Impact of a Renewable Energy Tax Credit extension and phaseout
Release Date: 9/15/16
As part of the 2016 Consolidated Appropriations Act enacted in December 2015 (H.R. 2029) [31], Congress extended the qualifying deadlines for the production tax credit (PTC) and investment tax credit (ITC) for renewable generation technologies. The deadline for PTC-eligible technologies to receive the full production credit was extended by two years. Wind technologies are eligible to receive the PTC beyond the two-year extension, but the value of the PTC declines gradually over time before final expiration. This extension is unlike the treatment in previous years, in which the tax credit maintained a constant inflation-adjusted value. The five-year ITC extension for solar projects also includes a gradual reduction in the value of the credit, as well as a provision that allows it to begin when construction starts.
History
Energy Production Tax Credit
The Energy Policy Act of 1992 [32] established a production tax credit (PTC) under 26 U.S.C. 45 [33], which now applies to wind and other renewable generation. With enactment of the American Recovery and Reinvestment Act (ARRA) in 2009 [34], a qualified wind facility was given the option to elect either a 30% ITC, or an equivalent cash grant (authority for which has since expired) in lieu of the PTC. EIA has generally assumed that wind energy projects prefer the PTC over the ITC, because the PTC typically is more valuable for power plants with high capacity factors and lower capital costs. The PTC is adjusted annually for inflation. As of the end of 2015, the PTC provided 2.3 cents/kilowatthour (kWh) for qualifying electricity production from wind, closed-loop biomass, geothermal, and certain waste energy facilities. The PTC also provided a half-value credit of 1.1 cents per kWh for qualifying electricity production from open-loop biomass, incremental hydroelectric, marine, tidal, and certain other waste energy facilities. Facilities qualified to receive the PTC if they were built within the timeframe specified by the law and its various extensions, and they were able to claim the tax credit on generation sold during their first 10 years of operation.
Energy Investment Tax Credit (26 U.S.C. 48 and 26 U.S.C. 25D)
The Energy Investment Tax Credit is a federal tax credit primarily claimed by solar systems on individually-owned residential systems (Section 25D) and business-owned systems (Section 48) [35, 36]. ARRA expanded the scope of the business credit, giving renewable electricity technologies otherwise eligible to receive the PTC the option to take the ITC instead. The ITC, based on a percentage of the amount invested in an eligible property, reduces the income tax paid by the person or company claiming the credit.
Originally established in the 1970s as a business tax credit for 10% of investment costs, the Energy Policy Act of 2005 (EPACT2005) [37] increased the value of the ITC to 30% and established a 30% tax credit for residential owners as well. Subsequently, the Energy Improvement and Extension Act of 2008 (EIEA2008) [38] extended the expiration date for projects entering service to the end of 2016, reverting to a permanent 10% credit for eligible commercial facilities entering service in 2017 and later, and ending the residential credit. EIEA2008 also extended the credit to 2017 for small wind energy systems and geothermal heat pumps, and the credits were further enhanced by the 2009 ARRA, which removed the maximum credit amount for all eligible technologies (except fuel cells) placed in service after 2008.
PTC and ITC provisions in the 2016 Consolidated Appropriation Act
The 2016 Consolidated Appropriation Act passed in December 2015 retroactively extended the PTC to the end of 2015. For wind projects, the tax credit retains its full value of 2.3 cents/kWh through 2016 and starts to phase out beginning in January 2017. Wind projects under construction after 2016 but before the end of 2017 are eligible to receive a credit equal to 80% of the current PTC value; those under construction in 2018 will receive a credit equal to 60% of the current value; and those under construction before the end of 2019 will receive a credit equal to 40% of the current value. The credits can be claimed during the first 10 years of a plant's operation. For other eligible technologies—including open- and closed-loop biomass, geothermal, certain waste energy facilities, incremental hydroelectric, marine, and tidal—the PTC was extended for two years, until January 1, 2017, with no reduction in value. Technologies eligible for the PTC still will have the option to claim the ITC in lieu of the PTC, but the subsidy will be subjected to the same value phaseout as the PTC.
Before December 2015, the value of the ITC was scheduled to drop from 30% to 10% of capital costs at the end of 2016. The 2016 Consolidated Appropriation Act enacted that month delayed the credit reduction, introduced a gradual phaseout of the credit, and changed the eligibility criteria. Qualifying projects now can claim the ITC for the year construction starts, as opposed to the year the project begins operation. For solar technology to be eligible, it must generate electricity or heat, or cool a structure. Passive solar building design and solar pool-heating systems are not eligible, but solar hot water heaters do qualify. Solar projects under construction before the end of 2019 will qualify for the full 30% ITC, and those starting construction in 2020 and 2021 will qualify for credits of 26% and 22%, respectively. Commercial projects under construction after 2021 will receive a credit equivalent to 10% of capital costs. Residential projects started in 2021 and finished by 2024 will receive a credit of 10%, but new residential projects constructed after 2022 will not receive a credit. Although the recent federal budget reconciliation bill extended residential and commercial tax credits for solar technologies, credits for technologies such as distributed wind and ground-source heat pumps were not extended.
The AEO2016 Reference case incorporates the gradual reduction in PTC value for wind and the extended expiration dates for all PTC-eligible biomass, geothermal, municipal solid waste, conventional hydroelectric, and onshore and offshore wind technologies. The ITC extension, phaseout, and change in qualifying criteria also are included in the AEO2016 Reference case for solar photovoltaic and solar thermal technologies. AEO2016 further reflects the extended tax credits for both residential and commercial buildings (Table LR3-1).
| Year | Wind PTC | Other PTC-eligible technologies |
Commercial solar ITC | Residential solar ITC |
|---|---|---|---|---|
| 2015 | 100% | 100% | 30% | 30% |
| 2016 | 100% | 100% | 30% | 30% |
| 2017 | 80% | -- | 30% | 30% |
| 2018 | 60% | -- | 30% | 30% |
| 2019 | 40% | -- | 30% | 30% |
| 2020 | -- | -- | 26% | 26% |
| 2021 | -- | -- | 22% | 22% |
| 2022 | -- | -- | 10% | 0% |
| 2023 and after | -- | -- | 10% | 0% |
| Sources: Production tax credits and investment tax credits included in the AEO2016 Reference case, 2015–23: U.S. Government
Printing Office, "H.R.2029 - Consolidated Appropriations Act, 2016, Public Law 114-113" (Washington, DC: December 18, 2015),
https://www.congress.gov/bill/114th-congress/house-bill/2029/text. Note: For commercial solar projects under construction before January 1, 2022, but not placed in service before January 1, 2024, the tax credit will be 10%. |
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Endnotes
- Congress.gov, "H.R.2029 - Consolidated Appropriations Act, 2016" (Washington, DC: December 18, 2015), https://www.congress.gov/bill/114th-congress/house-bill/2029/text.
- Library of Congress, "Bill Text, 102nd Congress (1991–1992), H.R.776.ENR, Energy Policy Act of 1992 (Enrolled Bill [Final as Passed Both House and Senate] - ENR)" (Washington, DC: January 3, 1992), https://www.congress.gov/bill/102nd-congress/house-bill/776/text/enr.
- U.S. Internal Revenue Service, Title 26–Internal Revenue Code, pp. 215–225, Subtitle A, Chapter 1, Subchapter A, Part IV, Subpart D, Section 45, "Electricity produced from certain renewable resources, etc.)," https://www.gpo.gov/fdsys/pkg/USCODE-2014-title26/pdf/USCODE-2014-title26-subtitleA-chap1-subchapA-partIV-subpartD-sec45.pdf.
- U.S. Senate and House of Representatives, 111th Congress, Public Law 111-5, "American Recovery and Reinvestment Act of 2009 (Washington, DC: February 17, 2009), https://www.gpo.gov/fdsys/pkg/PLAW-111publ5/pdf/PLAW-111publ5.pdf.
- United States Internal Revenue Code, Title 26, Subtitle A, Chapter 1, Subchapter A, Part IV, Subpart A, Section 25D, "Residential energy efficient property," https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartA-sec25D.pdf.
- United States Internal Revenue Code, Title 26, Subtitle A, Chapter 1, Subchapter A, Part IV, Subpart E, Section 48, "Energy credit," https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartE-sec48.pdf.
- Congress.gov, Public Law 109-58, "Energy Policy Act of 2005" (Washington, DC: August 8, 2005), https://www.congress.gov/109/plaws/publ58/PLAW-109publ58.pdf.
- Congress.gov, Public Law 110-343, "Emergency Economic Stabilization Act of 2008" (Washington, DC: October 3, 2008), https://www.congress.gov/110/plaws/publ343/PLAW-110publ343.pdf.