Calculation Conventions Result in Higher PTC Rate for Old Projects than New Projects After 2023 Inflation Adjustment

On June 20, 2023, Treasury and the IRS released the 2023 inflation adjustment factor and reference price that are used to determine the annual production tax credit (PTC) rate.  The notice was published in the Federal Register on June 21, 2023: https://www.govinfo.gov/content/pkg/FR-2023-06-21/pdf/2023-13191.pdf

There are two calculations for PTC rates, which results in two different rates: one for facilities placed in service after 2021, and one for facilities placed in service before 2022.  The rate for wind, solar, geothermal and closed-loop biomass power plants placed in service after 2021 is still 2.75 cents per kWh (the “post-2021 project rate”).  (See our earlier blog post on the calculation of the PTC rate under the Inflation Reduction Act of 2022 (IRA): projectfinance.law/tax-equity-news/irs-confirms-higher-ptc-rate-due-to-the-ira).  The rate for wind, geothermal and closed-loop biomass power plants placed in service before 2022 increased from 2.6 cents per kWh to 2.8 cents per kWh (the “pre-2022 project rate”).

Section 45 PTCs are claimed on the electricity produced by a qualified facility and sold to an unrelated person for 10 years from the facility’s placed in service date .[1] 

For facilities placed in service after 2021, section 45(a) provides that the PTC is equal to 0.3 cents multiplied by the kilowatt hours of electricity produced by the taxpayer and sold to an unrelated person during the taxable year.  Under section 45(b)(2), as amended by the IRA, the 0.3 cent amount is adjusted by multiplying such amount by the inflation adjustment factor for the calendar year in which the sale occurs.  If the 0.3 cent amount as adjusted for inflation is not a multiple of 0.05 cent, the amount is rounded to the nearest multiple of 0.05 cent.  In the case of any (i) facility with a maximum output of less than 1 megawatt, (ii) a facility that starts construction prior to January 29, 2023, or (iii) a facility satisfying the prevailing wage and apprenticeship requirements, the credit amount is multiplied by 5.[2]

The newly released inflation adjustment factor is 1.8909.  The calculation of the post-2021 project rate for power sold in 2023 is as follows: 0.3 cents x 1.8909 = 0.56727, or 0.55 when rounded to the nearest .05.  When 0.55 is multiplied by 5, the full credit rate is 2.75 per kWh.

The base PTC amount for projects placed in service before 2022 that are exempted from the IRA’s bifurcated credit regime is 1.5 cents per kWh.  The 1.5 cents per kWh is adjusted annually by the inflation adjustment factor for the year the project’s power is sold and rounded to the nearest multiple of 0.1 cent.  The pre-2022 project rate for power sold in 2023, adjusted for inflation, is calculated as follows: 1.5 cents x 1.8909 = 2.8364, or 2.8 cents per kWh when rounded to the nearest 0.1 cent.

[1] Internal Revenue Code Section 45(a).

[2] Internal Revenue Code Section 45(b)(7)-(8).