An energy tax credit proposal has been introduced in both the US House of Representatives and the Senate aimed at encouraging technology innovation and helping rapidly scale and diversify new technologies, including hydrogen. 

The bipartisan Energy Sector Innovation Credit (ESIC) Act would offer tax credits for solar, wind, hydrogen, energy storage, carbon capture and storage and nuclear, ramping down the credits as each technology’s market penetration edges up. New technologies would become eligible as they emerge.

“If we are to meet long-term emissions targets without sacrificing affordable electricity, we need to invest in on-the-horizon technologies that can accomplish our environmental goals, create good-paying American jobs and meet our energy demand,” says Senator Mike Crapo of Idaho, a Republican.  He notes that because ESIC ramps down, taxpayer dollars will not subsidise market-mature technologies. 

The bill defines clean hydrogen as that produced with a greenhouse gas emissions rate that is not greater than 2,500g CO₂ per kg of hydrogen produced.

$550bn – spending under Biden infrastructure deal

Some 40pc of cumulative CO₂ emissions reductions needed to meet sustainability targets rely on technologies not yet commercially deployed on a mass-market scale, according to the Clean Energy Innovation report by the International Energy Agency (IEA). 

“Immature technologies are critical to the clean energy transition,” agrees Tara Narayanan, a solar analyst with BloombergNEF. “[ESIC] could be useful but it is too early to see if it will be taken up in Washington within the next few weeks.”

Narayanan noted how much horse-trading is currently under way in Washington regarding infrastructure and energy.

The tax credit bills were introduced on the eve of the Senate voting to proceed with an infrastructure bill hammered out after weeks of negotiations by a bipartisan group and President Joe Biden.

The Bipartisan Infrastructure Deal, which includes $550bn in new spending for infrastructure projects, would establish a new Grid Deployment Authority, invest in research and development for advanced transmission and electricity distribution technologies, and promote smart grid technologies that deliver flexibility and resilience, according to a White House fact sheet.

It also invests in demonstration projects and research hubs for next-generation technologies including clean hydrogen. Further details have not been released.

Democratic leaders are at the same time trying to advance a $3.5tn infrastructure package, which has yet to be written and which they hope can be passed without Republican support, as the Democrats’ majority in Congress is slim. The package is expected to include tax credits for clean energy, and a standard requiring utilities to expand their use of clean energy. Debate is likely to continue into the autumn.  

"Immature technologies are critical to the clean energy,” Narayanan, Bnef

The energy sector innovation credit act (ESIC), introduced by Senator Crapo and Senator Sheldon Whitehouse, a Democrat from of Rhode Island, is co-sponsored by a group of four bipartisan Senators. In the House of Representatives, Tom Reed, a Republican from New York, and Jimmy Panetta, a Democrat from California, introduced the legislation on the same day.

The bill would offer a 40pc Investment Tax Credit (ITC) or 60pc Production Tax Credit (PTC), to be phased out as technologies mature.  This would provide a platform for the most innovative technologies to get to market and then compete on their own—rather than allowing Congress to pick winners and losers when temporary credits expire, the sponsors said.

It would also provide flexibility for unforeseen clean energy technologies to be eligible for ESIC by including an ‘expedited-consideration’ provision for Congress to take up new technology recommendations from the US Department of Energy (DoE).

Narayanan cautioned that tax credits—although long accepted in the US as a way of subsidising energy technologies—are not as efficient as cash-based subsidies. Firms cannot pay down debt or buy equipment with tax credits, and tax equity investors have their own risk appetite and requirements which project developers have to work around.

Moreover, fluctuations in the economy can impact the availability of tax equity. During the pandemic, tax equity investors who might have invested in the fast-growing wind and solar sectors were unsure of how much tax they would have to pay because of the economic downturn, meaning their ability to commit to investing was muted, creating uncertainty in the sector.

“There is lots more growth waiting to happen, and the will-they-won't-they situation with tax equity holds the industry back from scaling as quickly as possible. When it comes to new sectors, getting a subsidy when you currently have none is wonderful, but lessons from other sectors show that simpler subsidies are more efficient,” she said.

---

Author: Ros Davidson