Federal Tax Incentives

The establishment of the federal Production Tax Credit (PTC) and Business Energy Investment Tax Credit (ITC) have significantly contributed to the investment and rapid development of renewable generation by essentially partnering renewable developers with large corporations (tax equity partners) who can provide capital in exchange for the benefit from the corporate tax credits. The PTC was first enacted through the Energy Policy Act of 1992 and the ITC was enacted through the Energy Policy Act of 2005. Both tax credits have lapsed and been renewed several times over the past few decades, limiting their effectiveness in certain years due to last minute or retroactive renewals. In fact, the PTC has been renewed a total of thirteen times![i]

Production Tax Credit

The production tax credit (PTC) is a production-based corporate income tax credit in which the owner of a qualifying project receives an incentive based on the amount that the project generates (per kilowatt hour) and sells, for the first ten years of operation. The incentive amount and the expiration date vary based on eligible technology and construction commencement date. For all non-wind qualifying technologies – geothermal, solar, biomass, qualifying hydro, municipal solid waste, landfill gas, tidal, wave, ocean thermal – in order to be eligible for the incentive, projects had to begin construction by December 31, 2017. For wind, the incentive begins to phase down (a percentage reduction in the credit amount) for facilities beginning construction after 2016 and sunsets altogether at the end of 2021 (see table below).

Production Tax Credit for New Wind Facilities

If construction begins: Estimated* allowable tax credit
After December 31, 2016 1.5 cents/kWh (100% of credit)
By December 31, 2017 1.8 cents/kWh (80% of credit)
By December 31, 2018 0.9 cents/kWh (60% of credit)
By December 31, 2019 0.6 cents/kWh (40% of credit)
By December 31, 2020 0.9 cents/kWh (60% of credit)
By December 31, 2021 0.9 cents/kWh (60% of credit)
After December 31, 2021 No credit (0%)

*Actual amount depends on IRS adjustment for inflation in the calendar year; 1.5 cents/kWh was the original amount when the PTC was first enacted in 1992 – due to inflation, that amount is closer to 2.5 cents in today’s dollars.

Per the Internal Revenue Service (IRS) guidelines, a project must comply with one of two methods that define the beginning of construction – a physical work test or a safe harbor rule. To meet the physical work test, a project must have begun “physical work of a significant nature” (for example, excavation on the foundation of a wind turbine, development of on-site step-up voltage transformer, or construction of on-site roads). The safe harbor rule requires the project to have incurred (or paid) at least 5% of the total cost of the project (and received the purchased equipment within 105 days after payment, known as the 3 ½ month rule). For both methods, continuous progress towards completion of the project must be demonstrated in order to remain eligible for the incentive. After satisfying the continuity requirements, the wind facility must be in service within four years of the start of construction (with exceptions, see Covid-19 Updates).

Investment Tax Credit

In contrast to the PTC, the investment tax credit (ITC) is a front-loaded incentive based on the initial capital expenditures of the project. The ITC is a one-time tax credit that can be claimed on corporate income taxes for a percentage credit of the cost of the project. While the ITC can be used for many of the same list of technologies that qualify for the PTC above, it has had a significant impact in the development of utility-scale, commercial, and residential solar systems. The ITC for utility-scale solar remains in full effect through 2022, at which point it began to phase down to eventually equal 10 percent in 2023 and every year thereafter for the foreseeable future. Developers of wind projects were able to claim the ITC in lieu of the PTC, however the credit is phasing down from 30% in 2016 to zero in 2022. The same IRS guidelines defining the beginning of construction for the PTC also apply to the ITC.

The newest technology to qualify for a tax credit is offshore wind. To claim the offshore wind ITC, a qualifying project must begin construction by the end of 2025. Once a project satisfies the physical work test or safe harbor rule, it must be in service within ten years.

Investment Tax Credit for New Solar, Geothermal, Onshore Wind, and Offshore Wind

If construction begins: Solar PV
Geothermal Onshore Wind Offshore Wind
By Dec 31, 2019 30% of initial capital expenditure 10% of initial capital expenditure 12% of initial capital expenditure 30% of initial capital expenditure
By Dec 31, 2020 26% 10% 18% 30%
By Dec 31, 2021 26% 10% 18% 30%
By Dec 31, 2022 26% 10% 0% 30%
By Dec 31, 2023 22% 10% 0% 30%
After Dec 31, 2023 10%* 10%* 0% 30%**

* And each year thereafter; ** Offshore wind is eligible for 30% ITC through the end of 2025

For new wind resources, the ITC and PTC were not assumed as part of the reference plant cost estimates. However, for new geothermal and new solar PV, the ITC was assumed and included in the capital cost of the reference plants. For some existing wind that qualified for the PTC when it was constructed, the PTC is applied.

Covid-19 Updates

In response to Covid-19 related construction and supply chain delays, Congress and the IRS have provided tax extensions and relaxed construction requirements.

On May 27, 2020, the IRS issued relief to renewable developers who were trying to comply with construction deadlines for their projects. For wind projects that began construction in 2016 or 2017, the IRS extended the construction window from four to five years, meaning that the project must now be in service within five years of the beginning of construction in order to qualify for the tax credit. In addition, for developers who were complying with the 5% expenditure safe harbor rule in order to qualify for the December 31, 2019 tax credit, the IRS has extended the usual 3 ½ month rule to allow for delays in equipment delivery.

In December 2020, the “Taxpayer Certainty and Disaster Relief Act of 2020” passed, extending the phase-out dates of both the PTC and ITC for certain technologies. In addition, the bill created a 30% ITC for offshore wind developments that begin construction by the end of 2025.

In addition, Covid-19 had an indirect effect on the financial health and profitability of tax-equity partners who collaborate with developers to take advantage of the tax credits. This may have introduced a level of uncertainty to some renewable investments, however the full effects of Covid-19 on the development of wind and solar, in particular, are not yet known.

[i] https://fas.org/sgp/crs/misc/R43453.pdf