Exclusive: New Tax Rules Could Make It Cheaper to Hook Up Clean Energy to the Grid

It may soon be easier — and cheaper — to build a large-scale clean energy project in the United States.

Under a new and little-noticed update to a climate tax credit published last week, the government will now pick up some of the cost of connecting a new wind or solar project to the power grid.

The policy could ease one of the biggest barriers to the rapid transformation of the electricity system to fight climate change. It could save clean energy developers hundreds of millions in fees while potentially speeding the deployment of new renewable and low-carbon energy sources across the country.

The Treasury Department, which published the new rules governing the tax credit, declined to comment and referred me to earlier remarks from administration officials. In a statement last week, Deputy Treasury Secretary Wally Adeyemo said that the agency sought to give companies “clarity and certainty needed to secure financing and advance clean energy projects nationwide.”

The guidance would be particularly helpful for “small scale projects that need to connect to the grid,” he said. But a close reading of the guidance suggests that it may go further and help medium or large scale projects, deploying even more clean electricity to the grid than proponents had once envisioned.

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The expensive interconnection problem

The new tax credit appears to address a major obstacle to decarbonizing the grid: It’s very expensive to connect new wind, solar, and other resources to the electricity grid.

When a company proposes a new large-scale solar or wind project, it must apply to the local power-grid authority for permission to connect its new project to the grid.

This process — called the “interconnection queue” — can take nearly half a decade to complete in some parts of the country. More than 8,100 proposed projects — overwhelmingly wind and solar facilities — were waiting in the queue nationwide at last count.

Construction on those projects cannot begin until they receive approval. Only about one-fifth of wind and solar projects that enter the interconnection queue ultimately get built, according to a recent study from Lawrence Berkeley National Laboratory.

Even when a developer finally gets to the front of the line, the process is not over. Because America’s electricity law was written decades ago — when utilities added massive coal-fired power plants or hydroelectric dams to the grid — developers must pay the full cost of upgrading the entire local grid to accept electricity from a new project, even if that project generates relatively little electricity. These “network upgrade” costs are presented to developers as a surprise bill when they reach the end of the queue.

As the grid has gotten older and more congested, these costs have soared, Rob Gramlich, the founder and president of Grid Strategies, told me. A large solar project that costs about $180 million might now pay an extra $30 or $40 million in surprise network-upgrade costs, he said.

As these costs have rapidly increased, they have outstripped wind and solar developers’ ability to predictably budget for them. They are also sometimes large enough to kill the economics of a project.

In the Lawrence Berkeley study, researchers found that wind projects withdrawn from the queue had interconnection costs sometimes 10 times higher than projects that ultimately got built. Earlier this year, a renewable executive told The New York Times that interconnection costs have become the “no. 1 project killer.”

Those withdrawals can clog up the queue further, because proposals that cannot realistically pay the network costs slow down the process for everyone behind them.

An apparent solution stashed in tax guidance

But that could soon change. Under the new proposed guidance, at least 30% of a project’s interconnection costs could be covered by the investment tax credit, a climate-friendly subsidy in the Inflation Reduction Act.

While the investment tax credit was already known to cover small projects, the guidance suggests that it can now be used much more broadly. That could save some of the largest solar and wind projects more than $10 million.

Although this new tax credit will not address the underlying cause of high interconnection costs, it will “take the sting out of those charges,” Gramlich said, adding that it will “surely lead to many projects moving forward to construction instead of giving up and withdrawing their interconnection request.”

Utilities should like the new tax credit as well, he added, because it will help them build and own more of their own transmission lines. But the interconnection issue will only be totally solved when the Federal Energy Regulatory Commission, which oversees the country’s electricity grids, writes new rules governing the process, he said.

How the new policy works

The investment tax credit has long been one of the workhorses of American clean-energy policy. First created during the 1970s oil crisis, the tax credit initially paid businesses a 10% subsidy to switch to equipment that did not burn oil or natural gas.

The policy bumped along for decades, covering a fraction of the cost of a hodgepodge of clean-ish energy technologies. But last year, the Inflation Reduction Act made sweeping changes to the tax credit, allowing a huge array of climate-friendly energy sources to cover 30% of their costs.

The Treasury Department published draft rules governing those changes last week. The fact that the credit can now be used to pay for interconnection costs for large clean energy projects has not been previously reported.

The change rests on two terms used in the Inflation Reduction Act: “energy property” and “energy project.”

Under the climate law, an “energy property” is any kind of energy facility that qualifies for a 30% investment tax credit. A solar array, a wind turbine, and an industrial battery can all be an “energy property.” So, too, can certain types of electrical equipment — such as transformers or wiring — that might be shared across a clean energy installation.

An “energy project,” meanwhile, is defined in the law as one or more energy properties that connect to form a larger facility.

The Inflation Reduction Act made one more big change to the tax credit. Under the law, any “energy property” of less than five megawatts can have 30% of its interconnection costs covered by the investment tax credit.

This change, while celebrated by climate advocates, was previously assumed to cover only the costs of connecting a small renewable project — like a solar array on a warehouse roof — to the grid. For context, 5 megawatts is enough electricity to power perhaps 2,000 homes.

But remember that an “energy project” can be made up of several smaller and interdependent “energy properties.” So what if a solar developer, say, connected many small solar arrays — each an “energy property” — together into a single “energy project”? Would they be able to cover their interconnection costs under the law?

The new guidance says yes. Any “energy project” — even one large enough to power tens of thousands of homes — can qualify to have some of its interconnection costs covered as long as it is made up of smaller “energy properties” that are each no larger than five megawatts.

“If an energy project comprised of multiple energy properties has a combined nameplate capacity in excess of five megawatts, each of the energy properties would nonetheless be eligible to include amounts paid or incurred by the taxpayer for qualified interconnection property if each energy property satisfies the Five-Megawatt Limitation,” the guidance says.

The guidance goes on to say that the cost “to modify and upgrade the transmission system” can be covered by the tax credit even if those investments are made “at or beyond” the project’s connection to the grid.

Although the guidance is written in a technology-neutral way, it may not benefit all clean energy technologies equally. While a large solar or onshore wind farm can be broken into many five-megawatt segments, each offshore wind turbine generates more than five megawatts of electricity.

Each offshore turbine, in essence, may be too large to qualify as a standalone “energy property.” That said, the new guidance includes other changes that are more favorable to the offshore wind industry.

The guidance remains a draft proposal and has not yet been finalized. But due to an unusual attribute of federal tax law, companies can sometimes rely on proposed tax regulations as long as no final rule has yet been published.

Across the United States, more than 1.4 terawatts of proposed wind and solar projects are currently waiting in interconnection queues, according to the Berkeley National Lab study. That is more than enough to achieve President Biden’s goal of cutting power-sector carbon emissions more than 80% by 2030.

Read more about the investment tax credit:

Offshore Wind to Get a Little Tax Boost