At long last, technology-neutral tax credits are here

Clarity on how the clean electricity production and investment tax credits will work is coming.

• The top line: The Biden administration is expanding popular tax credits for solar and wind to include more clean technologies, including geothermal and nuclear fission and fusion. Proposed guidelines, released in an unpublished form this week, would create new clean energy investment and production tax credits (or ITC and PTC). The renewables industry has long clamored for these rules, which are expected to yield both clarity and flexibility for their projects.
• The market grounding: One major Inflation Reduction Act calling card was to sunset the existing ITC and PTC — which had to be re-upped every few years by Congress — and replace them with the technology-neutral credits for projects starting operation from 2025 onward. These credits will remain in place until 2033. 
• The current take: The industry seems to be breathing a sigh of relief. Rodrigo Inurreta Acero, who leads federal affairs for EDP Renewables North America, told Latitude Media that the change to the tax credits “might be the single most consequential and beneficial change introduced by the IRA for our industry.”

Included among the technologies newly recognized under the guidelines are hydropower, nuclear fission and fusion, geothermal, and others. Assuming the guidelines are finalized in something close to their current form, these will be eligible for the lucrative tax credits that solar and wind have already benefited from beginning next year. Those existing tax credits have amounted to up to 30% if all conditions are met. 

And stand-alone storage will be newly eligible for the ITC specifically. This is one of the reasons that Inurreta Acero said the new rules will give developers more flexibility. 

“In the past, the storage system had to be coupled with a generation unit, which limited our ability to capitalize on the fact that storage systems require smaller areas to be placed in service,” he said.

The reception from the industry has so far been warm. For instance, the American Clean Power Association said in a statement that the guidance “will help provide a stable, workable transition for energy market participants to the new emissions-based system for energy tax incentives.”

The IRS will officially publish the proposed guidelines on Monday, giving stakeholders until early August to comment. Those comments will inform the rules’ final form, expected later this year.

A public hearing will be held on the rules on August 12 and 13.

ITC versus PTC choice

Under the IRA, solar developers have had the choice between the PTC and the ITC. Research from ICF found that the ITC has tended to be more beneficial to solar developers in most situations. 

Asked whether the new rules will change how EDP Renewables considers which credit to use, Inurreta Acero said he anticipates they won’t, because the most important factor in that decision today is production (or capacity factor), which won’t be impacted by the tax credit. 

“If production is high, a generating unit tends to financially benefit more from the PTC; if production is relatively low, the ITC tends to be a better choice,” he said.

Editor's note: This piece was updated on May 30 to fix a factual error in Rodrigo Inurreta Acero's quote about how EDP considers which credit to use. The most important factor is production/capacity factor, not local electricity prices.