Tucked alongside more than $300 billion worth of clean-energy tax credits pending in Congress is an obscure but important provision whose supporters span the corporate gamut.
Utilities, renewable energy developers and cleantech startups alike are uniting behind not only the tax credits, but a policy called direct pay that helps them better monetize those credits.
Originally part of the House-passed Build Back Better Act, which has stalled in the Senate, the suite of nearly 20 tax credits is considered vital to accelerating America’s clean-energy transition to the pace scientists say is needed to prevent the worst impacts of a warming planet.
Direct pay would allow tax credit recipients to access credits by receiving cash payments from the Treasury Department instead of seeking tax-equity financing from a bank. (Tax-equity financing allows developers to effectively “sell” the tax credit to a bank, which then can use the credit to offset their own taxes. This transaction allows developers to shift the tax credit to another party—in this case banks—in exchange for cash.)
Financial institutions typically charge a commission of 15% to 20% of the credit value for these transactions, according to Maria Martinez, manager for U.S. policy and advocacy at Breakthrough Energy (which supports Cipher).
This type of clean-energy financing is not done elsewhere in the world, according to a report by Sarah Knuth, assistant professor at Durham University in the United Kingdom.
Sen. Ron Wyden (D-Ore.), chairman of the Senate Finance Committee with jurisdiction over tax policy, said direct pay is particularly important to what he calls “under-served communities”—in this instance startups looking to jumpstart new technologies since they don’t yet have the tax liability to get tax equity from banks.
“It’s hugely important to under-served communities that they get these funds in a way that makes it easier for them to get their projects off the ground,” Wyden told Cipher in an interview last week. “They don’t have to go out and get waltzed around by these big financial interests who can skim off more of the money.”
Some banks have resisted the direct pay provision, according to Wyden and several other experts interviewed for this article.
Bank of America and JP Morgan Chase account for roughly 50% of the renewable energy tax-equity market, according to law firm Norton Rose Fulbright.
“I think they [banks] have had trouble finding allies for their cause,” Wyden said. “There’s no question they’re not having a rally for this provision.”
A JPMorgan Chase spokesperson told Cipher: “We do not oppose the direct pay option.” Spokespeople for Bank of America and the American Bankers Association, a trade association representing U.S. banks, declined to comment.
Wind and solar electricity are growing so fast the tax-equity market hasn’t kept pace. That’s why The American Clean Power Association, a U.S. association representing clean-energy developers, supports direct pay.
“Tax equity supply is already constrained and will cripple the market in the absence of an alternative mechanism to monetize tax credits,” says an ACP fact sheet viewed by Cipher.
For utilities, direct pay frees up capital and “takes it out of a more expensive equity market, which provides savings for customers,” said Eric Grey, vice president of government relations at the Edison Electric Institute, a trade group representing investor-owned utilities.
As for the “under-served communities” Wyden mentioned, direct pay would help level the playing field “between startups and incumbent companies that can access the credits right away because they generate profits that the credits can offset,” said Jonas Murphy, government affairs manager of the National Venture Capital Association.
Direct pay would be an option for 13 out of approximately 16 tax credits in the Build Back Better Act, including those supporting clean hydrogen, transmission power lines and electricity storage, according to Breakthrough Energy.
What’s more, developers using direct pay for certain credits would need to satisfy new domestic content requirements, pleasing unions but irking some renewable energy groups, according to Jason Walsh, executive director of the nonprofit BlueGreen Alliance, which is a group comprised of environmental groups and labor unions.
The outlook for approving any clean-energy tax credits soon is murky.
With inflation levels at historic highs, more lawmakers are joining Sen. Joe Manchin (D-W.Va.), expressing concern about more big government policy.
If Congress waits until after the midterm elections to consider “tax extenders”—a suite of existing tax credits often renewed close to year-end—direct pay may fall to the wayside because it’s a new provision, Grey said.
Wyden demurred when asked about that.
“I’m not going to speculate on something like that,” Wyden said. “I want to have this done long before we get to extenders season.”