Tax extenders included within the stimulus invoice to provide renewable vitality a lift | Pillsbury Winthrop Shaw Pittman LLP

In particular, the package includes a two-year extension of the investment tax credit (ITC) for solar projects by 26 percent, a one-year extension of the 60 percent production tax credit (PTC) for onshore wind turbines and a new ITC of 30 percent for offshore wind projects whose construction begins before 2026 , and a two-year extension to begin building carbon sequestration projects.

Without this legislation, solar projects that had not started construction by December 31, 2020 would only have received an ITC of 22 percent. Instead, the legislation extends the current ITC from 26 percent to the end of 2022. Solar projects that begin construction in 2023 qualify for an ITC of 22 percent, followed by a decrease to 10 percent ITC from 2024. This means that a solar project is eligible for more than 10 percent ITC can qualify, it must be in operation before 2026 and not as before in 2024.

Solar projects whose construction began in 2019 or 2020 are not affected. Projects that started construction in 2019 and 2020 are still eligible with an ITC of 30 percent and 26 percent, respectively. The Internal Revenue Service (IRS) requires projects to be completed within four years of the start of construction in order to comply with applicable Safe Harbor rules. Unless further guidance from the IRS is available, any project that began construction in 2019 or 2020 would need to be completed by the end of 2023 or 2024 in order to comply with the applicable safe haven, regardless of the longer out date in the updated law.

The legislation also provides for a two-year extension of solar credit for non-commercial residential real estate (for homeowner-owned systems) by 26 percent for 2021 and 2022 and 22 percent for 2023. The solar loan for non-commercial residential property is determined by the start date instead of the date construction started and ends in late 2023 with no 10% loan expired after 2023.

Onshore wind
Onshore wind projects starting construction in 2021 will now receive a 60 percent tax credit over a 10-year period (the same amount as projects starting construction in 2020). PTCs at 60 percent full rate currently cost $ 15 per MWh. The option to convert the PTC to a pre-ITC was also retained at a rate of 18 percent.

There is no legal deadline for an onshore project to be operational, but as with solar projects, such projects must meet the four-year safe haven for “continuity” as per IRS guidelines. A project whose construction begins in 2021 must be commissioned by the end of 2025.

Offshore wind
After years of lobbying for specific rules that take into account the longer construction / approval period compared to onshore wind, offshore wind developers are finally getting their wish. Offshore wind projects whose construction began after 2016 until the end of 2025 are now qualified for an ITC of 30 percent. In line with the PTC exit, offshore wind projects will not have the option to claim PTCs for power generation in lieu of an ITC for projects starting construction after 2021.

As with onshore winds, there is no legal deadline for commissioning the project. Without further guidelines for offshore wind, however, the developers would have to be finished within four years in order not to have to prove that the work is ongoing. The US Treasury Department is expected to consider extending the safe harbor period for offshore wind, likely between seven and ten years. However, it is uncertain whether this will ultimately happen.

Given the long development cycle and high construction cost of offshore wind turbines, this new benefit offers developers significant value and long-term predictability. This is likely to boost offshore wind development in the US, which has lagged behind developments in other global markets.

Carbon bond
The legislation expands the PTC for carbon sequestration. The deadline is a requirement for construction to start before January 1, 2026 and not, as previously stated, until 2024.

Other renewable technologies
Combined heat and power (CHP) projects, small wind, microturbine and fuel cell projects also received ITC extensions. Fuel cells and small winds get an ITC of 26 percent when they start building in late 2022, and 22 percent when they start building in late 2023. CHP and microturbine projects qualify for 10 percent if they start construction at the end of 2023. These projects are not subject to the same phase-out rules for solar projects. The bill also adds a new ITC for devices that generate electricity from waste heat from buildings and appliances. (The capacity must not be more than 50 MW.) Construction must begin before 2024 and cease at the same time as fuel cell projects.

Other renewable energy projects that qualify for PTCs (biomass, geothermal, landfill gas for electricity, waste for electricity, hydropower, marine hydrokinetics) also received a one-year PTC extension. Projects starting construction in 2021 would receive the full PTC amount available for such projects.

The legislation also provides for a number of other tax credit extensions, including:

  • Qualified fuel cell vehicles. Extends a tax credit for purchases of new qualifying fuel cell vehicles through 2021. The credit ranges from $ 4,000 to $ 40,000, depending on the vehicle weight.
  • Alternative fuel real estate credit. Extends a loan to install alternative fuel vehicles including ethanol, biodiesel, natural gas, hydrogen and electricity through 2021. Funds are capped at $ 30,000 per location for commercial property and $ 1,000 for properties installed in a primary residence.
  • Deduction of energy-efficient commercial buildings. Allows permanent deduction for energy efficiency improvements in building envelope, lighting, heating, cooling, ventilation, and hot water systems of commercial buildings and indexes inflation to the amount of the limit of $ 1.80 per square foot.
  • Second-generation biofuel maker loan. Extends the $ 1.01 per gallon tax credit for second generation biofuels sold at retail, into the fuel tank of a buyer’s vehicle, or second generation biofuel blends that are sold or used as fuel by 2021.
  • Not business energy property. Extends a credit for the purchase of non-commercial energy property until 2021. The provision provides a 10 percent credit for qualified energy upgrades to the building envelope of primary residences and also allows for fixed dollar credits between $ 50 and $ 300 for energy-efficient properties.
  • Two-wheeled plug-in credit for electric vehicles. A credit of 10 percent will be granted for two-wheeled plug-in electric vehicles that are suitable for motorways until 2021. The balance is capped at $ 2,500. The battery capacity in the vehicles must be at least 2.5 kWh.
  • Production loan for Indian coal power plants. Extends a $ 2 per tonne manufacturing tax credit for coal produced on Native American tribe properties through 2021.
  • Energy efficient home loans. Until 2021, the loan will be extended up to $ 2,000 for qualified new energy efficient homes.
  • Extension of the excise tax credits for alternative fuels. Extends an excise tax credit of $ 0.50 per gallon or alternative fuel payment and $ 0.50 per gallon credit for alternative fuel blends through 2021.
  • Expansion of the energy credit for residential buildings and expansion to biomass fuels. Extension of the loan for energy-efficient properties for residential properties at the current rate of 26 percent for real estate in operation until 2022, reduced to 22 percent for real estate in operation in 2023. From 2021, the provision will expand the definition of eligible real estate to include qualified energy-efficient biomass fuel properties.

Error addressing the independent energy storage
This legislation puts many items on the renewable energy developers Christmas list. A major loophole in the legislation, however, is a separate ITC for energy storage. The standalone loan proposal has been sought by the industry for several years and incorporated into various previous legislative efforts, but it still remains on the cutting room floor. In this case, it appears to have been embroiled in a dispute over whether utility companies need to normalize storage in order to maintain ITC. It is unfortunate that this point has been ruled out as a resource-independent stand-alone tax credit for energy storage would have given energy projects a broader boost.

Another notable item that, despite considerable lobbying, was not included in year-end legislation is a “direct pay” or “refundable” ITC / PTC provision.

While it is unfortunate that neither the standalone storage balance nor the direct payment option were included in this stimulus round, we likely haven’t heard the last of these concepts. It is expected that the renewable energy industry will have ample opportunity during the future Biden administration to continue building on the gains made in this legislation.

Final thoughts
The far-reaching nature of renewable energy tax expansions will certainly stimulate billions of dollars in renewable energy investments and help fuel our country’s economic recovery with job growth. Some of these provisions may have been enacted under the new administration, but the extensive additions now allow for better predictability and multi-year planning.

While positive overall, the unexpected changes in ITC and PTC exit rates may lead some developers to try to change the arrangements made for construction to start in 2020. The expansion has a particularly negative impact on the value proposition for solar developers who placed large equipment orders in 2020 to secure tax credits with a 26 percent tax credit for a large number of future projects that would now likely qualify with a 26 percent tax credit regardless .