits essentially as grants—which makes new green investment and the resulting power considerably less expensive for those entities.
Public agencies and nonprofits generate about a quarter of American electricity, so this is a major upgrade to U.S. climate policy. But it’s also a major change in the policy landscape for these institutions, which will have to drastically change the way they operate. It’s an urgent priority to get direct pay flowing as fast as possible, so I spoke to several experts to investigate the state of the policy landscape—if anyone in this space is ready to start moving, what any obstacles might be, and how they might be removed.
The first thing that needs to happen is for the Treasury Department and the IRS to release guidance on how exactly direct pay will work. Back in October, the IRS submitted a request for comment, and experts expect that the full guidance will probably come out around March this year.
The fact that the guidance is not out yet is probably why I could only find two institutions that are definitely planning to take advantage of the direct pay credits. The first is the Salt River Project, a nonprofit utility cooperative owned by the state of Arizona. SRP is in the process of building 55 megawatts of utility-scale solar owned by itself for the first time. “The recent passage of the Inflation Reduction Act allows not-for-profit public power utilities like SRP to directly receive federal incentive payments for renewable projects,” the agency said in a press release. The second is East Bay Community Energy, a public agency launched in 2018 by Alameda County, California, and several of its cities. CEO Nick Chaset posted a thread on Twitter about how the IRA will allow his agency to provide renewable power more cheaply “by allowing public sector and not for profit electricity suppliers to directly monetize these tax credits instead of relying on contracting with a privately owned company to realize the value of the tax credits.”
Everyone I spoke with agreed that the most obvious move here is for the administration to publish the guidance as quickly as possible. The sooner the rules are available, the sooner institutions can start investment, and once a few have demonstrated viable procedures, others will likely start to copy them. “Utilities by their nature are slow-moving companies,” Mike O’Boyle, a director at Energy Innovation, told the Prospect. “It takes utilities a while to fully digest any big-step changes in technology costs, integrate into their plans, and then change course.”
Renewables are more useful if the power can be transmitted from areas where the sun is shining or wind is blowing to dark or calm ones.
“There is no time to waste,” said Uday Varadarajan, a principal at the Rocky Mountain Institute, in an interview.
The administration would also be well advised to make the application procedure simple. “Make it as easy as possible,” Desmarie Waterhouse, senior vice president at the American Public Power Association, told the Prospect. Many public utilities and rural co-ops are quite small, and so don’t have much staff available to start spinning up new projects. Even a lot of the big ones don’t have much experience with renewable-energy projects. If you’ve been running, say, a handful of gas and coal plants for 40 years, solar and wind are both more distributed and more erratic in their production—requiring new investment and different grid management to compensate for the changes.
By the same token, it would be wise for the administration, together with outside groups, to provide technical, contracting, and legal assistance for firms that might need it, especially rural cooperatives. If small institutions have to hire an accountant and a tax lawyer to get their direct pay, they might decide it’s not worth the headache.
The administration could also help by funding transmission upgrades. Renewables are more useful if the power can be transmitted over longer distances—for instance, from areas where the sun is shining or wind is blowing to dark or calm ones. “There are a lot of transmission upgrades that need to be made in the system to enable the higher penetration of renewables,” said Varadarajan. “The federal government also has some authorities in the [Department of Energy] loan program that can be used for new interregional transmission lines,” as well as reducing the cost of upgrading existing lines. Doing so “could be a real important piece of that puzzle,” he added.
The Tennessee Valley Authority deserves special attention. This federal agency is the largest public utility in the country, serving all of Tennessee and parts of six other states (mainly with nuclear and natural gas), and also contracts with over 100 other utilities in the region. It would be an ideal choice to set an example for the rest of the country—indeed, it is specifically mentioned in the IRA as being eligible for direct pay credits. But a TVA representative told me that the agency doesn’t have anything in the works yet: “It is still too early to speculate on exactly how TVA would participate,” he said via e-mail.
The TVA is, however, rushing to replace much of its coal power capacity with even more gas. On December 2, it completed the environmental review of a planned decommissioning of the Cumberland Fossil Plant and its switch to the preferred alternative of a gas replacement. “Natural gas provides the flexibility needed to reliably integrate renewables,” Jacinda Woodward, a TVA senior vice president, said in a statement.
This is a bizarre argument. For one thing, the TVA already gets about 28 percent of its power from gas. For another, the intermittency problem that comes with solar and wind is well understood by now, and grid operators have largely figured out how to compensate. That, plus the fact that wind and solar are extremely cheap (and getting cheaper), is why private utilities are now stampeding into renewables—in 2021, solar and wind made up about 83 percent of all new utility-scale power investment.
What’s more, while intermittency issues can become quite challenging when renewables make up a big share of total power, the TVA’s power mix includes just 3 percent from wind and solar. And even if it were a problem, unlike almost all utilities the TVA has significant hydropower assets—which are excellent backup for renewables because they are very easy to turn on and off. “TVA could absolutely manage its hydro system in such a way as to balance and complement resources like wind and solar,” Zachary Fabish, a senior attorney at the Sierra Club, told the Prospect. “That’s a huge advantage that TVA has that most other utilities in this country don’t have.”
More gas investment also carries a significant price risk. Thanks to Putin’s war in Ukraine, Europe is frantically trying to wean itself off Russian gas—and is filling that gap with liquefied natural gas exports from the United States. Multiple LNG terminals have been constructed in recent years on both sides of the Atlantic, and more are coming. It’s a safe bet that the dirt-cheap gas of the mid-2010s is not ever coming back, and anyone reliant on gas power will be paying the price.
In short, the TVA’s decisions here don’t pass the smell test. Fortunately, in late December the Senate finally confirmed all six of Biden’s nominees to the nine-member agency board, where they now constitute the majority. The board has ultimate control over the agency, and they can and should replace CEO Jeff Lyash (a former private utility executive) with someone more favorable to renewables.
To end on a note of optimism, there’s one final aspect of direct pay that could help improve America’s electric grid. Previous renewable tax credits incentivized private utilities to invest in zero-carbon power, but only on the basis of whether each individual project made financial sense. Accordingly, few of those utilities have been paying attention to other crucial factors when taking on new projects, such as planning and “grid topology”—that is, where renewables, transmission upgrades, and so on would make the most sense in terms of regional needs or even the whole national grid. “Direct pay creates an opportunity for public agencies … to be project developers themselves,” Paul Williams, executive director of the Center for Public Enterprise, told the Prospect. It will “help move the energy transition forward in a more coordinated and thoughtful way.”
