Wyden bill and tax credits
Many project developers are assessing how a bill that Senator Ron Wyden (D-Oregon) introduced with 24 other Senate Democrats last week to revamp tax credits for new power plants, standalone storage, high-voltage transmission lines, distributed generation and carbon capture transactions would affect their projects.
Wyden is chairman of the Senate tax-writing committee. The bill could be folded into a massive infrastructure bill that Congress is expected to pass later this year.
Its fate could depend on the process. It stands a better chance of being incorporated if Senate committees “mark up” their sections of the bill than if the Senate takes up some form of infrastructure bill the House has passed directly without a detour through committees. The House hopes to have passed its bill by July 4.
The Wyden bill would allow production tax credits to be claimed on wind, solar and other renewable energy projects at $25 a megawatt hour for the first 10 years of electricity output or a 30% investment tax credit to be claimed on the project cost in the year the project is put in service.
The investment tax credit would increase to 40% for any project in a census tract with at least a 20% poverty rate or median family income that is 80% or less than the statewide median family income or, if greater, 80% or less than the median family income in the metropolitan area for projects located in metropolitan areas.
Owners of all clean power plants, including solar and fuel cell projects, could choose either type of tax credit: production tax credits or an investment tax credit.
The increased tax credits would be available for projects placed in service after 2022.
This could cause developers to delay putting new power projects in service that would otherwise qualify for smaller tax credits. However, an investment tax credit could only be claimed on the tax basis built up after 2022.
The Wyden staff is still assessing whether the new tax credits can be claimed on projects on which construction started for tax purposes before 2023. The bill has anti-double-dip provisions that bar claiming both the new tax credits and any tax credits to which a project would otherwise be entitled under existing law.
A project owner could choose to receive the new tax credit amount in cash from the government. PTCs would be refunded annually over the 10 years. The bill says an election to choose refunds would have to be made before construction starts on the project.
Wyden calls the bill “technology neutral,” since tax credits could be claimed on nuclear power plants and on power plants that run on fossil fuels if all of the greenhouse gases are captured and disposed securely underground or put to commercial use.
Tax credits could only be claimed on new power plants whose greenhouse gas emissions are at or below zero.
Investment tax credits could also be claimed at a 30% rate after 2021 on new standalone energy storage facilities and after 2022 on transmission lines that transmit at 275 KV or greater voltage and other equipment “necessary for operation of a new circuit.” Storage facilities, but not transmission equipment, in low-income areas would qualify for a 40% investment tax credit.
An election that lets owners of carbon capture equipment that was in service before February 2018 qualify for 12 years of section 45Q tax credits on captured carbon dioxide measured from February 9, 2018 rather than the original in-service date -- and claim tax credits at higher rates and free from a 75-million-metric-ton cap on total credits nationwide -- would be repealed. This could make uneconomic some carbon capture transactions involving older capture equipment that are currently under negotiation.
The new tax credits for standalone storage, high-voltage transmission lines and carbon capture could also be received in cash.
There is no fixed end date in the bill for any of the tax credits. However, the credit amounts would fall to 75% of the full rate for projects on which construction starts two years after the year in which annual greenhouse gas emissions for the US power sector have declined by at least 75% from 2021 levels, to 50% for projects starting construction the next year and to 0% after that. If the Democrats end up having to use the budget reconciliation process to push the bill through the Senate by a majority vote in the 100-member Senate -- rather than the 60 votes required for most other major bills -- then budget rules could bar provisions that would add to the federal deficit after a 10-year budget window.
Construction workers working on any project on which new tax credits are claimed would have to be paid at least prevailing local wages as determined by the US Department of Labor.
Production tax credits could be claimed not only on electricity sold to third parties, but also on the parasitic load and electricity consumed by the project owner or held in storage in cases where there is a meter “owned and operated by an unrelated person” to measure total output.
The electricity would have to be generated in the US or a US possession like Puerto Rico to claim PTCs, but the electricity could be sold outside the US: for example, to Canada or Mexico.
Projects that are in service by the end of 2022 would qualify for production tax credits at the new rate on any incremental output from any “new units” or “efficiency improvements or additions of capacity” after 2022.
The PTC amount would be adjusted for inflation. The $25 figure is the amount for which a project would qualify if the new tax credits were available in 2020.
PTCs could be claimed not only on the electricity, but also the steam produced by cogeneration facilities that generate both steam and electricity.
However, steam counts only to the extent it is “useful thermal output,” meaning it has to be put to use as steam rather than solely to drive a steam turbine to generate electricity. The Btus of any useful steam would have to be converted into a per-KWh equivalent by dividing the Btus of steam by the heat rate, or the Btus of energy needed to generate one kilowatt hour of electricity.
The bill has special rules for claiming investment tax credits on micro-grids. It is not clear whether these are intended to make it easier or harder to claim such tax credits. A fact sheet released with the bill describes the special rules as elective.
They allow an investment credit to be claimed on equipment that is part of a micro-grid, but at less than the full rate. The ITC would have to be multiplied by a fraction called the “relative avoided emissions rate.” The denominator is the non-baseload greenhouse gas emissions rate for the regional grid to which the micro-grid is connected. The numerator is the non-baseload emissions rate for the regional grid minus the emissions rate for the micro-grid.
To qualify as a micro-grid, the generating equipment making up the micro-grid must be isolated from the utility grid “in order to withstand larger disturbances and maintain the supply of electricity to connected critical infrastructure” and have “no point of interconnection” to the regional grid “with a throughput capacity” greater than 20 megawatts.
Projects on which the new tax credits are claimed would have to comply with wage and apprentice requirements. This applies to clean power, storage and transmission projects. However, the requirements do not apply to any clean power “facility” smaller than one megawatt.
Laborers and mechanics employed by contractors and subcontractors during construction would have to be paid at least the prevailing local wages as determined by the US Department of Labor. Such wages would also have to be paid for work on alterations and repairs during the 10-year PTC period or five-year ITC recapture period, depending on which type of tax credit is claimed.
The US Department of Labor has a voluminous website showing wage rates by locality, position and type of construction within each state.
Contractors and subcontractors would also have to use qualified apprentices for at least 15% of total labor hours worked below the foreman or supervisor level. The US government has had national standards for labor apprentice programs since 1937. Qualified apprentices are participants in a program that a union or contractor has registered with the US Department of Labor to show that the program meets national quality standards.
Power plants at which tax credits are claimed must have “greenhouse gas emissions rates” of zero or less.
The emissions requirements do not apply to investment tax credits on standalone storage or transmission equipment.
The IRS is supposed to publish a table showing emissions rates for different types of facilities. It appears that whether PTCs can be claimed depends on the actual emissions rate at a power plant from one year to the next, at least in cases where the power plant has to rely on carbon capture to get to zero emissions. The ITC may be claimed based on the “anticipated” emissions rate for a project as shown in the table. The ITC may be recaptured in a later year if the IRS decides that the emissions rate for a facility is “significantly higher” than the anticipated rate used by the taxpayer.
The owner of a power plant can petition the IRS to determine the greenhouse gas emissions rate for any type of project that is not covered by the table. The IRS would have 12 months to provide a “provisional” rate and another 12 months after that to decide on the final rate.
“Greenhouse gas” has the same meaning as in the Clean Air Act. That statute lists six types of greenhouse gases: carbon dioxide, hydrofluorocarbons, methane, nitrous oxide, perfluorocarbons and sulfur hexafluoride.
Any power plant that uses combustion or gasification to generate electricity would have to do a lifecycle analysis of all greenhouse gas emissions potentially from producing the fuel through disposing of any ash or other waste.
Carbon dioxide captured and either disposed of securely underground or put to a permitted commercial use does not count toward greenhouse gas emissions. Section 45Q tax credits for capturing and burying carbon dioxide are subject to recapture where the CO2 leaks from underground storage within three years after burial. It is unclear whether PTCs or the ITC would be subject to recapture in the same circumstances. The CO2 could be buried in the US, a US possession like Puerto Rico, or on the US outer continental shelf that generally extends up to 200 miles offshore.
Standalone energy storage facilities would qualify for a 30% investment tax credit -- or 40% if in a low-income area -- but only if electricity is “sold” to third parties. This could rule out use of tolling agreements where a utility has dispatch rights over a battery to store electricity from the grid and then take back the electricity.
A tax extenders bill in December let any offshore wind project on which construction starts by the end of 2025 qualify for a 30% investment tax credit. The Wyden bill would shorten the deadline to the end of 2022, after which the new tax credits would take over.
Under current law, transmission lines at 69 KV or greater are depreciated using 15-year MACRS depreciation. The bill would let high-voltage transmission lines at 275 KV or greater and other equipment “necessary for the operation of a new circuit” be depreciated using five-year MACRS depreciation if placed in service after 2022. The entire tax basis would qualify for the more rapid depreciation even if it were built up before the new faster allowance takes effect.
Investment tax credits cannot be claimed currently on property owned by regulated utilities if two things are true: first, the rates at which electricity is sold are regulated on a rate-of-return basis and, second, the utility is required to pass through the benefits to its ratepayers more rapidly than under a “normalization” method of accounting.
Congress wanted to send a message to public utility commissions that utilities should be allowed to keep enough benefit from investment tax credits to act as an incentive to make new investments.
Wyden would let utilities opt out of normalization for the new investment tax credit on energy storage and transmission assets. However, a utility would not be able to opt out if its regulators object.
A utility could not opt out for batteries or other storage equipment with a storage capacity of 0.5 MWh or less.
An opt-out election would be made on an asset-by-asset basis. Thus, the utility could opt out for one investment without doing so for others.
The US government offers tax credits currently under section 45Q for capturing carbon oxide at power plants, factories and other industrial facilities that would otherwise have been emitted into the atmosphere. One of three things must be done with the captured emissions: bury them securely underground, use them for enhanced oil recovery or put them to a permitted commercial use.
The Wyden bill would deny such tax credits where the captured CO2 is used for enhanced oil recovery, effective for industrial sources on which construction starts after the bill is enacted.
It would increase the tax credit amount for capturing CO2 directly from the air. The existing tax credits will reach $50 a metric ton for C02 buried permanently underground and $35 a ton for CO2 put to a permitted commercial use in 2026. The amounts are adjusted for inflation. The bill would increase the tax credits for direct air capture to $175 a ton for secure burial and $150 a ton for permitted commercial uses starting in 2027, with adjustments for inflation after 2025.
Tax credits cannot be claimed under current law unless at least a minimum volume of CO2 is captured at an industrial facility. The bill would drop the minimum volumes and require instead that at least 75% of carbon emissions that would otherwise be released into the atmosphere be captured at a power plant and at least 50% at other industrial facilities each year to claim tax credits that year.
Section 45Q credits would start to phase out for carbon capture at any power plant or other industrial facility on which construction starts for tax purposes two or more years after greenhouse gas emissions in the US power or industrial sector drop by at least 75% from 2021 levels. Tax credits would drop to 75% of the full rate for any industrial facility on which construction starts two years after the year emissions fall to this level. It would drop to 50% where construction starts three years after and to 0% after that.
The phase out would not apply to direct air capture.
The tax credits used to be only $10 to $20 a metric ton. Congress increased the amount and dropped a 75-million-ton nationwide cap on the total tax credits that can be claimed in February 2018. An election can be made to allow tax credits to be claimed at the post-February 2018 rates and without the 75-million-ton cap where capture equipment was already in place before the February 2018. When such an election is made, the tax credits run 12 years after February 9, 2018.
The Wyden bill would repeal this election as of the enactment date. This would lead taxpayers to make the election before the infrastructure bill clears Congress. However, IRS regulations require the election to be made annually during the 12-year tax credit period on each tax return for a year in which section 45Q credits are claimed.
Construction workers on any industrial facility or capture equipment on which construction starts after 2021 would have to be paid prevailing local wages and the contractors and subcontractors would have to use qualified apprentices for at least 15% of total labor hours. These requirements would continue to apply to alterations or repairs done for the next 12 years after the capture equipment is put in service.
The taxpayer could choose to have the tax credits paid by the US government in cash. The direct-payment option could only be made for tax credits tied to capture equipment on which construction starts after 2021. It would have to be made before construction starts on the capture equipment. If a partnership owns the capture equipment, the election would be made by the partnership.
The bill would increase the residential solar credit to 30% as an inducement to individuals to buy rooftop solar systems and other distributed generating equipment. The equipment would have to be used to supply electricity to a dwelling unit in the United States that the owner uses as a residence.
The credit could be claimed on any type of distributed generating equipment that has zero greenhouse gas emissions. It would apply to equipment installed after 2022.
It could also be claimed on a battery as long as the battery has a storage capacity of at least 3 KWh. However, the electricity stored in the battery would have to be measured by a meter owned and operated by the local utility or another third party.
Any tax credits the individual cannot use immediately could be carried forward for up to three years. The credits would not be refundable in cash.
The residential credit would phase out on the same schedule as the other tax credits once greenhouse gas emissions by the US power sector drop at least 75% from 2021 levels.
The tax basis that a homeowner has in the equipment would have to be reduced by the amount of the tax credit.