ITC & PTC Renewable Energy Incentives Wind Down for Wind
We’ve just made history.
For the first time, the U.S. produced more electricity from renewables than coal in April of 2019, according to the U.S. Energy Information Agency (EIA). The EIA also predicts that all renewables will produce 18% of U.S. electricity in 2019, and almost 20% in 2020.
The record-breaking performance comes at a time when two important U.S. federal renewable energy generation incentive programs are phasing out, specifically the Renewable Electricity Production Tax Credit (PTC) and the Business Energy Investment Tax Credit (ITC).
There is proposed legislation that could extend the value of the ITC and PTC tax credit to corporations and developers alike. However, without any amendments, here’s what will change by the end of 2019.
ITC & PTC reductions by December 31, 2019
The PTC, which was first enacted in 1992 and had multiple revisions over the years since, provides payments for those generating electricity from renewables, such as utility-scale wind power. According to the IRS:
The renewable electricity PTC is a per-kilowatt-hour tax (kWh) credit for electricity generated using qualified energy resources.1 To qualify for the credit, the electricity must be sold by the taxpayer to an unrelated person. The credit can be claimed for a 10-year period once a qualifying facility is placed in service. The maximum credit amount for 2013, 2014, 2015, and 2016 was 2.3 cents per kWh. The maximum credit amount for 2017 and 2018 was 2.4 cents per kWh. The maximum credit rate, set at 1.5 cents per kWh in statute, is adjusted annually for inflation.
Since 2016, the PTC has been stepping down by 20% per year. In 2017, for example, the payment for wind generation was $0.019 per kilowatt-hour (kWh) of electricity generated. By the end of 2019, the PTC for large-scale wind will step down another 20% and disappear altogether.
Conversely, the ITC represents an additional federal tax credit based on a percentage of the cost to build new renewable energy generation. Without political will and legislative extension, the ITC for construction (not generation) of large-scale wind (over 100 KW) generation ends on December 31, 2019.
For most renewable energy project developers and off-takers, the ITC incentives for solar and other technology, such as solar plus storage, are most important. The Solar Investment Tax Credit is also stepping down the end of this year. This article is a good source on calculating the solar ITC step down for your solar and solar plus storage investments.
Safe harbor: You have four years to complete a qualified project
Both the ITC and PTC have “safe harbor” provisions that allow qualification for the annual incentives even if the project isn’t finished or put into production that year.
For 2019, the IRS considers the safe harbor clause as met if at least 5% of the project’s total capital cost is incurred before January 1, 2020. An alternate and second way of satisfying the clause is through the Physical Work Test, which delineates certain construction tasks that are significant enough to contribute toward PTC qualification.
From the point of qualification, you have 48 months to complete the project and begin generating renewable energy. “Continuous construction” after the four-year deadline may result in disallowance and other penalties.
What should you do to capture the savings before they’re gone?
Both the PTC and ITC effectively reduce the costs to develop clean energy projects by reducing the tax burden on the developer, and these savings can then be passed along to the buyers in the form of lower prices for renewable electricity.
A Virtual Power Purchase Agreement (VPPA) is one means by which corporations gain lower costs and cut greenhouse gas emissions caused by powering their operations while also qualifying for incentive benefits passed through to them by wind and clean energy project developers. The VPPAs also offer plenty of additional benefits, such as hedging against future utility bill price increases.
However, like any major agreement, plan in enough time to find and negotiate your renewable energy agreements. Since it typically takes enterprises six months to a year to go from seeking a project to having a finalized contract — and developers need about a year between contract signing and getting to commercial operation — interested wind project buyers just beginning their search should expect to wait until the end of 2020 at the earliest for their projects.
Since 2020 is the cutoff for fully PTC-eligible projects, time is of the essence.
Your tax advisor and wind energy production partner, like Duke Energy Renewables, can help you focus and get started. For example, we can help you complete IRS Form 8835, “Renewable Electricity Production Credit,” and Form 3800, “General Business Credit.”