By Peter Kelly-Detwiler - Storyteller in Residence
On May 7, in TREIA’s first webinar of 2019 Jason Reschly, Partner at legal firm Husch Blackwell and Ian Davis, Vice President of renewable project developer OnPeak Power tackled the complex and occasionally obscure issues related to the federal tax credits (future and past webinars). The webinar was moderated by TREIA board member and Husch Blackwell partner Chris Reeder.
Navigating the Complexity of Federal Tax Credits
Jason Reschly guided attendees through the challenges of understanding how the wind Production Tax Credit (PTC) and solar Investment Tax Credit (ITC) are applied. Needless to say, the rules of the game are somewhat arcane, and there are plenty of opportunities for mistakes and misunderstandings, which is why this webinar is quite helpful for the uninitiated.
The basic premise for both tax credits is simple: If you have a tax appetite (that is, exposure to federal taxes), investment in renewable facilities can offset how much one needs to pay in taxes. Companies can minimize tax exposure. However, municipalities and not-for-profits cannot, so they need to find a third party with the appetite and structure a purchase so they get the benefit of lower cost power.
Each of the tax credits is structured differently: with solar, it’s a 30% credit on the cost of the project; with wind, the tax credit is related to actual output, with a 2.3 cents-per-kilowatt hour tax benefit (adjusted for inflation). For solar projects, the credits vest over five years, and the ITC can also be structured to include storage devices if they are set up and tied to the solar project here again, the rules are quite specific). The wind tax credit also encompasses repowering, if more than 80% of the value is new investment.
For both wind and solar, both of which are scheduled to phase out over time, there are specific timetables for when projects needed to have started and when they are physically placed in production. Developers must also be able to show that they undertook physical work OR made investments equal to 5% of total project costs (including land integral to the project), and that a continuous effort to complete the project ensued thereafter. The webinar includes tables showing the various qualification dates and further explains the details related to the 5% ‘safe harbor’ provision.
Prospects in a Post-Credit World
Ian Davis Vice President, TREIA member of On Peak Power outlined the issues for consideration and the prospects for developers in a post-tax credit world. Today, tax credits represent a substantial portion of the overall capital contribution (roughly 30-40% for solar; and 50-60% for wind) with tax equity investors getting a return on capital for solar in 5-7 years, and wind in 8-10 years. Once the credits wind down, capital costs will increase correspondingly. As a result, Davis commented, power purchase agreement contract lengths will likely decrease (with many years remaining years of service remaining on assets that may last as long as 35 years).
Despite the loss of the tax advantage, Davis noted, ERCOT’s forecast for future wind and solar contributions to the resource mix is quite bullish. Even as capital structures revert back to the debt and equity approach typically used for conventional assets the wind and solar technologies will continue to improve, and efficiencies will increase. The result is that the levelized costs of energy (that include such costs as capital, interest charges, and O&M) will continue to be lower than conventional generation.