Section 45 of the U.S. Internal Revenue Code of 1986, as amended (Code), provides an inflation-adjusted production tax credit (PTC) for energy produced by certain renewable energy facilities that is sold to unrelated persons. Section 45 provides an unadjusted credit rate, which is then multiplied by an “inflation adjustment factor” published annually to determine the applicable PTC rate for a particular year. For certain technologies (open-loop biomass, landfill gas, and trash (and, in the case of facilities placed in service prior to 2023, qualified hydropower and marine and hydrokinetic)) (50% PTC Technologies), the rate so determined is reduced by 50%.
Prior to enactment of the Inflation Reduction Act of 2022 (IRA), the unadjusted credit rate was 1.5 cents per kilowatt-hour (kWh), and following application of the inflation adjustment factor, the resulting amount was then rounded to the nearest 0.1 cent. Earlier this year, the Internal Revenue Service (IRS) published the inflation adjustment factor for 2022, which, after application of this rounding rule, resulted in a PTC rate of 2.6 cents per kWh (1.3 cents per kWh in the case of 50% PTC Technologies). These rates remain effective with respect to projects placed in service prior to 2022.
Changes Made by the IRA. For projects placed in service after 2021, Section 45 now provides a two-tier credit system intended to encourage compliance with certain prevailing wage and apprenticeship requirements.
If these requirements are not satisfied (or deemed satisfied by reason of certain exceptions to their application), taxpayers are entitled to a “base” PTC rate equal to 20% of the unadjusted credit rate in effect prior to the IRA’s enactment (0.3 cents per kWh) multiplied by the relevant inflation adjustment factor. This product is then rounded to the nearest 0.05 cent (rather than to the nearest 0.1 cent, as was the case prior to enactment of the IRA). In the case of 50% PTC Technologies, such “base” PTC rate so determined is reduced by 50%.
If the prevailing wage and apprenticeship requirements are satisfied (or deemed satisfied) (either project, a Qualifying 2022 Project), taxpayers are entitled to a PTC rate equal to the relevant base rate multiplied by five (the 5x PTC Rate).
These labor-related requirements will be deemed satisfied, and as such the relevant projects would also be eligible for the 5x PTC Rate, if (i) the relevant facility has a maximum net output of less than 1 megawatt or (ii) the construction of such facility began before the date that is 60 days after the Department of the Treasury publishes guidance on the prevailing wage and apprenticeship requirements. No such guidance was issued as of the date hereof.
Announcement 2022–23. Because of the changes to the rounding rules and the manner in which the 5x PTC Rate is derived, the 5x PTC Rates applicable to Qualifying 2022 Projects placed in service after 2021 would differ from the PTC rates applicable to projects placed in service prior to 2022 for the same calendar year.
In Announcement 2022–23 (Announcement), published on November 10, 2022, the IRS provides that taking into account the previously published inflation adjustment factor for calendar year 2022 and the changes to the calculation mechanics described above, the new 5x PTC rate for Qualifying 2022 Projects placed in service during 2022 is 2.75 cents per kWh (1.25 cents per kWh in the case of 50% PTC Technologies). As noted, in the case of projects placed in service before 2022, the 2.6 cents (or 1.3 cents) per kWh PTC rates remain in effect.
As the application of these rules to projects involving technologies eligible for the full PTC (higher 2022 PTC rate for newer projects) and those involving 50% PTC Technologies (lower 2022 PTC rate for newer projects) illustrates, depending on the rate of inflation and the application of the rounding rules, in any given year newer projects could be eligible for either a higher or lower PTC rate relative to older projects. Financial models should take this into account in their assumptions and projections, as it will lead to different economics for different projects.
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