How Tax Reform Could Make Wind, Solar and Natural Gas Power More Expensive

In recent years, several members of Congress have proposed comprehensive tax reforms, all of which would affect the cost of electricity. In February 2014, previous House Ways and Means Committee Chairman Dave Camp (R-MI) released his proposal for comprehensive tax reform. Representative Camp’s proposal followed a set of proposals (here and here) issued as part of a staff discussion draft in December 2013 by former Senate Finance Committee Chairman Senator Max Baucus. The previous chairman of the Senate Finance Committee, Senator Ron Wyden (D-OR), proposed significant changes to the tax code in bipartisan legislation co-sponsored with Senator Dan Coats (R-IN) in 2011.

All three proposals proceed from the premised goal of lowering corporate income tax rates while broadening the base of taxable activities, generally by removing or limiting deductions and credits. While supporting documents for each of these proposals make reasoned arguments for changing various tax provisions, they do not discuss the impact of those changes on energy project economics. Recent studies from the Congressional Research Service and Lawrence Berkeley National Laboratory quantify the impact of changes to renewable energy tax credits on wind and solar electricity; however, these studies do not model the full impact of the Baucus, Camp, or Wyden-Coats proposals.

AEIC staff quantified the impact of the Baucus, Camp, and Wyden-Coats proposals on the project economics of an illustrative utility-scale wind project, solar photovoltaic (PV) project, and combined-cycle natural gas-fired power plant. Specifically, the study examines changes to the corporate income tax rate, depreciation rules, and energy-specific tax credits. Preliminary results indicate that all three tax reform proposals would raise the cost of electricity from all three projects, compared to current policy for corporate income taxes, accelerated depreciation, the production tax credit (PTC), and the investment tax credit (ITC). (Note that the PTC expired at the end of 2014, although wind projects that began construction by then are eligible for it.)

Impact of Reform Proposals on Levelized Cost of Energy ($/MWh)

(Current Policy scenario includes the PTC)
Impact of Reform Proposals on Levelized Cost of Energy ($/MWh)

Additionally, changes to depreciation rules affect the cost of wind and solar electricity generation more than that of conventional gas-fired electricity generation, as capital costs make up a larger proportion of total energy project costs for renewable energy sources. Changes in depreciation and corporate income tax slightly diminish the effective value of energy investment- and production-based tax credits. Finally, the use of tax equity reduces the cost-effectiveness of energy tax incentives—a result that is in line with previous analysis.

AEIC staff’s analysis can inform the parameters of the tax reform conversation to promote market competition among energy sources and further innovation in electric generation technology. AEIC staff expect to release the full study in coming weeks—stay tuned by following @TheAEIC on Twitter.