Tax credits do the dirty work of clean energy

Accounting

Former President Barack Obama famously sought to dramatically increase the utility of renewable and non-fossil fuel energy sources to the U.S. economy during his administration. Less famously however, President Obama put to use several tax credit and incentive programs, including the Investment Tax Credit and the Production Tax Credit, to accomplish that increase in “clean energy.” These credits can provide value in the current corporate climate, which seems to be heading in a similar direction under President Biden.

While the ITC and PTC may have become associated with Obama, both originated prior to his administration. The Production Tax Credit was enacted in 1992 by President George H.W. Bush in an effort to stimulate geothermal electric, solar thermal electric, solar photovoltaics, wind, biomass, hydroelectric, municipal solid waste, landfill gas, tidal, wave, and ocean thermal technologies.

It surprises most casual followers of the PTC to learn that the first President Bush, who had founded two oil companies himself, would have been behind the passage of what can be considered one of the two biggest federal levers of non-oil technologies. The logic behind it is simple and important to understand: Large oil companies are trying to create “clean energy” channels. While the larger corporations are financially responsible to shareholders, they are all implicitly and explicitly seeking out innovative solutions to meet energy market needs. What C&I does is bridge the perilous financial gap between R&D and scaled commercial viability, which is so difficult for even the most well financed organization to cross on their own.

Equally surprising as President Bush being behind the PTC is the fact that his son, President George W. Bush, who was an oil executive himself, was actually behind the ITC. Enacted in 2006, the ITC has become pertinent within the solar industry, but it too can be applied across the same multitude of energy sources as the PTC.

So while the “clean energy” C&I is often credited to President Obama, the reality is that each originated with a different President Bush, with Obama turning up the focus and funding of the ITC and PTC with respect to wind and solar energy.

How do the ITC and PTC work?

The ITC and PTC are mutually exclusive federal C&I programs. While there are greater nuances and complexities between the two, generally the difference is the following:

  • The PTC is an ongoing offset mathematically tied to the energy produced by the accredited project. These numbers vary from project to project. For example, a wind energy project with production beginning by Dec. 31, 2021, will receive a $0.015 credit per kilowatt hour generated.
  • The ITC is a one-time offset with predetermined benefits tethered to the type of project. The specific amount will vary by qualified expenditure from each project, but the overall breakdown is below.
Technology 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24 12/31/25 Future years
PV, solar heating 26% 26% 26% 22% 22% 22% 10%
Hybrid solar lighting, fuel cells, small wind (100 kw) 26% 26% 26% 22% N/A N/A N/A
Geothermal heating 10% 10% 10% 10% N/A N/A N/A
Geothermal electric 10% 10% 10% 10% 10% 10% 10%
Large wind 18% 18% N/A N/A N/A N/A N/A
Offshore wind 30% 30% 30% 30% 30% 30% N/A

How to pursue ITC and PTC

While the process of applying for either credit is well established by the IRS, the time resources and general comfort level may be outside the scope of an organization’s normal operations. Generally, if a company has never before pursued an ITC or PTC and has an existing or prospective project, it is likely worth their time to engage with an expert. Both of these markets are well established, so they won’t have any problems sourcing multiple perspectives and/or bids as their purchasing department may require.

The unfortunate reality is that opportunities to be revenue-generative rather than a cost center can be few and far between in the tax department. Not only can credits like these make huge impacts on the larger organization and market in general, they can also propel the perceived value of the tax department forward. Taking the time to make inroads with other departments such as finance, FP&A, real estate and government affairs that are charged with more forward-looking responsibilities can yield the cross-departmental alliance opportunities that provide the fertile ground necessary for the ITC, PTC and other significant C&I program

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