Investment in renewable energies is one that has long been encouraged through incentives by federal, state, and local governments as well as utilities. Incentives have been in place to encourage the increased integration of renewables within the energy mix. These incentives have driven investment in renewable technologies by making the economics competitive with other investment options and, in the process, unlocked technological advances that have driven down costs and increased productivity. There are two long-standing federal incentives that are most meaningful for utility-scale solar and wind projects: Business Energy Investment Tax Credit (ITC) and Renewable Electricity Production Tax Credit (PTC).
The ITC is often the incentive that is associated with solar projects, although the extent of the sectors to which it is accessible is farther reaching than that. It was originally enacted by the Energy Policy Act of 2005 as a 30% tax credit for investments in solar projects and set to expire in 2006, but the Tax Relief and Health Care Act of 2006 extended it for one additional year. The Emergency Economic Stabilization Act of 2008 in response to the financial crisis extended the ITC for eight more years. The Consolidated Appropriations Act of 2016 saved the ITC from extinction and extended it for five more years with a step down to 26% and 22% for projects that started construction in 2020 and 2021 respectively. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 is the most recent change to the ITC and the current form of the incentives as of the time of this writing. The ITC has currently been extended indefinitely, with projects that start construction by 2020 receiving 26% ITC, projects starting construction in the years 2023-2025 receiving 22% ITC, and projects starting construction after 2025 receiving 10% ITC.
The ITC is an upfront dollar-for-dollar tax credit that is realized when the project is placed in service. Unlike the PTC, which we will discuss next, it does not have anything to do with the quantity of power generated from an investment but rest solely on how expensive the project is. Thus, two projects with the same project cost, but very different generation profiles would still receive the same incentive under the ITC. What does and does not qualify for the ITC is prudent to understand as well. In general, the bones of a project (panels, racks, etc.) are all eligible, but fewer and fewer things become eligible as you move closer to your step-up transformer.
As an example of how the ITC works, consider that you are making a $100 million ITC qualified investment in a solar project and start construction on it in calendar year 2021. In essence, as soon as the project is operating, you will realize a $26 million ($100 million multiplied by the 26% ITC rate for construction year 2021) tax credit. However, the federal government also realizes that there are tax incentives associated with the depreciation of solar assets. Therefore, if the investor opts in on the ITC, they must also reduce the depreciable basis of the investment by 50% of the ITC amount. Revisiting our example, this means that the depreciable basis for the $100 million project would be $87 million (arrived at by subtracting 50% of the $26 million from the $100 million investment).
The PTC, on the other hand, is often the incentive that is associated with wind projects, although, just like the ITC, the extent of the sectors to which it is accessible is broader. The PTC was originally enacted by the Energy Policy Act of 1992 as a 10-year $15/MWh (in 1993 dollars) tax credit for generation coming from wind projects. The amount of the PTC is adjusted every year for inflation. It was initially set to expire in 1999 but extended multiple times (Figure 3). Notably, The American Recovery and Reinvestment Act of 2009 also enacted a provision in which the ITC could be claimed in lieu of the PTC. When it was extended by The American Taxpayer Relief Act of 2012, the eligibility was also changed to consider when the project starts construction, rather than when it starts operating. The Consolidated Appropriations Act of 2016 extended the PTC through 2019. The credit was extended at the then current rate through 2016. However, a credit reduction of 20%, 40%, and 60% was also enacted to be put in place for projects that started construction in 2017, 2018, and 2019 respectively. The same credit reduction was applied to those that claimed the ITC in lieu of the PTC. Most recently, it was extended by The Taxpayer Certainty and Disaster Tax Relief Act of 2020 through 2021. Consequently, it was determined that the PTC will be effective at 60% of the full PTC rate in 2020 and 2021. At the time of writing, the PTC rate is $15/MWh for wind projects that start construction in 2021. Currently, the fate of the ITC and PTC moving forward are in limbo as the Build Back Better Act continues to be debated over. When there is a final change to the ITC and PTC, we will revisit this article with the details.
Get Energy Transition Research updates straight to your inbox by filling out the form below.