What Is the Production Tax Credit (PTC)
Production Tax Credit (PTC) is a federal incentive included under Section 45 of the U.S. tax code that reduces the cost of renewable energy projects. The credit is available for eligible technologies such as wind, solar, geothermal, and biomass.
This tax credit was created under the Energy Policy Act of 1992 and has been renewed and expanded several times. When it was first established, the PTC was only available if a project qualified for the specified date when it was placed in service.
In 2013, the PTC was again extended with some changes. This time, eligibility was based on the commencement of construction.
The Inflation Reduction Act of 2022 made some further important changes to the PTC, which affected its value and availability, while adding several new areas where credits can be claimed.
For example, production credits can now be claimed for electricity produced at eligible nuclear power facilities and the local manufacturing of parts for solar modules, wind turbines, and other related equipment.
This article will focus more on the Renewable Electricity Production Tax Credit.
Program Overview
Below are some important details regarding the Production Tax Credit Program.
Eligible Renewable/Other Technologies
Eligible technologies include Geothermal Electric, Solar Thermal Electric, Solar Photovoltaics, Wind (All), Biomass, Hydroelectric, Municipal Solid Waste, Landfill Gas, Tidal, Wave, Ocean Thermal, Wind (Small), and Hydroelectric (Small).
Applicable Sectors
The applicable sectors include Commercial and Industrial ones.
Tax Credit Amount
The Renewable Electricity PTC offers a tax credit to corporations for the production of electricity from certain renewable energy sources.
The credit is based on the type of renewable energy source used and can range from 1.3 cents/kWh (kilowatt-hour) for landfill gas, open-loop biomass, and municipal solid waste. For wind, closed-loop biomass, and geothermal resources, up to 2.6 cents/kWh credit is allowed.
There are also various incentives to promote the use of renewable energy and sustainable practices. For instance, zero-carbon electricity generation facilities placed into service after 2024 are eligible for a credit of $30 per MWh, which decreases to $23 in 2034 and $15 in 2035.
A $15 per MWh credit is also available for power produced at qualifying nuclear facilities.
Duration
Eligible renewable energy facilities can receive a tax credit for the amount of electricity they generate during the first decade of their operation under the PTC program.
Projects smaller than 1 MW are qualified for the credit if construction commences between December 31, 2021, and January 1, 2025.
For projects exceeding this size limit, construction can commence on or after January 30, 2023, which is 60 days after the IRS provides labor-related guidelines, but no later than January 1, 2025.
Process for Claiming
The credit can be claimed using two forms:
Determination of Commencing Construction
To qualify for the renewable electricity PTC, a facility must have started construction by the previously mentioned dates. The IRS has set guidelines to describe what this means and has established two methods to determine if a project has commenced construction.
The first is the "physical work test." This means that physical work of a significant nature, rather than significant cost, must have begun.
If the work performed is of a significant nature, then “there is no fixed minimum amount of work or monetary or percentage threshold required to satisfy the Physical Work Test.”
Some examples of actions that illustrate work of a significant nature include the following, as provided in Notice 2013-29:
- for a facility that produces electricity from a wind turbine, the beginning of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation;
- physical work on a custom-designed transformer that steps up the voltage of electricity produced at the facility to the voltage needed for transmission; and
- beginning construction of roads integral to the activity performed by the facility, including onsite roads used for moving materials to be processed (e.g., biomass) and roads for equipment to operate and maintain the facility.
The second method is the "5% safe harbor." This means that a taxpayer has incurred at least 5% of the total cost of the facility.
In addition, projects must ensure that workers involved in construction or maintenance are paid prevailing wages and that qualified apprentices complete a certain percentage of labor hours. The percentage of hours increases over time up to 15% in 2024 and beyond.
Expiration Date
The Internal Reduction Act has extended the renewable energy PTC until 2024. Previously, the PTC for wind energy projects expired by the end of 2021.
The renewable energy PTC typically lasts for 10 years after the date that the renewable energy facility becomes operational.
Wind energy projects that fulfill the new requirements and became operational after December 31, 2021, will be eligible for an inflation-adjusted credit for the first decade of electricity generation.
Benefits of Production Tax Credit
Below are some benefits of this program:
Reduces Reliance on Fossil Fuels
The PTC helps to reduce our reliance on fossil fuels by incentivizing the production of electricity from renewable resources.
Utilities can meet their renewable energy goals, and ratepayers can be confident that their electricity comes from a clean and sustainable source.
Drives Innovation and Economic Development
The PTC drives innovation in the renewable energy sector by supporting the development of new technologies.
As the cost of renewable energy decreases, more businesses and homeowners can invest in these technologies.
This leads to economic growth and job creation in the engineering, construction, and manufacturing industries.
Lowers Costs
The PTC lowers the cost of renewable energy by providing a tax credit for every kilowatt-hour of electricity produced.
The PTC has also been shown to lower the project financing cost by attracting private investment.
Reduces Carbon Emissions
Renewable energy generation reduces carbon emissions by displacing fossil fuels in the electric power sector.
This is important for both the environment and public health.
Final Thoughts
The Production Tax Credit is a vital incentive for developing renewable energy in the United States. Its main thrust is to encourage utilities to switch from dirty, carbon-intensive fossil fuels to cleaner sources of electricity.
As the cost of renewable energy decreases and more businesses and homeowners invest in these technologies, the PTC will continue to create jobs and spur economic growth.
Production Tax Credit FAQs
1. What is the Production Tax Credit?
The Production Tax Credit is a federal incentive that provides a tax credit for every kilowatt-hour (kWh) of electricity produced from eligible renewable resources.
2. What are other means of encouraging the switch to renewable sources of electricity other than giving incentives?
A good way to encourage renewable energy is to put a price on carbon. This would make dirty energy sources more expensive and incentivize utilities to switch to cleaner sources of electricity.
3. How do we put a price on carbon?
There are many ways to put a price on carbon, but the most common is through a carbon tax.
A carbon tax is a fee levied on carbon dioxide emission (CO2). The tax is usually imposed on fossil fuels such as coal, oil, and natural gas. The revenue from the tax can be used to reduce other taxes, such as income taxes, or it can be used to fund renewable energy initiatives.
4. Has the Production Tax Credit been successful in reducing carbon emissions?
Yes, the Production Tax Credit has been successful in reducing carbon emissions. According to the National Academy of Sciences, production tax credits for wind and solar energy reduced carbon dioxide emissions by $250 per ton.
5. How does Production Tax Credit drive economic development?
As the costs of renewable energy technologies decrease, the Production Tax Credit drives innovation and job creation in the engineering, construction, and manufacturing industries. When businesses and homeowners invest in renewable energy technologies, this spurs economic growth.
