The energy provisions of Congress’s recent budget deal explained

Last week Congress reached an agreement to fund the government and historically boost the budget. The deal increases investments in domestic programs and the military by roughly $300 billion over the next two years. It also includes several key energy provisions that warrant mention.

The bill contains $2 billion for energy infrastructure reconstruction in Puerto Rico, which is part of $89 billion in disaster funding for areas impacted by hurricanes and wildfires. The $2 billion falls far short of the $17.8 billion requested by Puerto Rico Gov. Rosselló to rebuild the grid after Hurricane Maria destroyed the region’s infrastructure. Puerto Rico Electric Power Authority (PREPA), the island’s bankrupt utility, is struggling to restore power to nearly 500,000 customers four months after the hurricane.

The bill also includes a variety of tax credit extensions for nuclear energy, carbon capture projects, and small natural gas and renewable energy technologies, which were left out of the broad package of tax cuts passed by Congress in December.

One of the biggest winner is nuclear energy which is facing an uphill battle to hang onto its share of the country’s electricity production. Most notably, the budget deal extended a $0.018 per-kWh production tax credit for nuclear power plants over 6,000 megawatts, which is going to benefit the construction of two reactors at the Georgia Vogtle nuclear power plant—the only nuclear plant currently under construction in the United States. Before this, the $0.018/kWh credit had an in-service deadline of December 31, 2020. However, the two reactors at the Vogtle plant, which has faced serious headwinds following bankruptcy filed by nuclear developer Westinghouse and is now billions of dollars over budget, are not expected to be in service until 2021 and 2022 at the earliest. Extending the tax credit was a key consideration for Georgia public utilities commission when it voted not to cancel the troubled project in December 2017. With the budget deal, it now appears that the Vogtle project will move forward.

The budget also expanded and extended a tax credit, known as Section 45Q, for carbon capture projects which enjoyed bipartisan support in the Senate. Currently carbon capture and storage projects are both hugely expensive and technologically untested: only two carbon capture and sequestration plants—the Petra Nova plant in Texas and Boundary Dam plant in Canada—are in operation worldwide. Section 45Q was created in 2008 and allowed companies that captured carbon to collect between $10 and $20 a ton. The budget deal extends the tax credit for 12 years and increase the credit to $35 per ton for carbon that is captured and used for enhanced oil recovery, and $50 per ton of carbon that is capture and stored in a geologic formation deep underground. The tax credit also provides a crucial lifeline to the coal industry by providing a pathway for “clean coal” to remain a part of the diverse energy mix.  

While the inclusion of several energy tax credits in the budget deal represent a victory for the energy industry, many of these will only apply to 2017 production (see table below). According to the non-partisan Tax Foundation, such retroactive changes constitute poor public policy and do not contribute to long-term economic growth, which requires predictable, long-term policy. Businesses have already made their decisions for 2017 and cannot go back and choose to invest differently in light of the new tax breaks.

Finally, the budget deal does not allow energy storage to benefit from the federal investment tax credit. Currently there are no direct tax incentives available for energy storage and energy storage projects can avail the tax credit only if they are part of solar power installation and meet specific criteria. The U.S. energy storage market is growing rapidly, with 41.8 megawatts deployed across the United State in the third quarter of 2017, representing a 46 percent year-over-year growth. According to advocates of the industry, energy storage projects can grow more quickly if they can benefit from the investment tax credit on a stand-alone basis.

On Monday, President Trump unveiled his second budget proposal, broadly resembling the budget released last year, and seeking massive budget cuts to energy and environment programs across the government (more on forthcoming blog). Just like Congress ignored most of the provisions of the fiscal 2018 budget proposal, it is quite likely that the 2019 proposal may be similarly doomed. However, it reveals the huge disconnect between the bipartisan two-year budget agreement adopted by Congress last week, which calls for additional $300 billion in additional spending, and the Trump administration’s proposed 2019 budget.