On December 21, 2020, lawmakers on Capitol Hill passed a tax extenders package as part of a larger COVID relief bill, the Consolidated Appropriations Act, 2021 (the act). President Trump is expected to sign the act into law in the coming days. A summary of some of the key renewable energy provisions contained within the act follows.

Two-Year Extension of the 26 Percent Investment Tax Credit (ITC)

The act extends the ITC at the 26 percent rate for an additional two years. As such, the ITC rate for solar energy property—the construction of which begins in 2020, 2021, or 2022 and which is placed in service before January 1, 2026, will be 26 percent and for energy property the construction of which begins in 2023 and which is placed in service before January 1, 2026, will be 22 percent. Projects which begin construction before January 1, 2024, but which are placed in service after December 31, 2025, or which begin construction after December 31, 2023, will be eligible for the 10 percent ITC. The ITC rate remains 30 percent for solar energy property the construction of which begins before December 31, 2019.

Despite efforts from the renewable energy industry, the act does not provide for any option to receive a direct payment in respect of an ITC or PTC if a taxpayer has insufficient tax liability against which to utilize the credits nor does it contain a standalone ITC for energy storage systems.

One-Year Extension of the Production Tax Credit (PTC)

The act provides a one-year extension of the PTC for certain qualified facilities including wind, closed- and open-loop biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic renewable energy.

For qualifying wind facilities, the act provides that the 60 percent PTC rate will remain in effect for projects which begin construction before January 1, 2022. As such, the PTC rate for wind projects that begin construction (a) prior to December 31, 2016, is 100 percent, (b) during 2017, is 80 percent, (c) during 2018, is 60 percent, (d) during 2019, is 40 percent, and (e) during 2020 or 2021, is 60 percent.

The act also provides a one-year extension on the ITC-in-lieu-of-PTC election available under section 48(a)(5)(C).

The extension of the ITC and the PTC does not change guidance that the IRS previously issued with respect to the definition of "beginning of construction" (including a safe harbor which requires a facility to be placed in service within four years after the year construction began) and, as such, does not impact any strategies that taxpayers may have engaged in to establish "beginning of construction" with respect to ITC or PTC facilities.

Extension of ITC-in-Lieu-of-PTC Election for Offshore Wind Facilities

The act adds an election (effective retroactively to January 1, 2017) for taxpayers to elect to treat a "qualified offshore wind facility" as energy property eligible for the ITC. This election is not subject to the rate phaseout otherwise applicable to wind facilities under section 48(a)(5)(E), meaning that taxpayers are eligible for the full 30 percent ITC if construction of a qualified offshore wind facility begins before January 1, 2026.

Two-Year Extension of the Section 45Q Carbon Oxide Sequestration Tax Credit

In addition, the act provides a two-year extension of the section 45Q carbon oxide sequestration tax credit for qualified facilities the construction of which begins before January 1, 2026.

Extensions of the Section 25C Nonbusiness Energy Efficiency Tax Credit, Section 25D Residential Energy Tax Credit, and Section 45L Energy Efficient Homes Tax Credit

The act provides a one-year extension of the nonbusiness energy efficiency credit under section 25C for property such as certain heat pumps, air conditioners, fans, and biomass stoves and a one-year extension of the energy efficient homes credit available under section 45L. It also provides a two-year extension of the section 25D tax credit for qualified residential solar electric, solar thermal, wind, fuel cell, and geothermal property such that the rate for energy property expenditures in the case of such property placed in service in 2020, 2021, or 2022 will be 26 percent and in the case of property placed in service in 2023 will be 22 percent.