The Loss of Clean Energy Tax Credits will be Terrible for Alaska
The IRA finally made the credits work for us. Now they might disappear before we can use them.
I mostly write about state policy here. It feels more reachable, and often no one else is doing it. I can read analyses of the gutting of clean energy tax credits in the federal House Budget Bill, all of which tell me that it will make energy more expensive for everyone -- including us. But none spell out why this is particularly terrible for Alaska.
The investment tax credit (ITC -- 48E) and the production tax credit (PTC -- 45Y) are the primary federal tax credits for renewable energy. While they’ve been around in some form for my entire life, Alaska hasn’t had much chance to take advantage of them, because the credits didn’t usually apply to our system of tiny publicly-owned utilities.
Now they do. The current version of these tax credits, as passed in the Inflation Reduction Act (IRA) in 2022, is vastly more beneficial to Alaska than any previous version has been. And these improved credits come at a time when grants are much less likely to be available. But just as Alaskan communities are gearing up to take advantage of the credits they finally qualify for, they’re poised to disappear.
The current House bill phases out the utility tax credits on an accelerated schedule, and requires a project to be fully operational before claiming them. Provisions on material sourcing are so complicated and onerous that no Alaskan entity can likely meet the tracking requirements. Residential solar credits end entirely at the end of the year. The practical effect is the same as eliminating the credits entirely.
History of the investment and production tax credits
The investment tax credit has existed in some form since 1978. It gives a utility or developer a tax credit for a percentage of their investment in a renewable energy project. The production tax credit began in 1992. It gives credits out over time based on energy produced, on a cents per kilowatt hour basis.
These credits have been part of the backdrop of energy policy for more than 40 years, working alongside other supports for fossil fuels. They’ve also been subject to the winds of politics for all of that time. Nearly twenty different pieces of legislation extended or altered them. For most of their existence, these credits applied only to solar and wind energy. Until 2022, only taxpaying businesses could qualify.
Most utility-scale renewables in Alaska weren’t eligible in the past
Over 90% of Alaska’s existing renewable electricity comes from hydropower. Hydro wasn’t included in the credit system until 2005, and even afterwards it only received half the credits that wind did.
However, that didn’t actually matter here, because nearly all of our power projects were built by entities that don’t pay federal taxes. The vast majority of Alaska communities are served by non-profit electric cooperatives. Some major projects were built by the state. Neither the state nor the co-ops could benefit from these tax breaks. While there was always a possibility to set up a complicated financing structure with a for-profit company, Alaskan projects weren’t big enough to make that worthwhile.
The Inflation Reduction Act changed the credits in Alaska’s favor
The IRA made the credits ‘elective pay’ so non taxable entities could take a tax credit directly as cash. Immediately, this makes every owner of a power project eligible, including the state, cities, tribes, and the non-profit electric cooperatives that provide most of Alaska’s power.
It also made the credits technology-neutral. The Alaska Energy Authority can get the credits for its expansion of Bradley Lake, and diesel-dependent communities can get them for new hydro projects that have been long planned but difficult to fund. In some communities, particularly in Southeast Alaska, hydro may be the only non-diesel power option available.
And it made the credits bigger. The baseline credit level (after meeting prevailing wage and apprenticeship requirements) is 30%. And it also added various ways to stack 10% bonus credits on top of that baseline. The entire state of Alaska qualifies as an “energy community,” bumping the baseline up to 40%. Additionally, nearly all of our small communities would qualify for a 10% low income community bonus. While that only applies to projects less than 5MW, those are exactly what our small communities need.
Even the few for-profit independent power producers in the state that benefited from the old credits will benefit more from the new ones. Because they’re bigger, and because they’re extended. Alaska’s never been able to attract independent power producers from the lower 48. Our independent power producers are small home-grown enterprises often just getting off the ground. Our public utilities never qualified for the credits, and our independent power producers haven’t had time to grow to take advantage of them.
So now, our nascent independent power producer companies can still use the tax credits to lower the prices of the power they offer -- and they can lower them even more. Additionally, co-ops, municipalities, and the state can get the credits for their own projects. And these credits work for hydropower, geothermal, and any other non emitting technology.
What will we lose if they disappear?
Adding up potential credits (estimating capital costs and production) for Dixon Diversion hydro, Shovel Creek and Little Mount Susitna wind, and a Kenai Peninsula solar farm, the Railbelt alone stands to lose around $450 million dollars. Dixon Diversion is only potentially eligible because of the new elective pay provisions from the IRA -- but couldn’t possibly get built in time to use them. Likewise, HEA is pursuing a solar farm on its own, and needs elective pay to qualify.
It’s pretty obvious that removing a credit that makes energy cheaper will make energy more expensive. An annual study of US energy costs shows that over the last ten years, the credits have made solar and wind energy 15-20% cheaper on the high end of the cost range (where Alaska would fall). The current credits are more generous. Any project eligible for the production tax credit will cost 3 cents per kilowatt hour more without it.
If it gets built at all. Recently, Alaska’s largest solar developer pulled out of all their planned projects based on uncertainty over tax credits. Their Puppy Dog Lake project on the Kenai Peninsula would have been Alaska’s largest, and could have received over $20 million in tax credits to lower the power costs to customers.
The impacts of the tax credits on smaller utilities’ projects are harder to assess. While grants often cover a significant portion of the capital costs, the remaining matching costs can be a major burden, especially for projects that exceed the $2 million per project limit for state Renewable Energy Fund grants. The state is in fiscal crisis, and the federal government is freezing and clawing back any grants it can. If a rural utility can’t fund its matching costs today, it won’t likely get another chance.
The economics of rooftop solar get dramatically worse
Rooftop solar systems have been eligible for a tax credit since 2005. In 2010, Alaska passed a net metering law allowing people on the Railbelt to connect solar panels to the grid and get credit for that energy. Since then, around 3000 Railbelt homes and businesses have installed grid connected solar panels. Additionally, there are off grid houses and cabins all across the state, many of which have solar panels.
For homeowners putting up rooftop solar panels, the loss of the tax credits turns home solar from a decent investment in most places to something that won’t break even for many.
How does the House Budget kill the credits?
Residential solar ends this year
Homes wanting rooftop solar panels have to get them running by the end of the year to qualify for the 30% credit.
The accelerated phase-out ties eligibility to ‘in service’ date
The ITC and PTC credits phase out quickly. 80% of the baseline in 2029, 60% in 2030, 40% in 2031, and nothing after that. Historically, the eligibility date was determined by the start of construction. Now, it’s tied to the project being operational. Alaska sits at the far end of every supply chain; weather, funding, and logistics delays are normal. A halfway built project could lose the credit for factors outside the utility’s control
The “Prohibited foreign entity” requirements add likely impossible paperwork, even for projects that move fast.
The even bigger problem is the “Prohibited-foreign-entity” requirements. This prevents utilities from getting “material assistance” from countries our government deems problematic -- like China. But “material assistance” is defined so broadly that utilities and developers would have to prove that every wire, switch, and chip in a project contains no material that ever passed through or was processed by a prohibited country. Even huge companies will have trouble with that. Our small co-ops (and even the Railbelt ones are small) don’t have nearly the manpower or resources to have a hope of tracking that. There’s a one year grace period on this, but no more. But we could face claw-backs years later for an honest mistake.
Our expensive power will get more expensive.
Our power started out expensive and is already getting more expensive. Railbelt utilities’ rates have risen 10% in the past year and a half. Fuel costs are driving those up further. Rural rates have always been incredibly high. Losing the tax credits just as Alaska is finally able to take advantage of them will make everything more expensive. More importantly, it will make it a lot harder for anything to get off the ground. Capital costs have always been a huge barrier here, where our utilities are small, and everything is remote and expensive.
The uncertainty itself is an additional hurdle. Planning Alaska’s future grids, we are already trying to juggle unknown future fuel costs. The diesel that powers many of our communities has always been volatile, and the import replacement for Cook Inlet gas will probably be expensive, but also unknown, and likely volatile itself. Tariffs and the global economy add the same uncertainty for materials and supplies. Taking all of that, and then trying to sign a contract or make a construction plan without knowing whether you get a 40% tax credit or not just makes everything that much harder.
Since our utilities are small and mostly publicly-owned, getting something wrong (thinking a project can get built faster than it does, thinking a product is free from foreign material when it actually contains some), is a direct hit on the ratepayers.
These tax credits finally work for Alaska. Alaska should fight to keep them.