The Senate Finance Committee recently revealed its tax package which, despite being less drastic than the House version of the bill, is still set to relatively quickly phase out and terminate numerous clean energy credits and incentives provided for in the Inflation Reduction Act of 2022.
Current law provides for a production tax credit (PTC) for electricity produced by a qualifying wind or solar facility. The PTC is generally 0.3 cents per kWh but increases to 1.5 cents per kWh (i) for facilities with a maximum net output of less than 1 MW of electricity, (ii) if the prevailing wage and apprenticeship requirements are met, or (iii) if construction of the facility commenced before January 29, 2023 (Credit Enhancement Requirements). There are also additional enhancements if (i) the facility is located in an energy community or (ii) certain domestic content thresholds are satisfied (Additional Credit Enhancement Requirements). A taxpayer receives the PTC for a 10-year period after the qualified facility is placed in service.
Under current law, the credit is scheduled to phase out in 2032 or the calendar year in which domestic greenhouse gas emissions from the production of electricity are 25 percent of the amount emitted in 2022, whichever is later.
In lieu of the PTC, under current law, a taxpayer can claim an investment tax credit (ITC) of 6 percent of the qualified costs of the facility. This is increased to 30 percent of the qualifying costs if the Credit Enhancements Requirements are met. The tax credit rate is 50 percent if both the Credit Enhancements Requirements and both of the Additional Credit Enhancement Requirements are satisfied.
The House bill would have required construction of the facility to commence within 60 days of the enactment of the bill. If this requirement is met, both the PTC and the ITC would terminate for facilities placed in service after 2028.
As proposed by the Senate, both the PTC and the ITC will also be swiftly phased out, albeit not as quickly as under the House bill. Specifically, the phase out would commence in 2026 for electricity produced by qualifying wind or solar facilities. Those qualified facilities for which construction begins in 2026 will receive 60 percent of the value of either the PTC or ITC, and facilities on which construction begins in 2027 will receive 20 percent of the value of either the PTC or ITC. For any facility with construction beginning in 2028, neither the PTC nor the ITC would be available under the current version of the Senate bill.
Similar to the House bill, the Senate bill would also prohibit any credit for certain residential clean energy property leased to residential customers. Additionally, under the proposed Senate bill, the clean hydrogen production credit would cease to be available for facilities on which construction begins after December 31, 2025.
Under current law, Section 45X of the Internal Revenue Code provides for a credit for the domestic production and sale of components including wind, battery, and solar components (Clean Energy Components). Credits for Clean Energy Components were scheduled to begin phasing out in 2030. The House bill would have eliminated the credit for Clean Energy Components sold after 2027. The Senate proposal is the same as in the House bill.
With respect to facilities generating electricity through hydropower, nuclear, and geothermal technologies, both the clean energy production and investment credits would continue to be available for certain qualified facilities through 2036. The full value of the credit will be available for facilities beginning construction in 2033, with a step down in availability annually until 2036 when the credits will no longer be available.
While a final bill awaits, it seems the House and Senate are aligned in substantially paring back the availability of clean energy credits across multiple sectors, altering the landscape of clean energy production and investment. Attorneys at Barclay Damon will continue to monitor any updates to this bill and its impact on clean energy credits.
If you have any questions regarding the content of this alert, please contact Danielle Katz, counsel, at dkatz@barclaydamon.com; Matt Moses, partner, at mmoses@barclaydamon.com; or another member of the firm’s Energy, Regulatory, or Tax Practice Areas.