Last year’s extension of the U.S. federal investment tax credit (ITC) and production tax credit is expected to increase renewable energy capacity installation – as will the U.S. Environmental Protection Agency’s (EPA) Clean Power Plan (CPP), if resumed – according to Fitch Ratings. The company says both of these pieces of legislation will lead to longer-term stability for the solar and wind sectors.
Prior tax credit extensions were short term and sometimes retroactive, creating a boom-bust cycle of solar and wind project development. Without a clear understanding of how long and at what level the tax credits would remain in effect, Fitch says the long-term investment and financing decisions necessary for industry stability did not appear.
With the new legislation, Fitch continues, projects that would have been rushed into construction to beat previous tax credit expiration dates can optimize their schedules, and more new projects will qualify for development with the cost advantages of the favorable tax treatment.
Furthermore, Fitch says growth in renewable energy will be an important component of meeting greenhouse-gas reduction objectives required under the CPP. It requires aggressive cuts in carbon dioxide emissions for electric generators by 2030, with the first performance period beginning in 2022 under the current schedule – although this may be revised due to legal challenges from a coalition of states that oppose the CPP.
Fitch says the tax credit program through 2022 will support increasing proportions of zero-emissions renewable capacity in the overall generation mix, enabling states to rely on renewables to achieve final CPP goals. Similarly, the tax credit extension will support further development of utility-scale renewable energy projects needed for states to meet current and future renewable portfolio standard requirements.
According to Fitch, solar installations grew by 6,500% from the first year of the investment tax credit in 2006 through 2014, and utility-scale costs for solar energy have dropped by more than 60% since 2010. With continued capacity growth and cost reductions, both wind and solar energy industries will be in improved competitive positions by 2022 and less reliant on continuing subsidies, the company concludes.