By: Brian Lips, Sr. Project Manager
For several decades, two federal tax credits have supported the development of solar, wind, and other forms of renewable energy: the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). The two tax credits have been both a lifeline and a source of ire for the renewable energy industry as Congress’ shifting priorities have sometimes made them unreliable. Congress allowed both tax credits to expire on several occasions or renewed them just before they expired, forcing developers into the difficult position of making business decisions in an uncertain environment. But other times Congress has given them long-term extensions or made significant amendments that increased their usefulness. All the while, the solar and wind industries have weathered this uncertainty, adjusting their business models as needed to adapt to the changing landscape.
At the end of 2024, the two tax credits will undergo another major transition. They are changing from technology-specific tax credits to technology-neutral tax credits for which any clean energy technology may be eligible, and can pick and choose between the two credits. As we say goodbye to the tax credits we once knew, let us take a look at their long history and their impact on the solar and wind energy industries.
The ITC
The ITC was originally enacted in 1978 and was initially worth 10% of the cost for solar and wind technologies. It was also refundable; if the credit was worth more than the taxes the taxpayer owed, the IRS would write them a check for the difference. Initially set to expire at the end of 1982, Congress later extended it through 1985, increased its value to 15%, and extended it to additional technologies, but revoked its refundability. With the Tax Reform Act of 1986, Congress extended the expiration date again, but made wind ineligible and introduced a stepdown to bring its value back down to 10% within 3 years.
The ITC was extended a few more times in the 1980s, each time being renewed shortly before its expiration date. It was allowed to expire for about a month in 1990, and then for four months in 1992. But when Congress renewed it with the Energy Policy Act of 1992, it was made permanent at 10%. The ITC remained stable as the solar industry slowly plodded along throughout the rest of the 1990s and into the 2000s. It then received its biggest enhancement to date with the Energy Policy Act of 2005 increasing its value to 30% of a system’s cost. However, the 30% increase was given its own expiration date, which would become a new source of anxiety for the solar industry as Congress would need to repeatedly extend it in the coming years. The Energy Policy Act of 2005 also created a new 30% ITC for residential systems, which itself would need to be renewed numerous times.
As time wore on and the solar industry grew, the industry developed new ways to monetize the ITC. Tax equity financing enabled investors with large appetites for tax credits to invest in projects until they had extracted all the tax value from it, at which point they would sell off their interest in the project. These types of structured deals enabled the first boom in large scale solar project development.
The Great Recession, which started in late 2007, greatly reduced the availability of tax equity financing. Many of the institutions serving as tax equity financers had suffered significant financial losses, erasing their tax burdens, and thus, their appetite for tax credits. As a result, the solar industry suddenly found itself struggling to find financing for their growing project portfolios. To address this concern, the American Recovery and Reinvestment Act of 2009 included a new mechanism through which the Treasury Department would issue cash grants in lieu of tax credits. The cash grants were initially authorized only for projects which commenced construction in 2009 or 2010, but was later extended to include projects commenced in 2011.
Congress next modified the ITC with the Consolidated Appropriations Act of 2016. That bill gave it a long extension, but also introduced a gradual stepdown in the value of the tax credit, similar to the Tax Reform Act of 1986. The credit would step down to 26% in 2020, then 22% in 2021, and then bottom out at 10% for commercial systems and 0% for residential systems in 2022. Over the next few years, Congress extended and altered the stepdowns to retain the value of the ITC before making their biggest changes to date with the Inflation Reduction Act.
The PTC
As the name implies, the value of the PTC is determined by the amount of electricity produced by a renewable energy system. The PTC was originally enacted by the Energy Policy Act of 1992 and took effect in 1993. Its value was initially set at 1.5 cents per kilowatt-hour for the first ten years of operation, to be adjusted annually for inflation. The Energy Policy Act of 1992 only authorized the PTC for 6.5 years, and Congress allowed it to expire on July 1, 1999. Congress eventually reinstated the PTC retroactively in December 1999, but the six months of uncertainty harmed the early wind industry, and left it with a growing concern that it could expire again.
This fear was made real again two years later when Congress let it expire at the end of 2001. This time it was dead for 3 months before being reinstated retroactively, only to expire again, this time for 10 months. Each time the PTC expired, the wind industry hunkered down and did not build new projects, choosing instead to wait until the credit was renewed. As show in Figure 1, each expiration of the PTC led to a significant decrease in wind energy installations.
Improvements
In 2009, as part of Obama’s American Recovery and Reinvestment Act, Congress made some significant changes to improve the usability of the PTC, and extended its expiration date for the longest time period since it was enacted. As it did with the ITC, the Great Recession dried up the tax equity market for the PTC. While Congress authorized cash grants in lieu of the ITC to remove this financing hurdle, doing so for the PTC would be challenging since it is paid out over time based on actual electricity production. Congress instead developed a unique solution for the technologies that are eligible for the PTC. Congress made the PTC technologies eligible for the ITC in lieu of the PTC for a period of time, which then allowed them to claim the cash grant in lieu of the ITC.
But then, of course, Congress fell back to its old ways and allowed the PTC to expire again. Congress renewed it again with the American Taxpayer Relief Act of 2012, which was signed on January 2, 2013. Since the PTC had expired for wind on January 1, 2013, its expiration was short-lived. However, the impact was exasperated by three words in the tax code, “placed in service.”
For its entire existence the expiration date for the PTC was based on when a system was placed in service. There is a lot of complicated guidance on what exactly that entails, but in essence, it means all the wind turbines are up and running and feeding electricity onto the grid. Given the length of time it takes to construct a modern wind farm with numerous multi-MW wind turbines, developers feared the tax credit might expire in the time between the project starting and being placed in service. To alleviate this concern, The American Taxpayer Relief Act of 2012 changed the expiration date to be based on when construction commenced while extending the expiration date to the end of 2013.
Congress then immediately tested this expiration date theory by letting the PTC expire and remain expired for 11 months. Congress eventually renewed the PTC retroactively through the end of 2014. Unfortunately, it was December 19, 2014 by the time it was renewed, and so it again expired a mere 12 days later. It then took Congress another 11 months to renew it retroactively. As demonstrated in Figure 1, each time the PTC expired, wind installations dramatically dried up.
Figure 1. Wind Energy Capacity Additions Over Time
Frazier, Allister, Marcy, Cara, & Cole, Wesley J. Wind and solar PV deployment after tax credits expire: A view from the standard scenarios and the annual energy outlook. United States. https://doi.org/10.1016/j.tej.2019.106637
When Congress renewed the PTC in December 2015 with the Consolidated Appropriations Act of 2016, it gave wind the longest runway since it was first enacted. The expiration date was extended for 5 years, but featured a stepdown in its value to mirror the stepdown Congress adopted for the ITC. Projects commencing construction in 2015 or 2016 would receive the full value of the PTC. Projects started in 2017 would receive 80% of the value of the PTC, then 60% of the PTC for 2018 projects, and 40% for projects started in 2019. After that, there would be no more PTC. As with the ITC, in the intervening years, Congress extended and augmented the stepdown multiple times before making its biggest change yet with the Inflation Reduction Act.
The Inflation Reduction Act and Beyond
The Inflation Reduction Act (IRA) made several fundamental changes to the ITC and the PTC. For the first time, Congress tied other policy goals to the two credits. Projects can receive bonus credits for using domestically produced equipment and being located in an energy community. For the ITC, the IRA also established bonus credits for projects located on Indian lands or low-income communities, and for projects that benefit low-income customers.
In an effort to ensure green jobs are good-paying jobs, the IRA also requires labor associated with the project to earn prevailing wages and utilize apprenticeship programs to receive the full value of the credits and any bonus credits the project pursues. The IRA also made permanent the ability for projects to choose between the ITC and the PTC, and it allowed for the transferability of the tax credits so that non-tax-paying entities can more easily monetize them. Another major amendment the IRA made was to change these credits, effective January 1, 2025, from technology-specific tax credits to technology-neutral tax credits. The two credits will function the same as before, but will be open to a wider class of zero or negative greenhouse gas emitting generation technologies.
The last major change the IRA made to the tax credits was to provide long-term certainty to the renewable energy industry. Rather than tying their expiration to an arbitrary date, thereby forcing additional legislation to keep the tax credits active, the IRA tied their expiration to the U.S. reaching certain targets for greenhouse gas reductions. Since a primary selling point for these technologies is the chance to avoid the most harmful impacts of climate change without reducing our standard of living, it makes sense to ensure these credits are around until the job is done.
The IRA established that the technology-neutral ITC and PTC will begin a new stepdown on the latter of 2035 or two years after the Treasury Secretary determines that there has been a 75% or more reduction in annual greenhouse gas emissions from the production of electricity in the United States as compared to the calendar year 2022. If the U.S. does not meet the 75% requirement by 2035, the ITC and PTC will continue to be available until it is met. With data centers expected to lead to explosive growth in electricity demand for years to come, there is a good chance that these tax credits will be available for many years after 2035.
In spite of their occasional expiration and perpetual uncertainty, the ITC and PTC have brought the renewable energy industry to heights that were hard to imagine in the 90’s and 00’s. As complimentary state-level tax credits and other incentives have come and gone, the ITC and PTC have continued playing a valuable role. As the two tax credits enter their next phase, the IRA’s long-term extension has made their continued existence more certain. Rather than inaction from Congress resulting in their expiration, it will now take proactive legislation from Congress to terminate them. Anything can happen in Congress, but the two tax credits are in a safer position than they have been in years.