Several industry groups have asserted that repealing the Clean Energy Tax Credits authorized under the (inaptly named) Inflation Reduction Act (IRA) will cause electricity prices to increase. The pending House budget bill would begin phasing-out production tax credits and investment tax credits for facilities entering service beginning in 2029 (20%) through 2032 (80%). Thus, the existing credits would remain intact for batteries, wind and solar projects currently in service (and reflected in electricity rates) and for projects commissioned through 2028 (and recovered in future rates). Therefore, repealing the tax credits would not increase electricity prices in the short term.
What opponents of the phase-out ignore is that subsidized generation not only increases electricity prices, it is also impacting the grid, but not always in a positive way.
It is no coincidence that, as significant amounts of intermittent generation capacity have been deployed, electricity rates have increased. While not all rate increases can be attributed to intermittent generation, I can attest (based on cost/benefit analysis) that wind and solar projects have very long payback periods; that is, the projected benefits (assuming they actually materialize) won’t offset the high capital costs until long after the initial ten-year operating period. By then, the applicable production tax credits will have expired, thereby placing upward rate pressure.
The grid impacts are receiving increased attention by reliability organizations, system planners and system operators. The fact remains that intermittent generation alone cannot sustain a reliable 24 x 7 grid. A reliable grid requires significant dispatchable (i.e., nuclear, coal, gas, oil, and batteries) generation to provide the essential backup. Although pairing solar and wind with batteries can provide more “firm” capacity, this solution is nearly twice as costly (because batteries are not cheap). Less known is that the inverters required to convert electricity generated by wind, solar, and battery projects from DC to AC have caused unexpected outages. These outages have been cited in NERC’s Long-Term Reliability Assessments (LTRA).
Also less understood are the rate impacts of intermittent generation on transmission infrastructure. (Rate = Cost ÷ Output). A reliable grid requires significant investment in large power transformers, towers, conductors, capacitors, structures and land for rights-of way and substations. Essentially the same infrastructure would be required to support delivery of 1,000 megawatts (MW) of intermittent (nameplate) capacity and 1,000 MW of dispatchable (nameplate) generation capacity. However, intermittent generation can supply only 15% to 40% of its nameplate capacity rating during peak periods (versus 80% to over 90% of nameplate capacity rating for dispatchable generation). Thus, the effective rate impact of the transmission infrastructure required to support intermittent generation is two to six times higher than the corresponding rate impact to support dispatchable generation, when the rate is expressed on a per MW of peak demand. The per kWh cost would also be higher because intermittent generation operates at a significantly lower capacity factor than dispatchable base load generation.
Further, the tax credits, coupled with aggressive renewable energy standards adopted in several states, have increased demand for new infrastructure — particularly transmission upgrades and power transformers. As a result, critical supply chains are stressed, thereby raising equipment costs and delaying needed upgrades. Delays and higher costs of necessary infrastructure jeopardize economic growth while also driving higher electricity rates.
Ultimately, subsidized generation raises, not lowers, electricity rates. Wind and solar projects have benefitted from generous tax credits, which were supposed to be temporary but have been extended by Congress for decades. These tax credits have super-charged investment. However, they have not encouraged the essential research to make clean energy technologies more reliable and more cost-competitive with established generation technologies that aren’t eligible to receive generous tax credits.
In effect, the IRA-driven investment in intermittent generation has “crowded out” dispatchable generation. This has made the grid more costly and (as discussed in recent NERC LTRA and as demonstrated by higher target reserve margins adopted by electric utilities and regional transmission/independent system operators) less reliable.
It is time to reverse the policy. Going forward, wind and solar projects should have to fairly compete with other capacity resources. Phasing out the clean energy tax credits will finally restore a more level playing field.