Projected Impacts of Repealing the Section 45Y and 48E Technology-Neutral Clean Electricity Tax Credits

The Inflation Reduction Act replaced an assortment of technology-specific tax credits for clean electricity with two “technology-neutral” tax credits, the 45Y and 48E tax credits (named after their sections in the tax code). The 45Y tax credit is a “production” tax credit, which pays a set amount for every unit of electricity generated, while the 48E tax credit is an “investment” tax credit that pays a fraction of the capital cost for a qualifying generation or storage technology. Unlike previous iterations, these tax credits apply to any technology that can produce electricity with zero emissions. For more details, see On Deck for Treasury: The Inflation Reduction Act’s New Approach to Clean Electricity Tax Credits and The US Department of the Treasury’s Proposed Guidance for the Tech-Neutral Tax Credits Importantly, the expiration of these tax credits is based on the overall carbon intensity of the electricity sector rather than any specific year.

As the new administration and Congress contemplate proposals for the budget reconciliation process, these and other tax credits in the Inflation Reduction Act are on the table for potential repeal. In this issue brief, we explore the consequences of a repeal of these tax credits for retail electricity prices, consumer electricity bills, government expenditures, clean electricity, and emissions.

In addition to our reference case, we examine three additional scenarios to assess the impacts of high and low natural gas prices, as well as high electricity demand, on the consequences of a repeal. These scenarios encompass the main parameters known to affect electricity prices. Natural gas prices have displayed wide variation historically, and greater exports of natural gas would put upward pressure on electricity prices. Increased electricity demand, driven by electrification of end-uses or to power data centers and artificial intelligence, would also put upward pressure on electricity prices. We use a high-demand scenario taken from the National Renewable Energy Laboratory’s Electrification Futures Study to account for these factors.

We find that repealing these tax credits is modeled to:

• Increase nationally averaged electricity rates by roughly 5–7 percent across modeled scenarios in 2030, reaching a peak of 6–10 percent higher in 2035. These rate impacts translate into a $75–$100 increase in national average annual electricity bills in 2030, with a peak increase of $100–$160 per year (where the peak year depends on the scenario). Rate increases differ significantly by region, with the highest impact seen in the upper plains states ($300–$400 per year increases in the West North Central census region).
• Reduce tax expenditures by $190–$270 billion dollars over the ten-year budget window (2025–2034, cumulative real 2023 dollars). After 2035, the annual reduction in tax expenditures is $35–$50 billion per year, declining to $20–$35 billion per year in 2040.
• Increase power sector carbon dioxide emissions by 350 Mt–400 Mt CO₂ in 2035, with a cumulative increase in power sector emissions of 3,500 Mt–4,500 Mt CO₂ between 2025 and 2040.
• Reduce wind generation capacity in 2035 by 125 GW–225 GW and solar capacity in 2035 by approximately 175 GW. This is a coincidental convergence in 2035. The range increases to 175–225 GW in 2036 and remains at that level through the end of the projection period.

Figure 1 shows national projections for percent change in retail electricity prices. As the effects of the repeal compound, electricity prices increase by 6 percent in 2030 in all but the high natural gas price scenario, which has an 8 percent increase. After 2030, the price increase in the high natural gas price scenario reaches 10 percent, while the other scenarios stay between 6–8 percent. Price impacts are higher in the high natural gas price scenario because the repeal of the tax credits leads to greater reliance on natural gas, and the high gas prices are passed on to consumers through higher electricity prices.

Nationally, residential electricity bills increase by roughly $75 per year by 2030, and by values ranging from $75–$145 per year by 2035, with the highest average bill increase in the high natural gas price scenario. Figure 2 shows the effects of repeal on annual residential electricity bills by census region. We aggregate the New England and Mid-Atlantic census regions into a combined Northeast region due to their small sizes. See Figure 6 for a map of the US Census Regions. There is substantial variation across regions, reflecting the amount of renewable electricity generation that would otherwise have been incentivized by the tax credits in those regions. For example, the repeal of the tax credits leads to the greatest increases in electricity bills ($300–$400/year) in the upper plains states (the West North Central region). This increase is due to substantially less wind generation being built in those states under a repeal of the tax credits and instead being replaced with higher-priced generation. Regions losing a higher fraction of wind than solar, such as the West North Central region, tend to show the greatest increase in electricity prices in our modeling. This is because wind usually chooses to take the production tax credit (rather than the investment tax credit), which lowers the cost of generation during the tax credit’s ten-year duration. Solar, in contrast, at least in the early years of our projection, chooses the investment tax credit, which reduces the capital cost of the project but not the cost of generation, and capital costs are amortized over the lifetime of the project.

Figure 3 shows tax expenditures per year in each of the four scenarios. Across the scenarios, we find that 59–61 percent of the $190–$270 billion cumulative reduction in tax expenditures over the 2025–2034 period is due to the production tax credit (45Y). The total annual reduction in tax expenditures for both tax credits is between $35 and $50 billion in 2035. The high electricity demand and high natural gas price scenarios are projected to have the greatest deployment of renewable energy with the 45Y and 48E tax credits in place and accordingly see the highest decline in tax expenditures from their repeal.

Figure 4 shows the reduction in wind and solar capacity by region due to repeal of the 45Y and 48E credits. Wind capacity is reduced mainly in the center of the country, with the greatest reductions in the upper plains states (the West North Central Region). Solar power is reduced mainly in the Southeast and, to a lesser extent, the upper Midwest and Texas. These changes lead to an increase in nationwide emissions of 350 Mt–400 Mt CO₂ in 2035, shown in Figure 5, with a cumulative increase in emissions of 3,500 Mt–4,500 Mt CO₂ between 2025 and 2040.

RFF’s Haiku power sector model is used for modeling analysis of energy policy with a focus on the electric sector. Previous publications using the Haiku model can be found here. It has been deployed in various formulations for over two decades to analyze market-based mechanisms such as carbon pricing, tradable performance standards, and clean energy tax credits. We solve the model as a linear program for the lower 48 states with a 31-year time horizon (2019–2050), with each year divided into 24 time blocks across three seasons. We input data for existing electricity capacity and regionalized projections of future capital and operating costs from AEO 2021 and NREL-ATB 2023. The model does not represent barriers to the deployment of wind and solar such as interconnection queues.

For the purposes of this analysis, the model is most similar to the analysis done for the 2023 carbon score found here. Retail prices incorporate constant transmission costs on a per MW of capacity basis and assume 100 percent pass-through of subsidies. Residential electricity bills are calculated using the ratio between overall electricity prices and residential prices, by region, in the US Energy Information Administration’s Annual Energy Outlook (AEO) 2023 reference case. Retail prices and electricity bills are shown with a three-year centered rolling average to smooth the results and more closely reflecting rate and price adjustments in practice. The tax credits include a 3 percent haircut to represent the cost of monetizing the credits. The domestic content bonus is represented as a 0.5 percent annual increase in the credit starting in 2030, until it reaches 2050, when it is assumed all projects would qualify. The energy community bonus is calculated on a state-by-state basis based on the percentage of land that qualifies for the nonemployment requirements from this data.

The four scenarios we examine are based on the AEO 2023 reference case (Reference), the AEO 2023 high oil and gas supply case (Low Natural Gas Prices), the AEO 2023 low oil and gas supply case (High Natural Gas Prices), and the NREL Electrification Futures Study (High Demand Case). Our reference case does not include EPA’s regulation of power plants under section 111 of the Clean Air Act.