Troutman Pepper talks pros and cons of transmission ITC proposals

The clean energy sector has seen growing momentum around the creation of a federal transmission investment tax credit (ITC), driven by increasingly measurable impacts of climate change and the need to invest in a more resilient, majority-renewables grid.

A bill introduced earlier this month in Congress would create a 30 percent ITC to help promote construction of regionally significant transmission projects across the nation.

Sponsored by Sen. Martin Heinrich (D-N.M.) and Reps. Steven Horsford (D-Nev) and Susie Lee (D-Nev), the Electric Power Infrastructure Improvement Act would support more than 500,000 jobs, boost grid resiliency, and support new projects that connect renewable energy resources to the power demands of regional consumer markets.

Projects that would qualify for the ITC include overhead, underground or offshore AC or DC transmission lines, including ancillary facilities. Transmission projects must also be at least 500 MW and 275 kV in capacity and be placed in service by 31 December 2031 to qualify for the incentive.

The bill comes on the heels of the announcement of President Biden’s American Jobs Plan, which calls for a “targeted” ITC that incentivizes the buildout of at least 20 GW of high-voltage capacity power lines and mobilizes tens of billions in private capital.

“To me, the recent April transmission ITC bill and the White House’s comments on the transmission ITC are just the beginning,” Judy Kwok, a partner at Troutman Pepper, told NPM. “Similar to the direct-pay concept, there are many question marks around what the exact parameters of a transmission ITC would be. At a very high level, when the White House says, “at least 20 GW,” does that mean that the ITC might phase down after a certain amount of transmission lines have been built out? What does “high-voltage capacity” exactly mean? What restrictions, if any, would a “targeted” ITC have?”

A similar transmission ITC bill was previously introduced in 2019 by Heinrich, who cited a “disconnect” between transmission access and large-scale clean energy resources.

“The transmission ITC has been proposed before, but the fact that it is now backed by the Biden Administration’s infrastructure program is a significant development,” Kwok said. “The bills are conceptually similar, although the 2021 bill is more generous in several respects. Both bills contain restrictions not mentioned by the Biden Administration’s outlines. Unlike the 2019 bill, the 2021 bill contains a full 30 percent ITC for transmission property, but a major limitation of both bills is that the transmission property must deliver power produced in a rural area or offshore. The transmission property also has to meet threshold requirements for minimum voltage and capacity.”

Biden's Made in America Tax Plan also alludes "very vaguely" to a transmission ITC, says Kwok.

The plan cites incentives for clean energy production and investments as "insufficient" to match the massive scope of the nation's environmental and climate challenges. As an example, the production tax credit for renewable electricity producers lapsed and was retroactively extended five times between 1999 and 2015, leading to significant policy uncertainty for renewable producers. The Biden Administration’s climate-related commitments would remove the subsidies for fossil fuel producers and substantially expand tax incentives for clean energy.

“My general sense of the industry is that the 2021 version of the Electric Power Infrastructure Improvement Act is not universally viewed as accomplishing the stated goals of the Biden Administration,” Kwok said. “The Biden Administration has put out high-level language that can be interpreted more broadly, so the industry may be encouraged by that language to push for a 30 percent transmission ITC that is not restricted to rural and offshore power, and that may have lower or eliminated minimum voltage and transmission capacity thresholds. If we do believe that the transmission ITC will be limited to property that delivers power produced in a rural area or offshore, the “rural” requirement may create a need for a regulatory regime to ascertain what parts of the country are “rural.”

Building a backbone

Renewable generation has grown exponentially over the last decade and is expected to expand as state renewable standards and policies increasingly limit carbon dioxide and methane emissions from electric generation resources.

The availability of “backbone” transmission capacity (generally 345 kV and above) is essential to the efficient and least-cost deployment of U.S. solar and wind resources, according to a recent report by the American Council on Renewable Energy (ACORE). The U.S. Energy Information Administration projects that solar, wind, and battery storage will comprise 80 percent of the new capacity installed in 2021.

Fifteen U.S. states and territories have adopted mandates to achieve 100 percent carbon-free renewable energy, with some as early as 2030. Beyond state clean energy mandates, electric utilities have also made their own clean energy commitments, while corporate buyers are increasingly setting voluntary commitments to purchase renewable energy.

Clean energy tax credits have been touted as one of the most critical federal policy mechanisms to support the growth of renewables in the U.S., sending a signal to investors to put their capital behind wind and solar.

Since the solar ITC was enacted in 2006, the U.S. solar industry has grown by more than 10,000 percent, creating hundreds of thousands of jobs and pumping billions of dollars into the U.S. economy. In 2020, wind and solar power delivered 11 percent of the country’s electricity, up from negligible amounts prior to the establishment of the tax credits, according to the American Clean Power Association (ACP).

But the tax credits have made the energy tax landscape unnecessarily complex, according to ACP, who notes that "different energy technologies receive varying levels of support across divergent time periods without a unifying public policy rationale."

“In assessing whether the transmission ITC may phase down and when, we should remember that the dynamics of planning and implementing a transmission line project may be much more complicated than in many solar and onshore wind projects," Kwok said. "In contrast to the existing “beginning of construction” deadlines for PTCs and ITCs, the transmission ITC has a placed in service-based deadline. So, there is at least some justification for expecting a phase-down schedule to be slower in a transmission ITC than in other ITCs or PTCs."

ITC Holdings Corp, the largest independent electricity transmission company in the U.S., told NPM that it supports a transmission ITC to expand access to markets and allow new generating resources to interconnect to its systems.

“We are pleased to see transmission as a key part of the conversation regarding Biden’s economic recovery legislation,” Nina Plaushin, Vice President, Regulatory and Federal Affairs at ITC Holdings, told NPM. “A well-designed tax credit for transmission would further encourage approval of large regional projects in organized markets. Such a credit would provide savings to the customer and help defray the cost of a major buildout. We look forward to reviewing a detailed proposal as it is considered by Congress.”

The bill is supported by the ACP, ACORE, and Americans for a Clean Energy Grid, among others.