On April 11, the Internal Revenue Service (IRS) announced an inflation adjustment increase in the production tax credit (PTC) for power sold in 2017 that is generated by wind, closed-loop biomass and geothermal projects to 2.4 cents/kWh from the prior 2.3 cents/kWh.
The inflation adjustment announcement is being published in the Federal Register today.
Such inflation adjustments are welcome news when announced, and they slightly goose the economics of the pertinent projects.
The PTC is available for a qualified project’s first 10 years of its power sales. Therefore, the adjustment applies to qualified 2017 power sales from new projects and also to 2017 power sales from projects placed in service during the prior 10 years.
Unfortunately, for owners of open-loop biomass, small irrigation power, landfill gas, trash, qualified hydropower, and marine and hydrokinetic facilities, the PTC for energy sold from those projects after application of a rounding convention remains at 1.2 cents/kWh.
For a wind project that “starts construction” in 2017 and manages to have energy sales in 2017, the PTC under the extension/phase-out enacted by Congress in December 2015 would be only 80% of the 2.4 cents/kWh (i.e., 1.92 cents/kWh).
However, the developers of most wind projects that will be placed in service in the near term have taken steps to meet the IRS’ guidance as to what was required to “start construction” prior to 2017 in order to qualify for the full PTC (100% or 2.4 cents/kWh, with this inflation adjustment).
Geothermal, biomass (open and closed loop), landfill gas, trash, small irrigation power, qualified hydropower, and marine and hydrokinetic facilities were excluded from the 2015 extension/phase-out. Therefore, in order to qualify for any tax credits, those projects must have started construction prior to the end of 2016. The exclusion was reportedly inadvertent, and in 2016, there were efforts to enact legislation to place such projects on comparable footing with respect to the extension/phase-out of wind projects, but there was insufficient bipartisan support in Congress for such legislation to pass.
In 2017, consideration of such statutory nuances has been off the table, given the legislative agenda of the administration and the majority leaders of each chamber of Congress.
The 30% investment tax credit for solar does not have a comparable inflation adjustment, as it is computed using the project’s tax basis rather than its energy sales.
This article was reposted with permission from law firm Mayer Brown’s Tax Equity Times. David K. Burton is a partner at the firm.