Tax Incentives for US Renewable Energy: An Update
The UN Climate Change Conference (COP26) in November aims to commit countries to meet 2030 emissions reductions targets. Tax incentives to encourage the production of renewable energy can play an important role in achieving these targets.
This blog provides an update on President Trump’s tax reforms that impacted the US tax equity sector and discusses the more recent changes in the incentives available to renewable energy projects in the US. We’ll discuss potential future changes in a separate blog.
Tax equity – Incentives Available
On 27 December 2020, President Trump approved the Consolidations Appropriation Act 2021. The Act included the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Taxpayer Act), that extended the current solar investment tax credit (ITC) for two additional years, and the wind production tax credit (PTC) for one additional year. The US Treasury Department and the Internal Revenue Service also issued Notice 2021-05, providing an extension of the safe harbour for renewable energy projects located offshore or on federal land to receive PTCs and ITCs.
The Taxpayer Act extended the phase down period for eligible solar projects to claim the ITC. As a result, the available ITC for qualifying solar projects as revised by the Taxpayer Act is:
|Start of Construction||Available ITC Percentage|
The Taxpayer Act extended the eligibility period for qualifying wind projects to claim 60% of the PTC if they begin construction before January 1, 2022. The PTC is permanently reduced to 0% for projects that start construction during or after 2022.
As a result, the available PTC for qualifying solar projects as revised by the Taxpayer Act is:
|Start of Construction||Available PTC Percentage|
Offshore Wind Projects
Under Section 48 of the Tax Code, owners of qualifying wind projects can claim the ITC in lieu of the PTC.
The Taxpayer Act makes a distinction for the first time between offshore and onshore wind projects. It introduces a new 30% ITC for offshore wind projects that start construction between 1 January 2017 and 31 December 2025 recognising that offshore projects take longer to develop and construct because of the permitting and environmental challenges.
Safe Harbour Extension for Offshore Projects and Projects on Federal Land
Notice 2021-05 extends the safe harbour period up to 10 years after the start of construction for:
- Offshore Projects – qualified facilities that are placed in service in any inland navigable waters of the US or any coastal waters of the US; and
- Federal Land Projects – qualified projects, more than 50% of which will be placed in service on Federal Land (any land owned or controlled by the US), as determined by relative value or relative area.
To qualify, both offshore and federal land projects need to require the construction of one or more high voltage transmission lines to connect the qualified facility or energy property to the US electric grid.
Under the new guidance these projects can claim the ITC:
- if they start construction by 31 December 2025. The phase down of the PTC does not apply; or
- in lieu of the PTC if they start construction by 31 December 2025.
Prior IRS guidance had required these projects to be placed in service within four years after the start of construction unless certain conditions applied.
What has not changed?
The Taxpayer Act does not change:
- how “start of construction” is interpreted for qualifying wind and solar projects; or
- IRS guidance that requires a taxpayer to make continuous progress on a wind or solar project once construction has started; or
- IRS guidance that requires onshore (and not located on federal land) wind or solar projects to be placed into service within 4 years after construction has started or 5 years in the case of certain projects impacted by the COVID-19 pandemic.
Given the extension of the incentives, tax equity financing is likely to continue until at least the end of 2023 and, depending on potential future changes, could continue beyond this date. CoP 26 could also lead to more proposals being announced.
The need to track the returns of the tax equity investors and developer(s) involved, and the impact of available tax credits on projects, lend themselves to financial modelling. Operis has experience in building models to optimise tax equity structures and auditing models relating to tax equity financing to ensure that they correctly reflect the tax benefits and project cashflows to these parties involved.
If you have any questions regarding the above or would like to speak to someone at Operis about potential issues relating to tax equity structures, please don’t hesitate to get in touch.