Increase in tax credits for the production of renewable energy following the adjustment to inflation | Knowledge
The U.S. Internal Revenue Service (IRS) recently released the inflation adjustment factor for calculating Section 45 Production Tax Credits (PTCs), resulting in the increasing the PTC rate for wind and other renewable energy resources to 2.7 cents per kilowatt hour. (kWh). This increase in the PTC rate for the calendar year 2022 would improve the fiscal and economic advantages of the eligible projects concerned.
Section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), provides that the base amount of PTC is 1.5 cents per kWh for electricity generated from a qualified facility using wind or biomass in a closed circuit and sold to an unrelated person during the 10-year period beginning on the date of initial commissioning of the facility. This amount must 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 halved for electricity produced from a qualified facility using open loop biomass, landfill gas, waste, qualified hydroelectricity and marine and hydrokinetic resources.
The amount of PTC is also subject to phasing out if the “benchmark price” for the calendar year in which the sale takes place exceeds eight cents per kWh. Due to current PTC rates and the updated “reference price”, this sunsetting provision is not applicable.
On April 14, 2022, the IRS issued a notice (FR Doc. 2022-07967) (Notice) which provides an “inflation adjustment factor” for calendar year 2022 of 1.8012 and a “price benchmark” for the production of renewable electricity from wind power of 4.09 centimes per kWh.
By applying this new inflation adjustment factor, the PTC for renewable electricity produced from qualified energy resources of wind energy, closed loop biomass and geothermal energy increases from 2.5 cents per kWh in 2021 to 2.7 cents per kWh in 2022. The PTC for generated electricity from qualified open-loop biomass, landfill gas, waste, qualified hydropower, and marine renewable energy resources and hydrokinetic increases from 1.3 cents per kWh in 2021 to 1.4 cents per kWh in 2022.
Such an increase in PTC rates would improve the economics of qualified renewable projects currently in operation and allow developers and developers to adjust their models and pricing for projects currently in development or under construction, allowing for better monetization of tax benefits. relevant. Due to continued inflation, we may see additional rate increases in 2023 or 2024. As such, additional consideration should be given to modeling future projects to account for an appropriate inflation rate and the planned CIP increases.