As the world increasingly recognizes the urgent need to transition to clean and renewable energy sources, governments around the globe are implementing various incentives to boost investment in the renewable energy sector. In the United States, two prominent incentives are the Production Tax Credit (PTC) and the Investment Tax Credit (ITC). Under the Inflation Reduction Act (IRA), these tax credits have been enhanced to further encourage the development and utilization of renewable energy projects. By gaining an understanding of how the IRA has enhanced its influence on renewable energy investment, investors can make more informed decisions when it comes to allocating their resources.
Production Tax Credit
The PTC has long been a crucial policy tool in promoting renewable energy in the United States. It provides a tax credit to project owners based on the electricity production from qualified renewable energy facilities. Historically, the PTC has primarily supported wind energy projects, but through the IRA, its scope has expanded to include other renewable sources such as biomass, geothermal, hydropower, and marine energy.
Investment Tax Credit
The ITC is another critical component of the U.S. government’s renewable energy policy framework. Unlike the PTC, which focuses on electricity generation, the ITC provides tax credits based on the capital investment in qualifying renewable energy projects. It applies to a wide range of technologies, including solar, wind, geothermal, fuel cells, and combined heat and power systems.
Comparing the PTC and ITC under the IRA
Under the IRA, the PTC and ITC are invaluable tools for accelerating renewable energy investment in the United States. With enhanced eligibility periods, increased credit rates, and broader technology coverage, the PTC incentivizes renewable energy production, particularly in the wind sector. The extended ITC eligibility and inclusion of energy storage systems under the IRA fosters the integration of renewable energy sources with storage technologies, ensuring a more resilient and efficient grid.
Notably, the IRA broadens the application of the investment tax credit to include standalone energy storage systems, allowing for energy storage technologies to qualify even if they are not integrated with a renewable energy power plant. This significant expansion addresses the need for grid-scale energy storage systems given the intermittent nature of renewable energy and will contribute to the development of a more dependable and efficient grid infrastructure. These standalone energy storage systems are able to qualify for the ITC, but not the PTC.
The IRA also now allows most taxpayers to buy and sell certain renewable energy tax credits, known as transferability. This creates a secondary market where taxpayers can monetize their tax credits by selling them to other parties, such as financial institutions or investors, who can utilize them to offset their own tax liabilities. By enabling the transferability of tax credits, the IRA enhances liquidity in the renewable energy sector and attracts more private capital to fund clean energy projects. Guidance has yet to be release on transferability, but additional details on what is known now and what answers we are looking for from IRS, FASB and others can be found in our Transferability blog series (Opportunities in the Transferability of Renewable Energy Tax Credits, What Do We Know About the Transferability of Renewable Energy Tax Credits? and Maximizing Benefits: How to Make the Most of Transferable Tax Credits) as well as our “IRA Insights: Transferability of Tax Credits” podcast episode.
As we move towards a cleaner and more sustainable energy future, these tax credits, backed by the IRA, play a crucial role in energizing the transition to a low-carbon economy. By comparing the PTC and ITC under the IRA, investors and stakeholders can better understand the incentives available and make informed decisions to support these types of investments. Our team of experts is well-equipped to provide you with comprehensive information and guidance tailored to your specific tax-planning or development needs. To gain further insights into the optimal tax credit investment strategy, we encourage you to contact our team today.