Consequences of the US tax overhaul and industry trends

​In a nutshell:

In record time, the US Congress drew up a joint tax reform bill and presented it to the President for his signature shortly before Christmas. Donald Trump signed the bill on 22 December 2017 and thus the tax code rewrite was signed into law. This feature discusses the essential implications for the renewable energy industry and presents the current industry trends.

Summary of the text in English:

• The US tax reform reduces or repeals tax credits in some areas. Some changes will not be effective until after 2018. The investment tax credit and production tax credit remain unchanged. This is a success for the renewable energy industry.

• There is no direct impact on the state legislation in terms of renewable energy resulting from the tax overhaul.

• 25 percent of all new electric generating capacity brought on-line in the U.S. from January until September 2017 has come from solar. However, the Solar Energy Industry Association is concerned about the possible impact of some new tax regulations on tax equity financing, and the final outcome of a trade dispute to impose tariffs on crystalline silicone PV and cell imports from all countries. This could hurt the industry because of supply shortages as the solar industry depends heavily on imports from other countries.

• The American Wind Energy Association welcomes that the Production Tax Credit and the Investment Tax Credit remain unchanged. The Association expects 85 billion USD worth of investments and 20.000 new workplaces in the industry until 2020.

• The Renewable Energy Industry managed to eliminate new tax provisions with potentially negative impact on the industry. This shows the importance and power of the industry to impact the legislation process. German companies should follow the development and watch out for business opportunities especially on a state level.

Significant legislative changes on federal level

Implications for the renewable energy industry arise from the following significant legislative changes.

• For wind energy producers, the new law repeals inflation adjustment for tax credits. At the same time, it reduces the tax credit from 2.4 US cents to 1.5 US cents per kWh. The legislative change applies to wind turbines whose construction starts after the effective date of the tax overhaul.

• For companies investing e.g. in small-scale wind turbines, fuel cell plants and CHP power plants, whose construction starts before 1 January 2022, subsidies change as follows. The tax credit is reduced for power plants whose construction starts in 2020 from 30 percent to 26 percent and to 22 percent in the case of power plants whose construction starts in 2021. If a fuel cell plant or a wind turbine is not commissioned before 2024, the tax credit will be 10 percent.

• For private individuals operating fuel cell plants, geothermal power plants and small-scale wind turbines to generate electricity as prosumers, the subsidies will be prolonged until 31 December 2021. Nonetheless, the percentage rates for power plants commissioned in 2020 will be reduced from 30 percent to 26 percent and to 22 percent in the case of power plants commissioned in 2021.

• The tax credits for solar and geothermal power plants will be repealed effective 2028.

Despite those changes, the renewable energy industry doesn't see only negative aspects of the tax overhaul. Maintaining the Investment Tax Credit and the Production Tax Credit is celebrated as a success. The sector's lobby group could impact the legislative process so that the needs of the industry were taken into consideration and, thus, the rules adopted by Congress in 2015 have remained unchanged.

Implications of the tax overhaul on state level

The tax rewrite has no direct implications for the state legislation. It remains to be seen how the federal legislative changes will affect the forecast growth in the renewable energy sector.

Other latest developments

The most recent market report by Solar Energy Industries Association states that the capacity installed in the third quarter of 2017 decreased year-over-year and was 2,031 MW. The report notes that the main reason for this decrease were shortages of supply. It also emphasises that 25% of all new electric generating capacity brought online in the USA in the first three quarters of 2017 has come from solar. Only the share of natural gas is higher.

The Solar Energy Industries Association sees, in particular, two sources of risk for the further economic growth.

• Due to the reduced tax rate and certain Base Erosion Anti-Abuse Tax (“BEAT”) provisions, investors could be willing to pull back from financing projects. This would be a severe blow to the industry. In the past, the so-called tax equity financing had established itself as a popular approach to financing projects. As part of this financing form, investors provide equity to special purpose vehicles and, thus, avoid external financing and the related interest payments. The aim of this form of financing is, in particular, to generate positive returns and enjoy the tax credits for renewables. This is because the use of a tax credit is possible only when there is a tax liability. It remains to be seen whether the feared investor pullback will materialise. By all means, it should be stated that one of the prerequisites for applying the BEAT provisions is that the company must generate at least USD 500 million p.a. over a period of 3 years.

• It is also not known yet what the final outcome of the petition filed to the U.S. International Trade Commission for imposing import tariffs on solar cells and solar modules will be. Suniva, a solar cell and module manufacturer, filed the petition in a bid to protect US manufacturers. The authority to decide on this matter rests with President Trump. The decision must be made by 26 January 2018 and was not yet known as of the editorial close date for the February issue of ENews. Imposing protective tariffs could, however, have unexpected consequences. If imports decreased, the reliance on foreign-manufactured products could lead to a decline in the installed MW capacity that should not be underestimated and could negatively affect companies and jobs. In addition, the costs of solar modules and solar cells would probably increase due to the constrained availability and would also contribute to the decline in the installed MW capacity if investors became more conservative due to the higher costs.

The American Wind Energy Association particularly welcomed the fact that the Production Tax Credit and Investment Tax Credit have remained unchanged. It is projected that investments of USD 85 billion will be made and 20,000 jobs created by 2020. The report for the third quarter of 2017 emphasises that the number of wind projects in the construction phase increased by 27% year-over-year. The capacity being installed as of the end of the third quarter was 29,634 MW and thus the highest since the publication of figures. Texas, Indiana, Oklahoma and California are the leading states in terms of installed capacity.

Conclusion  

This overview shows that the latest developments present a very mixed picture. Positive is that the renewable energy sector managed to reduce or even eliminate the planned changes to the subsidies law, which would have had a hugely negative impact if adopted. This shows the importance and power of the industry to impact the legislation process. German companies should continue to follow the developments on a state level with particular attention. This is because more and more states are starting to incentivise the use of renewable energy sources and this creates business opportunities. Meaningful is that 37 states and 4 territories have already committed to switching their electricity supply systems to a large extent to renewables in the years or decades ahead (until 2040).