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Utilities upbeat entering tax bill conference but renewable sector wants changes

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Essential Energy Insights - November 2021


Utilities upbeat entering tax bill conference but renewable sector wants changes

Electric utilities are rooting for final passage of tax reform legislation that would lower the corporate tax rate and maintain key business deductions, but renewable energy developers remain vulnerable as Congress heads into a conference committee on the tax bills.

The U.S. Senate passed the Tax Cuts and Jobs Act early Dec. 2. Like the U.S. House of Representatives' tax proposal that passed Nov. 16, the Senate bill would slash the corporate tax rate from 35% to 20% and preserve investor-owned utilities' ability to deduct interest expenses and state and local taxes from their federal income taxes. Both bills also would allow full expensing of capital expenditures for five years, although they differ in how they would treat expensing after that.

Republicans hope to send a final tax bill to President Donald Trump's desk by Christmas. But Congress has a lot on its plate before the holidays, including passing spending legislation by Dec. 8 in order to avoid a government shutdown.

"Getting comprehensive tax reform across the finish line is the single most important action we can take this year to grow our economy and create jobs," Edison Electric Institute President Tom Kuhn said following the Senate vote.

Toby Shea, a vice president at Moody's Investors Service, said the effect on utility earnings from the legislation would be "neutral" because reduced tax expenses from the lower corporate rate would be passed on to customers. The investment firm also said cash flows likely would decline because utilities will not be able to defer as much in taxes due to the lower corporate rate, an assessment shared by Morgan Stanley in a recent research note.

Renewable sector faces risks

Despite broad support for tax reform among utilities, renewable power developers are worried about parts of both the House and Senate legislation.

The House bill effectively would lower the value of the federal wind production tax credit and toughen its eligibility requirements while ending the commercial solar investment tax credit at the end of 2027. The Senate legislation would preserve the existing wind and solar credits but includes language that renewable energy developers fear will hamper investment.

The Senate bill's base erosion anti-abuse tax, or BEAT, provisions could push tax equity investors out of the U.S. renewable energy market by subjecting renewable energy tax credits owned by affected multinational companies to a 100% tax. The renewable power sector also is displeased with the Senate's retention of the alternative minimum tax, a supplemental income tax that some companies pay if they have exemptions allowing for a lower standard income tax.

"If these provisions are retained, they will result in broad instability and uncertainty for businesses and investors across many sectors, including the clean energy sector," said a coalition of clean energy groups including the American Wind Energy Association, Solar Energy Industries Association and the American Council on Renewable Energy. "We look forward to working with conferees to address these concerns so that the sector can continue to contribute to vibrant and diverse domestic energy production."

American Council on Renewable Energy spokesman Gil Jenkins said the Senate bill's BEAT provisions were modified to help protect banks against a tax on swaps and other transfers, which could allow some banks to provide tax equity "without fear of the BEAT." But the bill excluded a proposal from U.S. Sen. Chuck Grassley, R-Iowa, to allow for a five-year carryover on credits, meaning the BEAT provisions "will have a major negative impact on the tax equity marketplace," Jenkins said.

The fate of these and other contested aspects of the tax bills remains unclear and will be worked out in a bicameral conference committee. In addition to the renewable provisions, the House and Senate bills differ on their treatment of the production tax credit for new nuclear facilities and credits for smaller-scale renewable technologies. The bills also proposed different tax breaks for master limited partnerships.

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