What Extending Federal Wind and Solar Tax Credits Means for the Clean Power Plan and Paris

February 26, 2016
Steve Clemmer
Director of Energy Research & Analysis

Two new studies by the National Renewable Energy Laboratory (NREL) and the Rhodium Group show that the five-year extension of the federal production and investment tax credits (PTC and ITC) for wind and solar, included in the Consolidated Appropriations Act of 2016 passed in December, could result in record-setting growth in the U.S. renewable energy industry while significantly reducing power plant carbon dioxide (CO2) emissions.

The tax credit extension provides greater certainty for the renewable energy industry to develop new projects, secure financing and expand U.S. manufacturing capacity. It also allows them to build on recent gains in transitioning the U.S. to a clean energy future, while providing a bridge for states to meet their CO2 emission reduction targets under EPA’s Clean Power Plan (CPP).

More renewables and CO2 reductions under a range of natural gas prices

NREL examined the impact of the tax credit extensions under two different natural gas price futures—a base price forecast and a low price forecast—based on Energy Information Administration (EIA) projections. All scenarios include current policies and regulations as of January 1, 2016, including state renewable electricity standards, state and regional carbon emissions policies, and the CPP.

Building on recent gains

Federal tax credits along with state renewable electricity standards have been primary drivers of renewable energy development in the U.S. over the past two decades.  Between 2010 and 2015, new renewable capacity grew at an average rate of nearly 11.6 GW per year.  In 2015, the U.S. added 16.6 GW of new renewable capacity, which was slightly below the U.S. record of 17.6 GW added in 2012.

NREL’s analysis shows that the tax credit extensions will accelerate renewable development (primarily wind and solar), resulting in 48-53 GW of additional capacity by 2022 (Figure 1).  With base natural gas prices, NREL projects:

  • Total renewable capacity additions will grow at 18.9 GW per year on average between 2016 and 2020, breaking the 2012 U.S. record, compared with an average of 8.3 GW per year without the tax credit extensions.
  • 11.9 GW of new wind capacity and 6.2 GW of new solar capacity would be added each year, on average through 2020, which is slightly below the U.S. record of 13.1 GW of wind installed in 2012 and 7.3 GW of solar in 2015.


Source: NREL.

Source: NREL.

With base natural gas prices, NREL projects total renewable capacity (from wind, solar, geothermal, hydro, and biopower) to more than double over the next 15 years, reaching ~450 GW by 2030 (18 GW/year on average), with or without the tax credit extensions (Figure 1). The vast majority of this new capacity is wind and solar (Figure 3). While the tax credits accelerate deployment through the early 2020s that result in greater reductions in natural gas and CO2 emissions (see below), other factors drive the renewables deployment in the mid to late 2020’s that result in similar levels by 2030.  These factors include continued reductions in the cost of renewables, increasing natural gas prices, and compliance with the CPP and state renewable electricity standards.


Source: NREL.

Source: NREL.

As expected, overall growth in renewable capacity is lower with lower natural gas prices. By 2030, total renewable capacity is projected to reach 356 GW, or 11.3 GW per year on average, with the tax credit extensions (Figure 1).  This growth rate is slightly below the annual average levels achieved in the U.S. between 2010 and 2015.  Like the base gas price case, the tax credit extension accelerates renewable deployment in the early years under the low gas price case, resulting in 48 GW of additional capacity by 2020.  But unlike the base gas price case, renewable capacity is considerably higher (36 GW) by 2030 with the tax credit extension and low gas prices.  This is mainly because zero emissions renewables are displacing more coal generation, which results in about twice the emission reductions per unit of electricity than shifting to natural gas to meet the CPP targets.

Renewables achieve greater emission reductions with lower gas prices

The additional deployment of renewables due to the tax credit extensions displace coal and natural gas generation, resulting in a reduction in power sector CO2 emissions.  From 2016 to 2030, the tax credit extension results in a cumulative net CO2 reduction of 540 million metric tons (MMT) under the base gas price case, and 1,420 MMT under the low gas price case (Figure 6).  The two main reasons why emission reductions are greater under the low gas price case are: 1) the ratio of coal to gas generation displaced by renewables is much higher (coal plants are less competitive with lower gas prices) and 2) the incremental level renewable generation is higher over the entire 2016-2030 timeframe.

Source: NREL.

Source: NREL.

NREL’s analysis shows that the tax credit extension will help states get an early start in meeting their emission reduction targets under EPA’s Clean Power Plan, even as the legal issues around the CPP get resolved.  The additional ~540-900 MMT cumulative reduction in CO2 emissions achieved by 2025 due to the tax credit extension will also help the U.S. meet its pledge under the Paris Climate Agreement to cut economy-wide emissions 26-28 percent below 2005 levels by 2025.

Other studies show similar results

The results of NREL’s analysis are consistent with another analysis released this week by the Rhodium Group.  This new analysis builds on an analysis Rhodium completed last month using EIA’s National Energy Modeling System (NEMS) that found the tax credit extensions provide a bridge to the clean power plan and change the game for CPP compliance by replacing the need to rely more heavily on natural gas combined cycle plants.

However, their initial analysis used EIA’s pessimistic cost assumptions for renewable energy that are significantly higher than recent industry and NREL estimates. This is something I and my UCS colleagues have blogged about several times.  Rhodium’s new analysis uses the same assumptions as NREL with capital costs that are 43 percent lower for solar PV and 24 percent lower for onshore wind by 2020 compared to EIA. Like NREL, they also analyzed scenarios with lower natural gas prices.

The results are eye opening. Using EIA’s more pessimistic renewables and natural gas assumptions, Rhodium found that new wind and utility scale solar capacity would be highest under a scenario that combines the tax extenders with the CPP (142 GW by 2025) compared to the tax extenders without the CPP (92 GW), and the CPP without the tax extenders (60 GW).  However, when they used the more realistic and updated assumptions for renewables in the tax extender only case, new wind and solar capacity increased to 250 GW with EIA’s base natural gas prices and 163 GW with lower gas prices (Figure 4).

Rhodium Figure 4

While the Rhodium group analysis clearly shows the best case scenario for renewables is the combination of the tax extenders and the CPP, it also clear that the tax extenders will drive significant deployment of renewables on their own, particularly in the near-term. Which is why they conclude “in all but the low gas price case [and pessimistic renewables costs], the future is bright for wind and solar.”

No more boom-bust cycle for renewables?

Over the past two decades, Congress has allowed the tax credits to expire several times–followed by short-term extensions–that have created a boom/bust cycle for the wind industry. The recent 5-year extension combined with implementation of the CPP through 2030 provides much greater certainty for the U.S. renewable energy industry.  This will allow U.S. to expand its global leadership in advancing clean energy technology, create new jobs, and further drive down costs.  It will also help states avoid an over-reliance on natural gas that could save consumers money, while continuing to make progress in reducing CO2 emissions that will help meet the CPP targets and the Paris Climate Agreement.  This provides a compelling reason for other states to join the 16 states that have already announced they will move forward with crafting their compliance plans while they await resolution of legal challenges to the CPP.