Energy

Renewable Energy Production Tax Credits Increased Following Inflation Adjustment | Insights

The U.S. Internal Revenue Service (IRS) recently published the inflation adjustment factor for the calculation of the Section 45 production tax credits (PTC), resulting in the increase of the PTC rate for wind and other various renewable energy resources to 2.7 cents per kilowatt hour (kWh). This increase in the PTC rate for calendar year 2022 would improve the tax benefits and economics of the relevant qualified projects.

Section 45 of the Internal Revenue Code of 1986, as amended (Code), provides that the base amount of the PTC is 1.5 cents per kWh for electricity produced from a qualified facility using wind or closed-loop biomass and sold to an unrelated person during the 10-year period beginning on the date on which the facility is originally placed in service. Such amount is to be adjusted annually by multiplying the credit amount by the “inflation adjustment factor” for the calendar year in which the sale occurs.

The PTC amount is reduced by half for electricity produced from a qualified facility using open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources.

The PTC amount is also subject to a phaseout if the “reference price” for the calendar year in which the sale occurs exceeds eight cents per kWh. Due to the current rates of the PTC and the updated “reference price,” such phaseout provision is not applicable.

On April 14, 2022, the IRS published a notice (FR Doc. 2022-07967) (Notice) that provides an “inflation adjustment factor” for calendar year 2022 of 1.8012 and a “reference price” for renewable electricity production from wind of 4.09 cents per kWh.

Applying this new inflation adjustment factor, the PTC for renewable electricity produced from qualified energy resources of wind, closed-loop biomass, and geothermal energy is increased from 2.5 cents per kWh in 2021 to 2.7 cents per kWh in 2022. The PTC for electricity produced from qualified open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy resources is increased from 1.3 cents per kWh in 2021 to 1.4 cents per kWh in 2022.

Such increase in PTC rates would improve the economics of currently operating qualified renewable projects and would allow developers and sponsors to adjust their models and pricing of projects currently in development or during construction, allowing for a better monetization of the relevant tax benefits. Due to ongoing inflation, we may see additional increases in the rate in 2023 or 2024. As such, additional consideration should be given in modeling future projects to account for an appropriate rate of inflation and projected PTC increases.

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