Manchin has indicated that he will not support a budget reconciliation bill that includes direct pay, in which payments are sent directly to companies that produce clean energy for consumers, according to the two individuals, who spoke on the condition of anonymity to describe the private negotiations. Politico first reported Manchin’s opposition to the proposal.
The Democrat from West Virginia has expressed concern that direct pay would be a handout to the private sector and could reward companies that are losing money, the two people said. He has also voiced concern that the policy could be inflationary amid the fastest inflation in four decades, one of the people said.
While the debate over direct pay is wonky, it has major implications for whether the United States deploys renewable energy projects at the speed and scale necessary to tackle climate change and meet President Biden’s clean energy goals.
The issue comes as Democrats face a narrowing window to pass the package, with just three legislative days left before lawmakers leave town for the Fourth of July holiday.
Here’s how direct pay works, why Manchin’s concerns are somewhat ironic, and why it all matters:
Clean energy developers often don’t have enough tax liability to use clean energy credits themselves. As a workaround, many developers go to the tax equity markets, where they trade the tax credits for a smaller amount of cash upfront.
But Democrats say this system is problematic because some of the value of the credit goes to financial markets, rather than clean energy development. They argue that direct pay is a simple solution.
“Current energy tax credits are often difficult to access, with big banks serving as middlemen for byzantine agreements,” Senate Finance Chair Ron Wyden (D-Ore.), whose panel has jurisdiction over the credits, said in a statement to The Climate 202.
“Our goal here is to make it easier for startups and nonprofits in particular to deploy the credits to fund projects,” Wyden added. “Cutting out the middlemen will help get projects off the ground more quickly.”
When asked Tuesday about direct pay, Wyden declined to comment on the specifics of the negotiations with Manchin.
In a twist, proponents say direct pay would help turbocharge the technologies that Manchin has publicly championed, such as nascent technology to capture carbon from the air and store it underground.
“The irony here is that some of the technologies that Manchin has been most publicly supportive of, like carbon capture and hydrogen in particular, would be most hurt by taking direct pay out of the tax package,” Sasha Mackler, who leads the Energy Project at the Bipartisan Policy Center, told The Climate 202.
“They have a harder time taking advantage of tax equity compared to some of the more mature technologies like wind and solar,” Mackler added.
It’s unclear whether Democrats can reach a compromise with Manchin that salvages some aspects of direct pay, or whether they will need to jettison the proposal to win his vote.
One individual familiar with the matter said a deal could be possible. “There’s a lot of middle ground between no direct pay and direct pay as envisioned in December,” the individual said, referring to when Manchin said he could not support the spending package in its current form.
However, another person close to the negotiations said it would be difficult to limit which companies could take advantage of direct pay, such as by excluding privately traded companies.
“I am not aware of a way to limit it,” the individual said, “that will make a difference to Joe Manchin.”
Sam Runyon, a spokeswoman for Manchin, did not respond to requests for comment.
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