By Erik Lange
The U.S. Internal Revenue Code will continue to provide tax incentives
for renewable energy. On December 18, 2015, President Obama signed the Consolidated
Appropriations Act, 2016 (“Act”), which sailed through both the U.S. House of
Representatives and the U.S. Senate. The Act renews tax credit programs for both wind and solar electricity
generation for a specified period and incorporates a phase-out schedule for
these programs, providing some stability for these sectors of the renewable
energy market.
Section 45 of the U.S. Internal Revenue Code had provided a limited-time Production
Tax Credit (known as the “PTC”) per kilowatt hour of renewable electricity
production. However, the credit was only available to wind facilities for which
construction had begun before January 1, 2015. The American Wind Energy
Association (“AWEA”) indicates that the PTC has contributed to a wind-energy production increase of
more than 50,000 MW.
Under the Act, wind facilities for which construction
begins before January 1, 2020 will also now be eligible for the PTC program.
This change applies retroactively beginning January 1, 2015. The Act also
includes a phase-out provision, under which a 20% reduction applies to facilities
for which construction begins in 2017, a 40% reduction applies to facilities
for which construction begins in 2018, and a 60% reduction applies to
facilities for which construction begins in 2019.
Section 48 of the Internal Revenue Code has additionally provided an Investment Tax
Credit (known as the “ITC”) based upon a percentage of each energy property
brought into service during any taxable year. The Act allows a qualified wind
facility brought into service before January 1, 2020 to elect the benefits of
the ITC program rather than the PTC program. Similar to the PTC program, a
percentage-based phase-out applies for wind facilities entering the ITC
program.
According to the AWEA, the Act’s renewal of the PTC
and the ITC secures 73,000
American jobs. For solar energy
production, the ITC program was previously set to continue only through 2016.
Under the Act, the ITC program for solar energy will now continue through 2021.
However, this ITC extension for solar energy also includes a percentage-based
phase-out provision, under which the energy credit reduces from 30% to 26%
percent for facilities upon which construction begins after December 31, 2019
and to 22% percent for facilities upon which construction begins after
December 31, 2020. The Solar Energy
Industries Association estimates that the Act will add 220,000 new jobs by 2020, cut 100 million tons of
emissions, and lead to $133 billion invested in the U.S. economy.
Tax incentive programs for renewable energy can be
quite complex. However, as was demonstrated in the early years of these
programs, the United States is a leader in wind and solar renewable energy
investment when the financial implications are understood. The Act’s
extension of these programs now provides continued marketplace certainty
and should promote renewable energy investment once again.
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