Godofredo A. Vásquez/AP Photo
Vehicles travel down Altamont Pass Road with wind turbines in the background, in Livermore, California, August 10, 2022.
The Inflation Reduction Act (IRA) has all kinds of goodies in it: tax credits for homeowners and businesses to install rooftop solar or upgrade their appliances, credits for electric vehicles, money for clean-energy research, and much more.
But there are two provisions that have largely flown under the radar in the discussion of the bill. These are “direct pay” and “transferability,” which will be two of the biggest drivers of emissions reductions in the power utility sector over the next decade. Moreover, the first provision marks a quiet break with decades of American policy orthodoxy, and a lesson in the value of public power.
Let me first review some history. There have been two major kinds of clean-energy tax credits: an investment tax credit (ITC) for installing new clean-power generators, first passed in the 1970s, and a production tax credit (PTC), first passed in the 1990s, for actually producing it. They worked just like you’d think: allowing a deduction from one’s taxes for clean-energy investment or production. And to be fair, these credits actually have driven considerable investment in clean power and therefore lower emissions.
But there were problems. As this brief from the American Public Power Association explains, entities that are exempt from federal income tax—like nonprofit co-op utilities or public institutions like the Tennessee Valley Authority or state-owned utilities—weren’t eligible for these credits. Because public power companies and co-ops provide nearly a quarter of American power generation, this created a large roadblock to decarbonizing the electricity sector.
Direct pay in the IRA, by contrast, now means these non-tax-paying entities can receive the credit as a cash payment—basically turning the ITC and PTC into a grant for them. It’s similar to the Earned Income Tax Credit for individuals, in which the working poor receive a “tax refund” even though they may not pay anything in federal income tax.
The new ITC base rate is 6 percent, while the PTC is 2.6 cents per kilowatt-hour produced (though you can only claim one). However, if a producer complies with wage and apprenticeship requirements, both credits are multiplied by a factor of five—a very strong motivation indeed to provide good jobs.
Transferability, meanwhile, refers to a change in the rules of these credits. Under the prior tax policy regime, entities without enough tax liability to claim the credits could rope in direct investors who did owe a lot in tax (called “tax equity finance”), and therefore make some use of the credit.
But as energy analysts Jesse Jenkins and Leah Stokes explain on David Roberts’s Volts podcast, this practice had three problems. First, these investors—typically large financial companies like Goldman Sachs—would eat up something like 20 to 30 percent of the value of the credit. That’s both an unnecessary subsidy of Wall Street and cuts down on the effectiveness of the spending. Second, while some non-taxed electric producers could figure out these arrangements, it is impractical for public power utilities. They could contract with third-party electric producers, but such arrangements are complicated and expensive. Third, there simply isn’t enough tax owed by Wall Street banks to drive the kind of massive clean-power buildout we need.
“Direct pay” and “transferability” will be two of the biggest drivers of emissions reductions in the power utility sector over the next decade.
Now thanks to the IRA, entities can simply sell their credits to anyone with tax liability—no investment necessary. That cuts down the buying party’s share of the proceeds to perhaps 5 percent, and greatly expands the available bucket of tax liability that can be used to finance new investment.
Finally, the IRA creates for the first time ten years of policy stability. Up until now, Congress had written credits to expire after a few years, or continually fiddled them up and down, which created herky-jerky surges and collapses in investment and chronic uncertainty in the market. Now, utilities will have a full decade to plan new projects without having to worry about Congress bothering to re-up the credits (assuming Republicans don’t repeal them somehow).
All told, these tax credits and the way they’ve been reformed will drive the largest portion of the IRA’s emissions reduction—modelers estimate a reduction of 360 million metric tons by 2030, or about 37 percent of the total.
In some ways, the IRA approach is unfortunately typical of American policy habits, where instead of the government just doing what needs to be done, it provides tax incentives for private companies to do it instead. But the direct-pay program is actually a major shift from this tradition. Despite its pose as yet another tax credit, it is really more like a New Deal social-democratic policy: direct investment of public cash into publicly owned power generation.
When American electricity generation was first being established in the early 20th century, private companies built out a crazy tangle of utilities, typically owned by utility holding companies that tended to skimp on maintenance and jack prices up as high as they could. Hence a central element of Franklin Roosevelt’s 1932 campaign was his advocacy of strict national regulation of power utilities to rein in these abuses, along with direct state ownership of them as he had pioneered in New York state as governor (particularly of hydropower). One result was the Tennessee Valley Authority, to this day one of the best-run and most reliable sources of electricity in the country.
Conversely, when many of the New Deal–era controls were removed during the deregulation frenzy of the 1990s, the result was even worse than in the 1920s—corrupt swindlers at Enron causing blackouts on purpose to rake in easy profits.
While the IRA credits are a huge improvement on the status quo system, at bottom there is no reason to involve private capitalists in the power utility business. We’ve known how to generate and transmit electricity for well over a century. Adding renewables complicates the picture, but not in a fundamental way. Publicly owned utilities, managed properly, can and do create and deliver power consistently, reliably, and without any need to cough up profits for shareholders. If America has any sense, we will continue to build on that foundation.
