On Dec. 15, House Republicans unveiled legislation that included multiyear extensions of tax credits for solar, wind, biofuels and electric vehicles, and energy efficiency. These bills passed the House of Representatives in the wee hours of Friday morning (Dec. 18), allowing the Senate to approve mid-Friday.
This legislation is the most significant action by Congress in the last few years and insures a robust growth rate for the depth and breadth of the renewable energy and energy efficiency industries.
Overview of Legislation
The Omnibus Budget Bill contained measures to lift the ban on exports of U.S. crude oil, a symbolic gesture to the Republican Congressional leadership as well to an assortment of Democratic and Republican oil state members of Congress. While I was not bullish on this idea, the fact that we have a global oil glut with prices at rock bottom, will not jettison U.S. oil on the world stage any time soon.
Under the Congressionally passed legislation, the 30 percent Investment Tax Credit (ITC) for solar will be extended for another three years, and then ramp down incrementally through 2021, and remain at 10 percent permanently beginning in 2022.
The 2.3-cent Production Tax Credit (PTC) for wind will also be extended through 2016. Projects that begin construction in 2017 will see a 20 percent reduction in the incentive, and then the wind PTC will then drop 20 percent each year through 2020.
The legislation would make the R&D tax credit permanent. Small businesses with less than $50 million in gross receipts can claim the credit against their alternative minimum tax liability. Certain small businesses can claim the credit to offset their payroll tax liability.
According to Washington law firm Nixon Peabody:
Regarding the PTC for wind only, the credit is extended and remains indexed to inflation, but adjusted down (i.e., phased out) based on the following schedule:
- For projects in which construction has begun before January 1, 2017, the PTC will remain at the full amount otherwise available
- For projects in which construction has begun from January 1, 2017 through December 31, 2017, there is a 20% reduction to every year of the 10 years of the applicable PTC
- For projects in which construction has begun from January 1, 2018 through December 31, 2018, there is a 40% reduction to every year of the 10 years of the applicable PTC
- For projects in which construction has begun from January 1, 2019 through December 31, 2019, there is a 60% reduction to every year of the 10 years of the applicable PTC
- For projects in which construction has begun after December 31, 2019, the PTC is not available.
The rule providing for annual inflation adjustments to the PTC rate remains in effect.
The Energy Investment Tax Credit (ITC) election in lieu of the Production Tax Credit (PTC) is also preserved to 2020, and also phases down the ITC at the identical percentages to the PTC in each year as set forth above. For example, a wind project that will meet the begun construction requirements in 2017 will be eligible for a 24 percent ITC (calculated as 30 percent times 80 percent = 24 percent). The PTC commence construction rules apply in each year the credit is available to qualifying projects.
According to Washington law firm Nixon Peabody:
The Omnibus Spending Act bill will provide extensions for both Section 48 (the business solar credit) and Section 25D (the residential solar credit) over the following schedule:
- For solar projects in which construction has begun construction before Jan. 1, 2020, the ITC will remain at the full 30 percent
- For solar projects in which construction has begun from Jan. 1,2020 through December 31, 2020, the ITC will be 26 percent
- For solar projects in which construction has begun from Jan. 1, 2021 through December 31, 2021, the ITC will be 21 percent
- For solar projects placed in service after Dec. 31, 2021, the ITC is 10 percent.
The bill also requires that projects receiving a tax credit in excess of 10% be placed in service before January 1, 2024. There is no commence construction thereafter and the 10 percent ITC under Section 48 remains permanently in place after 2021. However, the residential 25D credit expires Dec. 31, 20121 and there is no commence construction provision for 25D.
Note that the commence construction rules now, for the first time, apply to the ITC. We anticipate that rules will be either identical, or substantially similar, to those for the PTC. However, the Treasury may have the IRS issue additional tax notices to clarify these rules and other points.
Other Extenders in the “Extenders Act” but not in the “Omnibus Bill” which was also passed by Congress:
Two-year extension of the PTC: 2015 (retroactive) and 2016.The provision extends the PTC for certain renewable sources of electricity to facilities for which construction has commenced before January 1, 2017
Extension and modification of bonus depreciation.
The provision extends bonus depreciation for property acquired and placed in service during 2015 through 2019 (with an additional year for certain property with a longer production period).
Energy efficiency, renewable fuels and alternative vehicles also did well. A selective summary is below:
- Section 181. Extension and modification of credit for nonbusiness (residential) energy property. The provision extends through 2016 the credit for purchases of nonbusiness energy property. The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500.
- Section 184. Extension of second generation biofuel producer credit. The provision extends through 2016 the credit for cellulosic biofuels producers.
- Section 185. Extension of biodiesel and renewable diesel incentives. The provision extends through 2016 the existing $1.00 per gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2016 the $1.00 per gallon production tax credit for diesel fuel created from biomass.
- Section 189. Extension of special allowance for second generation biofuel plant property. The provision extends through 2016 the 50-percent bonus depreciation for cellulosic biofuel facilities.
- Section 190. Extension of energy efficient commercial buildings deduction. The provision extends through 2016 the above-the-line deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.
- Section 191. Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities. The provision extends through 2016 a rule that permits taxpayers to elect to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale (rather than entirely in the year of sale) if the amount realized from such sale is used to purchase exempt utility property within the applicable period.
Highway Authorization Act
Another legislative win in December, President Obama signed the Highway Authorization Act into law which included a provision for accelerated federal authorization (licensing, permitting, approval, et. al.) and environmental review processes for qualifying large infrastructure projects. The project categories include Renewable Energy Production, Pipeline, Water Resource Projects, and Electricity Transmission. Renewable energy and energy storage are increasingly economic and more resilient than traditional energy approaches, especially for infrastructure.
The legislation is more than just a feel good win, but rather a long term bipartisan national policy commitment to clean energy in all its forms. The support was broad along political, geographic, and ideological lines.
The policy gives market and investment stability, not only to the solar and wind sectors, but the entire portfolio of renewable energy, including geothermal, water energy, and biomass fuels and electricity. And energy efficiency was also supported in buildings and industry, which is essential to meet emissions and provide a higher impact for renewable energy options.
And while stability is extremely important, this Congressional action was even more important in its significance that clean energy has matured to the point that both parties can step up and proclaim it is for the national good and the global good.
The month of December 2015 will be known as the grand slam for clean energy, the triple crown for the environment, and the super bowl for our national security.
Lead image: Clean energy concept. Credit: Shutterstock.