As part of a last-minute tax extenders bill at the end of 2020, the renewable energy industry got its wish: a tax credit extension. The bill addressed solar, wind, fuel cell, geothermal, biomass, incremental hydroelectric and other decarbonized energy projects. Though many expected an extension of some kind, its passing still caused an unfortunate scramble, as many saw it as a gift of more time and looked to delay start of construction for projects.
Unpacking the Extension
The bill extended the current solar investment tax credit (ITC) percentages by two years. Therefore, projects starting construction in 2021 or 2022 will be eligible for a 26% ITC so long as they are placed in service prior to 2026. Projects starting construction in 2023 will be eligible for a 22% ITC and must be placed in service by the end of 2025, and projects starting construction in 2024 will be eligible for a 10% ITC. Additionally, to qualify for the 26% ITC, projects that started construction in 2019 and 2020 must be placed in service by the end of 2023 or 2024, respectively.
As a reminder, there are two ways to grandfather a project’s eligibility for the current year’s ITC:
- Incurring 5% of qualified project cost prior to the specific deadline, or
- Starting work of a “physical and significant nature” either at the project site or on qualified power generation equipment.
In March 2020, we discussed a potential generation-side stimulus, or Direct Pay, in which companies would be directly paid for the execution of renewable energy projects in lieu of enhanced tax obligation offsets. While potentially more stimulative, this method’s optics appear as direct payments to corporations, which a majority in Congress does not support. However, a change to Direct Pay could expand the market for entities such as regulated utilities and co-ops that either have no tax appetite or have not yet found a way to monetize the full ITC and bonus depreciation benefits. During the first 100 days of Joe Biden’s administration, we will see whether Direct Pay supplants ITC/PTC, or if they will coexist in some form, or if there is something entirely different in the works.
One item that many in the industry were eager for that wasn’t included was a benefit for stand-alone energy storage. While this did not transpire in 2020, it is likely to be debated in the new administration. Biden has hinted that renewable energy will be a significant portion of his administration’s energy policy, with many hoping for a tax credit or other stimulative incentive for stand-alone energy storage.
Keep Moving Forward
The ITC extension caused a scramble at the end of 2020 for some project owners to delay the start of construction to buy themselves more time in an effort to improve the economics of their project. While this latest extension gives the illusion of more time, project owners still need to have execution plans in place to effectively monetize the latest tax credits. The rush to qualify for the 26% ITC led to tightening in the equipment and services supply side of the market, resulting in limited availability from equipment manufacturers and constraints on labor availability. With many projects pressing forward and even more coming down the pipeline as a result of the extension, supply chains are expected to continue to be constrained.
Therefore, project developers and owners need to be considering interconnection, tax equity, off-take, permitting, equipment supply, design, construction and commissioning today, even if those plans place the project in service in 2025. After all, market constraints will likely continue as the wave of renewable projects across the country shows no signs of slowing down. Even with an extension in place, avoid the mad dash many experienced at the end of 2020 and keep planning to move your projects forward.
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