America has the chance to lead the energy transition – will Congress hold us back?

By Jon Powers, president and co-founder of CleanCapital. Jon served as federal chief sustainability officer for the White House under President Barack Obama.

President Joe Biden’s ambitious $2 trillion infrastructure plan aims to remake America’s energy sector for the 21st century. But the biggest opportunity for creating explosive growth in clean energy could come from something much simpler.

The people making the energy transition happen—from utility-scale wind and solar developers and forward-thinking utilities to clean energy financiers, large corporate power purchasers, and centrist and progressive policy think tanks—all agree that reforming the tax code to enable 100 percent direct pay is necessary for meeting President Biden’s goals.

Streamlining access to capital

Direct pay is the key to ensuring U.S. projects have access to capital at low cost, high speed, and with greater certainty. It would remedy a clunky tax credit system that keeps vital tax credits for clean energy like the Production Tax Credit (PTC) and Investment Tax Credit (ITC) from fully driving the energy transition the way Congress intended. The tax equity system that has emerged to fill the gaps in that framework remains one of the largest remaining barriers to major wind and solar development. Eliminating its use here will pave the way to new jobs, cleaner power and a 21st century green economic opportunity.

Direct pay is a simple and straightforward fix to the problems that have plagued the efficient use of the PTC and ITC. This option would transform the industry’s current reliance on the surge and freeze cycle of tax equity financing. Right now, projects that are critically needed to meet America’s climate goals and create jobs face a minefield of uncertainty around financing. When tax cuts, recessions, or other shocks to the financing system happen, the availability of tax equity investment grinds to a halt. And so do the clean energy investments that rely on that system.

The direct pay solution

To say this creates a major bottleneck in clean energy investment and deployment is an understatement. At a time when the opportunity for the energy transition is greatest, two thirds of wind projects set to begin construction this year are still seeking tax equity financing, along with more than half of large-scale solar projects. These delays hold America back from its potential as a global clean energy leader.

Thankfully, a rising tide of policymakers, corporate leaders and environmental groups are calling for direct pay to help companies access capital faster, more reliably and at lower cost. Under this solution, Congress would simply allow the IRS to provide wind and solar builders the same money up front that they would have been able to eventually deduct from their taxes.

Making direct payment an option for current and emerging technologies without the artificial constraints of the tax equity market would be one of the most transformative energy policies in decades. Offering 100 percent direct pay would not eliminate tax equity financing, but it would open massive new opportunities for investment as well as new options for conventional loan underwriting and bond issuances for large projects.

A time for action

Direct pay is already under consideration by the White House’s Council of Economic Advisors, but ultimately it will be up to Congress to seize the opportunity and ensure that America is leading the way on clean energy investment. A group of legislators led by Senators Tom Carper and Ron Wyden and Rep. Earl Blumenauer are already taking notice and have introduced a suite of new bills in response.

U.S. leadership of the clean energy transition depends on American entrepreneurship and innovation. Direct pay is the most concrete action that Congress can take to send a clear signal to investors: the energy revolution will happen here.

It is time to move past the cyclical uncertainty of the tax equity market and guarantee maximum private sector investment in U.S. leadership of the energy transition. In tandem with President Biden’s ambitious plans on energy and infrastructure, allowing full direct pay would eliminate a needless bottleneck and unleash an unprecedented wave of investment at a crucial time.

Listen to Experts Only Podcast #98 With the Experts in Direct Pay:

Shannon Maher Bañaga, Managing Director, Public Affairs, Energy & Natural Resources at FTI Consulting Strategic Communications & Frank DeRosa, Senior Policy Advisor at 8minute Solar Energy