In particular, the package includes a two-year extension for the investment tax credit (ITC) for solar projects at 26 percent, a one-year extension of the 60 percent production tax credits (PTC) for onshore wind, a new 30 percent ITC for offshore wind projects that begin construction prior to 2026, and a two-year extension to start construction for carbon sequestration projects.

Solar
Without this legislation, Solar projects that did not begin construction by December 31, 2020, would have only been eligible for a 22 percent ITC; instead, the legislation extends the current 26 percent ITC through the end of 2022. Solar projects that begin construction in 2023 will qualify for a 22 percent ITC, with a subsequent drop to a 10 percent ITC from 2024 onward. For a solar project to qualify for more than a 10 percent ITC, it would need to be in service before 2026, rather than 2024 as was previously the case.

Solar projects that started construction in 2019 or 2020 are not impacted. Projects that started construction in 2019 and 2020 remain eligible for an ITC at a 30 percent or 26 percent rate, respectively. The Internal Revenue Service (IRS) requires that projects must be completed within four years after the year construction starts to comply with the applicable safe harbor rules. Thus, unless there is further guidance from the IRS, any project which commenced construction in 2019 or 2020 would have to be completed by the end of 2023 or 2024 to comply with the applicable safe harbor, notwithstanding the longer outside date in the updated statute.

The legislation also includes a two-year extension of the nonbusiness residential solar credit (for homeowner-owned systems) at 26 percent for 2021 and 2022 and 22 percent in 2023. The nonbusiness residential solar credit is determined by the placed-in-service date, rather than the date construction began, and terminates at the end of 2023, with no non-expiring 10% credit after 2023.

Onshore Wind
Facing a full phase out for projects that had not commenced construction by the end of 2020, onshore wind projects that begin construction in 2021 will now qualify for a 60 percent tax credit amount over 10 years (the same amount as projects that started construction in 2020). PTCs at 60 percent of the full rate are currently $15 a MWh. The option to convert the PTC into an upfront ITC was also preserved at the 18 percent rate.

There is no statutory deadline for an onshore project to be placed in service, but like solar any such projects, must meet the four-year “continuity” safe harbor in the IRS’s guidance. A project that begins construction in 2021 will need to be placed in service by the end of 2025.

Offshore Wind
After years of lobbying for specific rules that take into account the longer construction/permitting timeline compared to onshore wind, offshore wind developers finally get their wish. Offshore wind projects that began construction after 2016 through the end of 2025 will now qualify for a 30 percent ITC. Consistent with the PTC phaseout, offshore wind projects will not have the option to claim PTCs on the electricity output, instead of an ITC, on projects that start construction after 2021.

Like onshore wind, there is no statutory deadline for the project to be placed in service. However, without further guidance specific to offshore wind, developers would still need to finish within four years to avoid having to show work was continuous. It is expected that the U.S. Treasury will consider extending the safe harbor period for offshore wind, likely somewhere between seven to 10 years; however, it is uncertain whether that will ultimately occur.

Considering the long development cycle and high construction costs for offshore wind, this new benefit provides significant value and long-term predictability for developers. This should provide a boost to offshore wind development in the United States, which has lagged compared to development in other global markets.

Carbon Sequestration
The legislation extends the PTC for carbon sequestration. The deadline is a requirement to begin construction before January 1, 2026, rather than 2024 as stated previously.

Other Renewable Technologies
Combined heat and power projects (CHP), small wind, microturbine and fuel cell projects also received ITC extensions. Fuel cell and small wind receive a 26 percent ITC if they begin construction by the end of 2022, dropping to 22 percent if they begin construction by the end of 2023. CHP and microturbine projects qualify for 10 percent if they start construction by the end of 2023. These projects do not face the same phasedown rules applicable to solar projects. The bill also adds a new ITC for equipment that generates electricity from waste heat from buildings and equipment. (The capacity cannot be more than 50MWs.) Construction must start before 2024, and phases down in the same timeframe as fuel cell projects.

Other renewable energy projects that qualify for PTCs (biomass, geothermal, landfill gas to power, trash to power, hydropower, marine hydrokinetic) also received a one-year PTC extension. Projects starting construction in 2021 would receive the full PTC amount available for such projects.

The legislation also provides for a variety of other tax credit extensions including:

• Qualified fuel cell motor vehicles. Extends, through 2021, a tax credit for purchases of new qualified fuel cell motor vehicles. The credit is between $4,000 and $40,000, depending on the weight of the vehicle.
• Alternative fuel refueling property credit. Extends, through 2021, a credit for the installation of alternative fuel vehicle refueling property, including ethanol, biodiesel, natural gas, hydrogen and electricity. The credit is capped at $30,000 per location for business property and $1,000 for property installed at a principal residence.
• Energy efficient commercial buildings deduction. Makes permanent a deduction for energy efficiency improvements to building envelope, lighting, heating, cooling, ventilation and hot water systems of commercial buildings, and indexes to inflation the amount of the $1.80-per-square-foot limitation.
• Second generation biofuel producer credit. Extends, through 2021, the $1.01-per-gallon income tax credit for second generation biofuel sold at retail into the fuel tank of a buyer’s vehicle, or second-generation biofuel mixtures sold or used as a fuel.
• Nonbusiness energy property. Extends through 2021 a credit for purchases of non-business energy property. The provision provides a credit of 10 percent for qualified energy improvements to the building envelop of principal residences, and also allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property.
• Two-wheeled plug-in electric vehicle credit. Extends, through 2021, a 10 percent credit for highway-capable, two-wheeled plug-in electric vehicles. The credit is capped at $2,500. Battery capacity within the vehicles must be greater than or equal to 2.5kWh.
• Production credit for Indian coal facilities. Extends, through 2021, a $2 per ton production tax credit for coal produced on land owned by an Indian tribe.
• Energy-efficient homes credit. Extends, through 2021, the credit of up to $2,000 for qualified new energy-efficient homes.
• Extension of excise tax credits for alternative fuels. Extends, through 2021, a $0.50-per-gallon excise-tax credit or payment for alternative fuel and $0.50-per-gallon credit for alternative fuel mixtures.
• Extension of residential energy credit and expansion to biomass fuel property. Extends the credit for residential energy efficiency property at the current 26 percent rate for property placed in service through 2022, reduced to 22 percent for property placed in service in 2023. Starting in 2021, the provision expands the definition of eligible property to include qualified energy efficient biomass fuel property.

Failure to Address Standalone Energy Storage
This legislation contains many items on the Christmas list of renewable energy developers. One significant omission from the legislation, however, is a standalone ITC for energy storage assets. The standalone credit proposal has been sought by the industry for several years, and has been considered in various prior legislative efforts, but continues to be left on the cutting room floor. In this instance, it apparently was caught up in a fight over whether utilities should have to normalize storage to get the ITC. It is unfortunate that this item was excluded, since a resource-agnostic standalone tax credit for energy storage, would have been a boost to energy projects across the board.

Another notable item that was not included in the year-end legislation, despite significant lobbying efforts, is a “direct pay” or “refundable” ITC/PTC provision.

While it is unfortunate that neither the standalone storage credit nor the direct pay option were included in this round of stimulus, we likely have not heard the last of these concepts. It is expected there will be ample opportunity during the incoming Biden administration for the renewables industry to further build on the gains made in this legislation.

Final Thoughts
The sweeping nature of tax extenders for renewables is sure to spur billions of dollars of investments in renewable energy and help power our nation’s economic recovery with job growth. Some of these provisions might have eventually been enacted under the new administration, but the sweeping extensions now allow for greater predictability and multiyear planning.

While positive overall, the unexpected changes to the ITC and PTC phaseouts may cause some developers to attempt to amend arrangements they put in place to start construction in 2020. The extension particularly negatively impacts the value proposition to solar developers that placed large equipment orders in 2020 to lock in tax credits at a 26 percent tax credit level for a large number of future projects, which would now likely qualify at a 26 percent rate regardless.