By Gabe Phillips, founder and CEO, Catalyst Power
Build Back Better (BBB), the major infrastructure bill that contains critical climate and energy proposals, may be back from the dead. That’s great news and offers an opportunity to improve its clean energy incentives so that all businesses — even small businesses — can be a part of the climate solution.
Signs of life for BBB came last week when prominent holdout, West Virginia Senator Joe Manchin surprised many when he stated that he thinks the climate change aspects of the bill are some of the easiest for Congress to agree on. This perspective from Sen. Manchin, who has been a major hurdle to climate action, is a welcome one.
How did we get to a place that the senator from West Virginia says climate action is “easy” to agree on? The answer is that, after decades of innovation, carbon reductions are not only doable but practical and economical.
The world has seen a significant shift in the last decade. Major companies are pledging to go net-zero. The largest banks and investment firms in the world are making similar shifts. Renewable energy investment is rising by the double digits.
If you think these huge, public companies are making these decisions strictly because they’re concerned about climate change, you’re fooling yourself. They’re making these investments because they’re smart and make financial sense.
But there’s an essential segment of the economy that is getting left behind — the middle market. Millions of small- and medium-sized commercial and industrial businesses don’t have the time, money or expertise to take advantage of these opportunities. These businesses represent a large section of the economy and climate emissions. These are businesses whose owners are looking for ways to help but have fewer options for their businesses to decarbonize than they do at their homes.
Including this part of our economy in climate action should be a no brainer. Commercial and industrial consumption accounts for 60% of the electricity usage in the United States and electricity generation produces 25% of our country’s carbon emissions. Shifting commercial and industrial electricity usage to renewables would make a significant dent in our national carbon footprint, and focusing our energy on mid-sized companies in this sector would offer a much stronger rate of return than individual efforts or further appeals to huge corporations. So why are these businesses being left out?
One reason is that most clean energy companies lack the appropriate incentives to offer innovative products and solutions to this customer segment. That’s something that could be fixed if Build Back Better gets another chance.
Right now, the biggest financial incentive for business to use solar power is the investment tax credit (ITC). The ITC grants a 26% tax credit to the owners of any solar project in the United States with a gradual phasedown. That should mean that any business or individual that installs solar panels on their property or invests in solar projects elsewhere should be able to use the credit. But that’s not how the ITC currently works.
As it stands, the credit from commercial solar projects is only available to individuals and organizations with the exact right kind of taxable income and/or corporate structure, making it way too much of a headache for smaller and mid-sized companies to even consider making the switch to renewables on their own. This makes clean energy companies that work with commercial organizations entirely dependent upon a very small group of financial institutions that can take advantage of the ITC. That group becomes even smaller when we consider that only institutions with a specific type of investment structure would find smaller commercial and industrial projects worth the logistical headache.
Congress and the Biden Administration can change that.
The solution is for all privately held businesses, no matter what their corporate structure or income classification, to also have access to the ITC and be able to use it against all their income, full stop. In addition, if solar developers were able to effectively lower their costs using the ITC, a third-party ownership model for renewables like solar would be much more viable and less dependent on the small clique of tax equity investors currently picking and choosing the industry’s winners.
The Biden Administration and Congress should take advantage of this second chance at Build Back Better to simplify ITC eligibility and distribution.
While their most recent plan has expanded ITC-eligible projects to include standalone energy storage, it makes no mention of modifying the actual ITC process itself. If small- and mid-sized businesses were guaranteed cash incentives to invest in renewable energy alternatives, we could marshal this huge part of our economy toward climate action. It’s a small change. But the change will allow smaller business owners to trust that these measures will positively impact their bottom line today and in the future — and allow us to start supporting a move in the ITC from a tax credit to a direct pay mechanism. These changes would mean the tax credit that already exists is more accessible to everyone. By switching the ITC to a direct pay, we can properly incentivize all American businesses to take positive climate action — and with it, unleash the power of millions of smaller businesses.
That type of broad-based climate action is something that everyone can get behind — maybe even Sen. Manchin.