Production tax credits

Production tax credits

April 01, 2013 | By Keith Martin in Washington, DC

Production tax credits for US power plants that generate electricity from wind, geothermal fluid or steam or “closed-loop” biomass will be 2.3¢ a kilowatt hour during 2013.

They remain unchanged at 1.1¢ a kilowatt hour for other biomass, landfill gas and ocean energy projects.

Production tax credits are claimed for 10 years after a project is first put in service on the electricity sold to third parties. Projects must be under construction by December 2013 to qualify. There is no deadline to put them in service. Credits can only be claimed on projects in the United States. It does not matter if the electricity is sold across the border into Mexico or Canada. “Closed-loop” biomass is any plant grown on a so-called electricity farm exclusively for use as fuel in a power plant.

The tax credit amount is adjusted each year for inflation. The IRS calculates the inflation adjustment and announces it each year on or around April 1.

When the tax credits were first enacted in 1992, Congress wrote into the statute that they would start to phase out automatically if electricity prices reach a high enough level that a subsidy is no longer needed. Congress said that level would be reached at 8¢ a kWh. The government looks at the average price at which contracted electricity from the same energy source was sold the year before. Spot sales are ignored. The IRS said 8¢ in 1992 dollars translated into 12.05¢ a kWh in 2012. The credit phases out as the average contracted price moves across a band of the next 3¢ per kWh.

The IRS said the average contracted price at which wind electricity was sold in the United States in 2012 was far below the level at which the credits would phase out. It has not calculated the average sales prices for electricity from the other sources.

The average price at which wind electricity was sold fell last year for the first time in several years. It was 4.53¢ a kWh in 2012, compared to 5.31¢ in 2011, 4.68¢ a kWh in 2010, 4.22¢ in 2009, 4.32¢ in 2008, 3.60¢ in 2007 and 3.29¢ in 2006.