Our previous post discussed the two-year extension for the solar Investment Tax Credit, which is part of the federal spending and relief bills passed by Congress. However, the bills also include measures that benefit renewable energy in general. Tax incentives for wind power have also been extended, and there will be major R&D funding for emerging technologies like energy storage and smart grids.
In large-scale installations, wind turbines and solar panels now offer lower electricity costs than fossil fuels. However, their electricity output is variable, while coal and natural gas can be used on demand. Energy storage and smart grids can achieve synergy with wind and solar power, by balancing generation and consumption. This would allow a larger share of renewable energy in modern power grids, reducing their environmental impact.
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The Congress bill also includes a $35 billion research and development fund for energy technologies. This investment can lead to innovative solutions for electric utility companies and the building sector. Established technologies like wind turbines and solar panels will also continue to receive R&D funding.
Tax Credit Extensions for Wind Power
Solar and wind power are both growing fast around the world, but there is an important difference between them. Solar panels are viable at all project scales, and they can adapt to most buildings with an unshaded roof area. On the other hand, wind turbines are better suited for large-scale generation, and they are demanding in terms of site conditions. With high-quality equipment and a suitable project site, both solar and wind power can beat the generation cost of fossil fuels.
The Congress bill passed on December 21 includes two tax benefits for wind power:
- The Production Tax Credit (PTC) was extended for a full year, at its current value of 60%.
- The Investment Tax Credit (ITC) now covers offshore wind power projects that start construction before the end of 2025.
The wind PTC currently has a value of 1.5 cents/kWh (60% of the nominal value, 2.5 cents/kWh). Before the new bill, the incentive would decrease to 1.0 cent/kWh in 2021 (40%), before expiring in 2022. The expiration date remains the same, but the 60% incentive stays available for all wind power projects that start construction in 2021. Consider that the wind PTC lasts for 10 years; eligible projects can deduct the tax credit for a full decade, even after it expires for new installations in 2022.
Offshore wind power is promising, since the sea offers better wind conditions than inland locations. However, these projects are still limited by their high cost compared with onshore wind farms. To stimulate offshore wind power, the Congress bill includes a 30% ITC for all projects that start construction before 2026. This incentive helps cover the upfront costs, since it can be claimed on the first tax declaration.
The New England region has some promising locations for offshore wind power, and also some of the highest electricity prices in the US. The 30% ITC will improve the financial projection for many projects, drawing investment to the region. New York and other Northeast states are already among the top markets for solar power.
R&D Investment in Energy Programs
Another promising measure in the Congress bill is the $35 billion R&D fund for energy programs, which could deliver innovative solutions in the near future. R&D investment does not have the immediate impact of tax credits, but it can greatly benefit the energy industry over time.
R&D investment will continue for existing technologies like solar power ($1.5 billion) and wind power ($625 million). However, the fund also covers innovative areas like grid modernization ($2.36 billion) and energy storage ($1.08 billion). The bill also includes $2.9 billion for the Advanced Research Projects Agency-Energy (ARPA-E), which is managed by the US Department of Energy.
The renewable energy sector can benefit greatly from R&D investment. Solar and wind power are already viable financially, and their main challenge is technical: managing a variable electricity output. Energy storage systems can absorb surplus production, which is then used to meet peaks in consumption. At the same time, renewable sources can benefit from smarter and more flexible grids that adapt to production.
The combination of tax credits and R&D investment is great news for the US renewable energy industry. Solar and wind power projects will benefit from an extension of key tax credits, which were about to expire. At the same time, energy R&D programs will have additional funding, and they can deliver innovative solutions to complement solar and wind power.
Renewable generation can now compete with fossil fuels in cost, but not in terms of flexibility when responding to power consumption. However, innovations in energy storage and smart grid technology can make clean energy more competitive.