New tax laws bring both a boost and uncertainty to the energy sector
Energize Weekly, December 27, 2017
The negotiations over tax-reform legislation in Congress were a roller coaster for the energy sector with potential plums and pitfalls appearing and disappearing as the bill made its way through committees, floor votes and reconciliation of the Senate and House versions.
When the ride was finally over, the oil industry came out ahead, utilities fared pretty well and renewable energy developers had avoided the worst-case scenario. The nuclear industry, however, was left out in the cold.
Here are the biggest elements for the energy sector in the Tax Cuts and Jobs Act that was signed into law by President Donald Trump last week.
Reduction in the corporate tax rate and maintaining key deductions
The single biggest plus for all parts of the energy sector is the reduction in the corporate tax rate to 21 percent from 35 percent.
The oil industry is projected to receive billions of dollars in tax relief from the cut in rates, as well as from generous treatment for capital expenditures.
The utility industry will also benefit from the cut in the tax rate and the ability to deduct the cost of capital projects from taxes in the first year rather than over time.
The industry also managed to preserve the ability to deduct state and local taxes from their federal tax bill.
“We are pleased that the Tax Cuts and Jobs Act maintains the federal income tax deduction for interest expense for regulated electric companies and the federal income tax deduction for state and local taxes,” Tom Kuhn, president of the Edison Electric Institute, the investor-owned utilities trade group, said in a statement.
“This legislation will grow our economy and encourage much-needed investment in our nation’s infrastructure,” Kuhn said.
Wind and solar dodge a bullet
On Thanksgiving Eve, a provision was added to the Senate tax bill—the Base Erosion Anti-Abuse Tax (BEAT)—that renewable energy company executives said would devastate the sector.
The provision, while aimed at thwarting tax avoidance, had the effect of preventing companies from monetizing wind and solar tax credits, a key way of financing projects. BEAT could have jeopardized an estimated $12 billion in investments. The final tax bill allows companies to offset up to 80 percent of the BEAT tax payments generated by energy tax credits.
Still, the impact of the BEAT on renewable energy development is not clear. “We are uncertain how the marketplace will react to the fact that more multi-national firms may now be covered by the BEAT, and tax credits may not all be usable in any given year,” Gregory Wetstone, president and CEO, American Council on Renewable Energy, said in a statement.
The House also took aim at wind and solar. The House bill sought to reduce the wind energy tax credit to 1.5 cents per kilowatt-hour from 2.4 cents, but that measure did not make it into the final bill. It also would have ended solar tax credits for commercial installation and large solar arrays, and done away with all solar tax credits after 2027. None of these provisions made it into the final bill.
Electric vehicles drive on
Congress first enacted a tax credit for electric vehicles (EV) in 2005 and then increased the income tax credit to $7,500 for an EV or plugin in 2010.
The House bill aimed to kill the credit. The measure faced lobbying by manufacturers, unions and environmental groups, and it did not make it into the final bill.
The credit is available on the first 200,000 EVs an automaker sells. Once a company reaches that level, the $7,500 credit ends at the end of that calendar quarter. It is reduced by 50 percent every six months until the credit is zeroed out.
Nuclear power is left out in the cold
The final bill did not include the continuation of a tax credit for nuclear projects brought online after 2020.
That was a blow for the Vogtle Nuclear Project in Georgia, which is behind schedule and $6 billion over budget at $20 billion.
The tax credit, equal to 1.8 cents per kilowatt-hour, was for nuclear plants brought into operation by 2020. The tax bill initially removed the 2020 deadline, but the final legislation did not extend the credit.
On Dec. 21, the Georgia Public Service Commission approved a motion permitting continued construction at the Vogtle project, which is slated for completion in 2022.