With new tax credits, clean energy beats gas plants almost every time

One of the most consequential choices facing the U.S. power sector is whether or not to keep building new fossil-fueled plants. And the passage of the Inflation Reduction Act last August irrevocably altered the economics of this choice.

Having displaced coal as the workhorse of the grid in the last couple of decades, fossil gas delivers more electricity in the U.S. than any other source. New gas-fired power plants remain the default choice when utilities need to know they’ll have power on demand — something that wind and solar cannot promise on their own.

But analysts and climate advocates argue that portfolios of complementary clean energy tools can play a similarly reliable role for the grid. Instead of one large gas plant, mixtures of solar, wind, energy efficiency, flexible consumer demand and energy storage across a given region can deliver power throughout the day and night, without greenhouse gas emissions.

Going forward, the economics of these portfolios will almost always be a better deal than building more gas plants, thanks to a bunch of new federal incentives in the Inflation Reduction Act, according to a recently published analysis by climate think tank RMI. (Canary Media is an independent affiliate of RMI.)

“The math on the next right investment has changed,” said Lauren Shwisberg, a principal at RMI’s carbon-free electricity program and author of the new analysis. ​“Decisions that are based on pre-IRA assumptions may no longer be what provides the greatest savings for customers.”

The landmark climate legislation institutes a decade of clean energy tax credits tied to policy goals including labor standards, stronger domestic supply chains and investment in communities that are affected by the energy transition. If clean energy plants access the maximum tax credits allowed, they’ll outcompete 99 percent of the gas plants slated for construction between now and 2035, according to RMI’s analysis.

That’s a stunning fall in gas power’s cost-competitiveness. But a 99 percent win rate for clean energy may be a tad optimistic: To get the biggest possible tax credits (a 50 percent credit on the upfront investment, or $31.2 per megawatt-hour produced), projects need to stack bonuses by using domestically produced materials and building in ​“energy communities” that used to host coal plants, for instance. The IRS is still writing the fine print on how to qualify for those, so it’s too early to know how feasible it is for developers to layer all the necessary requirements.

But clean energy options perform nearly as well in scenarios with lower levels of tax credits.

If eligible carbon-free projects claim a 40 percent Investment Tax Credit, they’ll beat 95 percent of pending gas plants on overall cost. And if they only claim a 30 percent credit, which requires paying workers at local prevailing wages and incorporating apprenticeships, then the clean energy options still beat 93 percent of gas plants.

Interestingly, carbon-free projects were gaining ground even before President Joe Biden signed the climate legislation this summer. RMI’s model found clean energy options beating 72 percent of proposed gas plants prior to incorporating the IRA changes. But the law undoubtedly accelerated the momentum.

“The analysis shows that the utility should be asked what the alternatives are because it’s very likely that there’s a more cost-effective set of options,” Shwisberg said.

Whether utility companies pay attention to this argument is another matter. Utilities know and trust gas plants; they tend to be leery of the notion that a diverse portfolio of clean energy tools working in unison performs as well. And utilities don’t make investment decisions based on third-party researchers concluding that something is a good deal for customers.

But the conclusions from this and other analyses of the IRA’s impacts absolutely could inform the inputs and assumptions that utilities use to calculate what new power plants they need to build.

“Utilities always model resource costs in their plans, and those right now are largely pre-IRA numbers,” Shwisberg said. ​“What we want to see is those resource costs being updated to reflect these new credits.”

When utilities do update their numbers, the results are promising. Michigan utility DTE got out in front of the trend. Its long-range plan filed in November will save customers an estimated $500 million over 20 years using IRA tax credits.

If utilities fail to accurately update their cost assumptions based on the IRA, those assumptions will lose their grounding in reality (imagine not factoring an available half-off deal into your purchasing decision). That could saddle customers with extra expenses while locking in fossil fuel consumption for decades to come.

One practical obstacle to carrying out this clean energy vision is that, well, someone’s got to do the math.

“It’s a lot of work to put together a really good set of cost projections,” Shwisberg said. And there’s still uncertainty around future costs for some of these technologies, not to mention near-term volatility caused by recent supply-chain disruptions. ​“But it’s definitely worth trying” to capture the new post-IRA reality, she said.

Other roadblocks to turning the analysis into action are more methodological.

RMI’s Clean Energy Portfolio model takes a regional approach, inputting localized costs and availability of all the different grid technologies within each balancing area of the grid. Then it picks resources that can meet the needs of energy production, peak capacity, and response time or ramp rate. Gas price fluctuations over the next 15 years will influence which grid investments ultimately make sense.

RMI’s model factors in regional transmission costs, Shwisberg noted, but it can’t predict whether particular transmission projects will get built or canceled. It’s possible that slowdowns in transmission construction or other barriers to grid access will make clean portfolios impractical for certain locations.

But in another sense, the analysis is conservative, because the tax credits it models are only one part of the sweeping climate law. The IRA also creates various grant programs and transition financing to support the shift to clean energy, so clean energy developers could unlock even more ways to improve their project economics.

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