The reinstatement of the solar PTC has broadened the tax credit options for solar developers in the U.S… But should you choose the solar PTC or solar ITC to maximize the financial value of your project?
Regardless of the solar ITC or PTC, you may want to consider tax credit insurance to transfer the risk in your investment.
What Is The Solar PTC (Production Tax Credit)
The Inflation Reduction Act (IRA) of 2022 reinstated the solar PTC (production tax credit) after it had been unavailable since 2005.1
Unlike the solar ITC, which is an up-front tax credit based on the value of the system, the solar PTC is a tax credit that’s given over a 10 year period based on the kilowatt hour (kWh) production of the solar system each year.
Currently, the value of the tax credit is 2.6 cents per kilowatt hour over the 10 years…2
Note that project eligibility for the full solar PTC amount changes over time. Credit eligibility is subject to Treasury Department guidance, “Qualified Facility” compliance as defined in the IRA, including adherence to Section 13101(f) and new “prevailing wage and apprenticeship” requirements.
Part of Section 13101(f) is included below (full text here):
(f) Wage and Apprenticeship Requirements.--Section 45(b) is amended by adding at the end the following new paragraphs:
``(6) Increased credit amount for qualified facilities.--
``(A) In general.--In the case of any qualified facility which satisfies the requirements of subparagraph (B), the amount of the credit determined under subsection (a) (determined after the application of paragraphs (1) through (5) and without regard to this paragraph) shall be equal to such amount multiplied by 5.
``(B) Qualified facility requirements.--A qualified facility meets the requirements of this subparagraph if it is one of the following:
``(i) A facility with a maximum net output of less than 1 megawatt (as measured in alternating current).
``(ii) A facility the construction of which begins prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of paragraphs (7)(A) and (8).
``(iii) A facility which satisfies the requirements of paragraphs (7)(A) and (8).
Solar PTC vs. ITC
There is understandably confusion about the solar PTC vs. ITC and which factors are most important in choosing one over the other.
Both Cohn Reznick, a corporate advisory firm, and the U.S. Department of Energy offer helpful diagrams below that illustrate the breakeven point for choosing whether you may want to choose the solar ITC or the solar PTC, and compare the timing of the tax treatment for the ITC and PTC, respectively.
As seen above, Cohn Reznick’s chart compares the up-front cost per watt for the system and the net capacity factor of that system over time.
- Cost Per Watt: Cost per watt is the cost of the solar system to build, in $ per watt. As solar projects get bigger, the cost per watt falls. For larger projects with a lower cost per watt, you may decide to choose the solar PTC.
- Capacity Factor: Capacity factor is the ratio of actual electrical energy produced to the maximum potential at full nameplate value. For projects that have a higher capacity factor (actual production/nameplate capacity), i.e. have more direct sun exposure/in sunnier areas, choosing a solar PTC may make more economic sense than a solar ITC over time.
For utility scale projects, where the $/watt may be closer to $1.00 and the capacity factor is high, you may want to choose the solar PTC.
Conversely, projects with a greater up front cost (higher cost per watt, e.g. $2.00-$3.00/watt) and lower capacity factor, you may choose the solar ITC.
The table below from the U.S. Department of Energy provides a summary of the solar ITC and solar PTC values over time.
Note the terms of the IRA stipulate that the solar PTC will be replaced on January 1st, 2025 with the new Clean Energy Production Tax Credit (45Y), as described below.
Clean Energy Production Tax Credit (45Y)
Section 13701 of the Inflation Reduction Act created a new tax credit, the Clean Energy Production Tax Credit to replace the solar PTC as we know it for systems placed in service on or after January 1, 2025.
The new tax credit is not technology-specific.
In other words, the Clean Energy PTC applies to all zero emissions energy generating facilities. The Clean Energy PTC is subject to the same prevailing wage and apprenticeship requirements as the current solar PTC. Any projects that comply with the labor requirements may be eligible for the full value of the tax credit, adjusted for inflation.
The credit is scheduled to phase out as the U.S. meets greenhouse gas emission reduction targets.
For a project whose construction is commenced in the year following the year in which greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the 2022 levels, the tax credit will not be reduced.
However, for projects commenced in the second year following the target being met, the tax credit will reduced to 75% of what it would otherwise be.
Projects commenced in the third year will receive a tax credit that is reduced to 50% of what it would otherwise be.
All projects that commence afterwards will not be eligible for a tax credit.
Tax Credit Insurance
The risk of adverse tax treatment for a tax credit, such as the solar ITC or solar PTC can be reduced – or eliminated entirely – with tax credit insurance.
Tax credit insurance, also known as “tax equity insurance” or “tax liability insurance”, transfers the risk of a potential tax liability to an insurance company.
If the IRS or other tax authority disagrees with the intended tax treatment of a tax credit transaction, or a tax position you have taken in a particular tax year, tax credit insurance steps in.
A tax credit insurance policy allows you to to proceed with your investment while protecting you against tax recapture, possible fines, penalties, interest, legal contest costs and taxes due to federal or state tax authorities.
Tax credit insurance may be purchased on its own, or along with representations and warranties insurance. The former may broaden the coverage of the latter.3
Tax credit insurance may be used to reduce risk in day to day corporate operations as well as business transactions and M&A including, but not limited to:
- Tax equity investments
- Solar investment tax credit (ITC) transactions
- Wind production tax credit (PTC) characterization
- Risk management in tax treatment of routine corporate business operations
- Historical tax treatment by a target entity in an M&A transaction
- Foreign tax credits
- Opportunity zone tax compliance
- REIT structures
Tax insurance may be used by renewable energy project developers and tax equity investors as a risk management tool to protect tax treatment of commercial and industrial solar, wind and energy storage projects.
Tax insurance provides comfort to lenders and regulatory, compliance and credit committees when managing corporate risk.
As with all tax situations and decisions, you should talk with your insurance broker about tax insurance and consult with your attorney and/or accountant about the nuances of any tax credit.
Your project (and tax situation) is unique based on the physical specifics and timing and whether your project qualifies.
This article is for informational purposes only and does not constitute tax advice. Please talk with your tax preparer to understand how the IRS guidance applies to your specific situation.
Footnotes
- The solar PTC was available from 1992-2005. Since 2005, solar developers and tax equity investors relied on the solar investment tax credit (ITC) which the IRA also extended and increased to 30%... The solar ITC is a dollar for dollar credit equal to 30% of the value of the solar system that you're building, including the cost of the panels, the inverters, the infrastructure, the labor, the permitting, everything that would go into the cost of that system up front.
- The PTC, as written, has a full value of 1.5 ¢/kWh in 1992 dollars, but is adjusted each year using “GDP implicit price deflator” published by the Department of Commerce. The reduced “base rate” offered to solar systems that do not meet the prevailing wage and apprenticeship requirements has a value of 0.3 ¢/kWh in 1992 dollars. In the event of rounding, the 1.5 ¢/kWh rate is rounded to the nearest 0.1 cent, while the 0.3 ¢/kWh is rounded to the nearest 0.05 cent. The Internal Revenue Service publish a 2022 value of 2.6 ¢/kWh in May. Some have argued that with the passage of IRA, this value should be increased, however Treasury has yet to issue additional guidance.
- Tax related representations and warranties in a merger or acquisition are often excluded from a representations and warranties insurance policy.
