U.S. Legislation Extends Tax Credits for Renewable Energy
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.