The following is a contributed article by Bob Hinkle, President & CEO of Metrus Energy
While there has been a lot of focus on the ultimate size of the current reconciliation bill (likely to be sub $2 trillion in spending when passed), the lasting environmental value of this bill will be its ability to unlock and accelerate private investment in climate-positive projects that reduce greenhouse gas (GHG) emissions.
According to Bloomberg New Energy Finance, governments and companies will need to invest at least $92 trillion by 2050 in order to limit global temperature rise to the Paris Agreement's target of well below two degrees Celsius compared to pre-industrial levels. On an annual basis, this means global investment in the transition to a low-carbon economy needs to rise between $3.1 trillion and $5.8 trillion per year on average until 2050. All of this serves to underscore that successfully mobilizing private sector investment is a prerequisite to achieving President Biden's stated goal of reducing U.S. GHG emissions 50% below 2005 levels by 2030.
So, what's in the reconciliation bill that can spur private investment and third-party project finance in energy efficiency and renewable energy? The honest answer is not enough – but it could represent a good starting point for further needed action. Listed below are four key items to watch and push for as well as what is missing and will need to be rectified in the future.
Critical facility infrastructure
What's in? $500 million is slated through fiscal year 2030 for facility modernization which is linked to Open Back Better and supports critical facilities such as public and non-profit buildings, including schools, medical facilities, community buildings and libraries. Funds will go to the states and cover projects targeting resiliency, energy efficiency, power reliability, health and safety. (Although separate, and very much in flux, it's worth noting that the House of Representatives has a related provision – Green Federal Procurement – with $17.5 billion for federal clean energy investments, including buildings, EVs and procurement).
What's missing? Although investment in critical facilities is sorely needed — both from a climate readiness and deferred maintenance perspective — a key provision was dropped from the original draft of this bill that required the formation of private-public partnerships at the state level to leverage government funds on a four to one basis. This is a missed opportunity by the federal government, but one that individual states could (and should) include in the development of their own local programs.
National Climate Bank
What's in? $27.5 billion is called for over the next five years to fulfill the purposes of the legislatively proposed National Climate Bank. Approximately $7.5 billion is slated as competitive grants to states and local governments, tribal governments and others for financial and technical assistance to deploy zero-emission technologies and other GHG reduction strategies. Roughly $20 billion is budgeted for competitive grants to qualified non-profits operating a climate investment institution to fund qualified projects (broadly defined as projects, activities and technologies to reduce or avoid emissions) leveraging investments from the private sector. Of the $20 billion, $8 billion would be used to financially assist qualified projects in low-income and disadvantaged communities.
What's missing? The original language in this provision specifically identified energy efficiency as an authorized investment activity but was taken out. Although the current provision doesn't prohibit energy efficiency, not specifically calling it out overlooks the fact that energy efficiency can achieve over 50% of the U.S. GHG reduction targets by 2050.
179d tax deduction
What's in? The long-standing 179d tax deduction for installing energy efficient equipment in buildings would be expanded in several areas. First, the existing lifetime cap would be lifted for a three-year cap with the deduction ranging from $0.50 to $1.00 per sq. foot. A bonus deduction of $2.50 to $5.00 per sq. ft. would be available if projects meet prevailing wage and apprenticeship requirements. Both deductions are measured based on energy and power reductions of 25% or more as compared to existing buildings that meet relevant ASHRAE standards. These expansions are temporary through 2031, after which tax deductions would revert to the Energy Act of 2020. Importantly, the new proposal expands the transferability of 179d beyond public sector buildings to include projects for 501c3 entities (e.g., private, not-for-profit colleges and hospitals).
What's missing? Despite the importance of third-party financing of energy efficiency upgrades to meeting our climate goals, there is no transferability of 179d (e.g., to financing and engineering firms) for projects installed in private sector facilities. Presently, if a third-party finances and owns energy efficiency upgrades at a private sector building, neither the building owner nor the third-party financer (equipment owner) is eligible to receive the deduction. This runs counter to the intent of 179d and excludes financing solutions like Sustainable Energy-as-a-Service (SEaaS), which is rapidly growing, a key part of what Guidehouse estimates to account for $5.4 billion in investment in 2021, and is expected to grow at a compound annual growth rate of roughly 32% between now and 2030.
Clean Electricity Performance Program successor
What's (potentially) in? A scramble is underway to find a replacement (or a series of replacements) for the $150 billion Clean Electricity Performance Program (CEPP) that would have charged or paid electric utilities based on the share of clean energy they supply to consumers. The likely outcome is that a combination of different items will be added that in aggregate could fill the gap in GHG reductions created by CEPP's removal. Leading candidates include a grant program that would reward states (and utilities) for making progress tied to federally set emission reduction benchmarks. Other ideas include allocating some of the $150 billion that was earmarked for CEPP to added clean energy tax incentives or to new loan (or grant) programs focused on the industrial sector and domestic supply chains.
What's (potentially) missing? In two words: energy efficiency. Despite being the cheapest and quickest route to delivering a kWh from an energy resource perspective, the original CEPP framework did not allow utilities to achieve their targets by crediting energy efficiency. One silver lining of scrapping the CEPP is that new or alternative schemes could rectify this and put energy efficiency more front and center.
The climate portion of the reconciliation bill could reach $555 billion which is noteworthy. Regardless of the final amount, however, this bill must be viewed as an initial jumpstart to getting the U.S. fully back in the fight against climate change.
On Sunday. the United Nations Climate Change Conference (COP26) begins in Glasgow where the actions taken (or pledged) will reveal how feasible it is to attain the Paris Agreement goals. The latest IPCC report indicates this goal is still within reach but will require near-term transformational change. The reconciliation bill is a blunt budgetary instrument, by design. Going forward, the U.S. government needs to craft new climate policies that are specifically geared to fostering private sector investment. At present, we should be all in on this particular reconciliation knowing that the future will require bigger and bolder actions.
Correction: A previous version of this opinion piece had an incorrect number for the amount of money slated in the reconciliation bill for facility modernization.