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Climate Change Blog

  • 04
  • January
  • 2016

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Renewable Energy Tax Credits Extended

On December 18, 2015, President Obama signed the Consolidated Appropriations Act, 2016 (the “Act”). As part of a heavily negotiated Congressional bargain to lift the crude oil export ban, the Act includes provisions that extend certain tax credits for renewable energy under the Internal Revenue Code of 1986, as amended (the “Code”), including the credits for wind and solar energy. The extension of these credits is expected to continue the significant growth in renewable energy projects constructed in the United States through the end of this decade. Many wind and solar developments had been placed on hold as only wind projects that had begun construction in or prior to 2014 and solar projects that would commence operations no later than December 31, 2016, would have qualified for tax credits under prior law.

Limited Five-Year Extension and Phaseout of Wind Facilities’ Production Tax Credit and Option to Elect the Investment Tax Credit

The Act includes a retroactive five-year extension, through December 31, 2019, of production tax credits (PTCs) for the production of electricity from wind energy. However, the inflation-adjusted credit rate for facilities that begin construction after December 31, 2016, will be reduced. The credit rate for facilities that begin construction in 2017 will be reduced by 20 percent, and the credit rates for facilities that begin construction in 2018 and 2019 will be reduced by 40 and 60 percent, respectively. The election to claim the investment tax credit (ITC) in lieu of PTCs for wind projects has also been extended for five years, and the same phase-out percentages apply.

Although the Act does not define when construction begins, IRS Notice 2013-29 (the “Notice”) states that construction of a qualified facility begins when “physical work of a significant nature begins.” Under the Notice, preliminary activities (such as planning or designing, licensing, obtaining permits, clearing a site, excavation to change the contour of the land or conducting surveys) will not qualify as physical work of a significant nature, regardless of the cost. The Notice explicitly states that beginning excavation of foundations, setting anchor bolts into the ground, or pouring concrete pads of the foundation will all constitute “beginning construction.” The Notice also provides an alternative safe harbor under which construction of a facility will be considered as having commenced if a taxpayer pays or incurs five percent or more of the total cost of the facility, not including land or any property not integral to the facility, and thereafter the taxpayer makes continuous efforts to advance towards completion of the facility.

Five-Year Extension and Phasedown of the Solar Investment Tax Credit

The Act includes a five-year phased extension of the 30 percent ITC for solar energy property, which under prior law would have dropped to 10 percent beginning in 2017. To be eligible for the 30 percent credit, solar energy property must have begun construction before January 1, 2020, and be placed in service before January 1, 2024. Under prior law, the 30 percent ITC was available only for property that was placed in service before January 1, 2017. The adoption of the “beginning construction” standard gives solar developers more flexibility and a longer time frame in which to complete construction. Under a phase-down rule, the credit rate for solar property that begins construction during calendar year 2020 will be 26 percent and for property that begins construction during calendar year 2021 the ITC rate will be 22 percent. Any property that is not placed in service before January 1, 2024, will continue to be eligible for a 10 percent ITC. 

Potential Five-Year Extension for Fuel Cells and Certain other Renewable Resources

House Minority Leader Nancy Pelosi stated that because of a drafting error, the five-year extensions of ITCs and PTCs did not include fuel cells, geothermal, and certain other renewable energy resources. Both Representative Pelosi and House Ways and Means Committee Chairman Kevin Brady stated that the decision to extend fuel cell, geothermal, micro-turbine and combined heat and power tax credits will be revisited before the credits expire on December 31, 2016. Although the Act did not provide a five-year extension for these credits, geothermal energy and certain other section 45 credits (discussed below) were extended for two years under the “extenders” bill. 

Two-Year Retroactive Extensions of Tax Credits for Renewable Energy Resources other than Wind

The Act includes a two-year retroactive extension of PTCs for other forms of renewable energy, including open- and closed-loop biomass, geothermal energy, landfill gas, trash facilities, hydropower, and marine and hydrokinetic facilities. Under this extension, PTCs will be available for such facilities that begin construction before January 1, 2017. The election to claim the ITC in lieu of PTCs for these facilities has also been extended for two years.

Two-Year Extensions for Other Energy Credits

Other energy tax credits have also been extended for two years, including the credits for biodiesel and renewable diesel fuels, alternative fuels, second generation biofuels, Indian coal, energy-efficient properties, alternative fuel vehicles and plug-in vehicles.

Extension and Phasedown of Bonus Depreciation

The Act extends bonus depreciation to property placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period). The bonus depreciation rate for property placed in service during 2015, 2016 and 2017 is 50 percent. The rate is reduced to 40 percent in 2018 and 30 percent in 2019. 

Bonus depreciation is available for use on assets with a Modified Accelerated Cost Recovery System (MACRS) recovery period of twenty years or less. Under MACRS, most renewable energy property has a five-year recovery period, including solar, wind, geothermal, combined heat and power, fuel cell and microturbine property, as well as renewable energy generation property that is part of a “small electric power facility” and certain biomass property.

Impact on the Renewable Energy Industry

The renewable energy industry has experienced numerous boom and bust cycles as a result of past tax credit extensions which only lasted for one or two years. The industry has pushed for a longer term extension that would give developers more certainty and ability to plan ahead, and the five-year extension in the Act does just that. The phasedown of tax credits for wind and solar property provides incentives for developers to begin construction of projects before the phasedown period begins, but also allows projects which are further away from construction to benefit from the reduced tax credits. Finally, the Clean Power Plan may also provide new types of incentives for renewable generation, and these incentives would begin right around the time when the tax credits are phasing out.

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