US clean energy backers rally to keep direct pay option for tax credits

A key clean energy tax proposal could be excluded from a possible new budget reconciliation package under negotiation in the U.S. Senate, speakers said at a June 22 conference.

But supporters say they will advocate the policy to lawmakers in hopes it will be included in any final bill.

U.S. Sen. Joe Manchin, D-W.Va., a key swing vote in the Senate, has "voiced a lot of opposition" to including a direct-pay provision in a reconciliation package, American Clean Power Association CEO Heather Zichal said at the group's Energy Storage Policy Forum in Washington, D.C.

A direct-pay mechanism would allow tax-exempt entities, such as rural electric cooperatives and municipal utilities, as well as renewable energy developers with relatively small tax burdens, to receive cash payments in lieu of federal clean energy credits. Public power groups have blamed the lack of direct payments for hindering renewable energy development by cooperatives and public utilities relative to investor-owned generators.

Traditional tax credits can also be more expensive for renewable energy developers to take advantage of, requiring developers to effectively sell the credits to tax equity investors to finance a share of the project.

A direct-pay provision was included in the stalled Build Back Better Act that the U.S. House of Representatives passed in late 2021. Although Senate Democratic leaders are considering a new reconciliation bill, Manchin's concerns over direct pay have cast doubts on the policy's inclusion in the package.

"There's a big question around direct pay," Zichal said. "I think there's an opening there for a conversation, and certainly in the discussions we've had with the key members of the Hill, that seems to be where the conversation is really focused."

Zichal said Manchin is opposed to giving direct payments to what he views as "mature industries." But the policy change is crucial to increasing renewable energy deployment and achieving the country's climate goals, she said.

"We've been delivering a very clear message: there's not enough tax equity," Zichal said. "We really need this direct pay provision."

Two spokespeople for the West Virginia lawmaker did not respond as of press time on what the senator's position is on direct pay language. Manchin's resistance to direct pay was first reported June 17 by Politico.

Unrealized promise

Advocates of the policy say existing and new clean energy credits will not be as effective without direct pay.

"We're going to need a mechanism that addresses the reality that the tax equity marketplace ... is too constrained to effectively support the growth we need for the energy transition on its own," Gregory Wetstone, president and CEO of the American Council on Renewable Energy, said in an email. "We want to avoid a situation where we have legislation with promise that cannot be realized."

Rural cooperatives have also vowed to fight for enacting direct pay.

"If Congress is going to use the tax code to incentivize energy innovation, it's imperative that electric cooperatives and municipal utilities have direct access to that same funding," Stephen Bell, a spokesperson for the National Rural Electric Cooperative Association, told S&P Global Commodity Insights.

Electric vehicle credit also at risk

Direct pay is not the only climate-related tax provision at risk in the reconciliation bill.

During the June 22 storage conference, Sen. Sheldon Whitehouse, D-R.I., said that reconciliation talks between Senate Democrats have centered on three key pillars: a suite of clean energy tax credits approved by the Senate Finance Committee, a program to reduce methane emissions, and a possible carbon border adjustment that accounts for the carbon intensity of certain imported commodities and manufactured products.

However, Whitehouse said the tax package may not include enhanced credits for electric vehicle purchases, incentives that Manchin has also opposed. The Build Back Better Act would have provided up to $7,500 in federal tax credits for electric vehicles, with an additional $4,500 in bonus credits for cars and trucks made in the U.S. by union workers.

But much could change in the coming weeks as Congress tries to advance a range of legislative priorities before the July 4 and August recesses.

"We're now hanging fire on the reconciliation bill," Whitehouse said. "First question: will there be one? Second question: what will be in it? Neither has a clear answer yet."

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