On April 11, the 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, geothermal projects to 2.4 cents from the prior 2.3 cents per kWh. The inflation adjustment announcement will be published in the Federal Register on April 12.
Such inflation adjustments are welcomed news when announced and slightly goose the economics of the pertinent projects.
The PTC is available for a project’s first ten years of a qualified project’s power sales. Therefore, the adjustment applies to qualified 2017 power sales from new projects and also to 2017 power sales from projects placed service during the prior ten 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 per kWH.
For a wind project that “starts construction” in 2017 and manages to have energy sales in 2017, the PTC under the extension/phaseout enacted by Congress in December of 2015 would be only 80% of the 2.4 cents per kWh (i.e., 1.92 cents per kWh). However, the developers of most wind projects that will be placed in service in the near term took steps to meet the IRS’s guidance as to what was required to “start construction” prior to 2017 in order to qualify for the full PTC (i.e., 100% or 2.4 cents per kWh, with this inflation adjustment). Detail with respect to the start of construction rules is available in our prior post.
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/phaseout. Therefore, those projects to qualify for any tax credits 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/phaseout as wind projects, but there was insufficient bipartisan support in Congress for such legislation to pass. In 2017, consideration of such statutory nuances have been off the table given the legislative agenda of the administration and the majority leaders of each chamber of Congress.
The 30 percent investment tax credit (“ITC”) for solar does not have a comparable inflation adjustment as it is computed using the project’s tax basis, rather than its energy sales.