COVID-19 Relief Package Includes Significant Extensions of Key Renewable Energy and Carbon Capture Tax Credits
December 29, 2020
The President has signed into law an approximately $900 billion COVID-19 relief package that contains extensions of several key renewable energy and carbon capture tax credits. In particular, the legislation extends the beginning of construction deadlines for wind projects seeking to claim the production tax credit (the “PTC”),1 solar projects claiming the investment tax credit (the “ITC”), and carbon capture projects claiming tax credits under Section 45Q of the Code (the “45Q Credit”).2 The legislation also contains a significant ITC eligibility extension for offshore wind projects.
Wind Projects
Under prior law, wind projects were eligible for a PTC based on energy produced from wind resources for a ten-year period following the date on which the project was placed in service. The percentage of the PTC that could be claimed stepped down by 20% each year (and was eventually phased out completely) based on when the wind project began construction:
- 100% PTC if construction began prior to 2017;
- 80% PTC if construction began during 2017;
- 60% PTC if construction began during 2018;
- 40% PTC if construction began during 2019; and
- 60% PTC if construction began during 2020.
Wind projects that did not begin construction prior to 2021 were not entitled to any PTCs. The new legislation extends the beginning of construction deadlines described above by adding a new category for projects that began construction in 2018, 2020, or 2021. The revised beginning of construction deadlines set forth in the bill are as follows:
- 100% PTC if construction began prior to 2017;
- 80% PTC if construction began during 2017;
- 40% PTC if construction began during 2019; and
- 60% PTC if construction began during 2018 or 2020, or begins in 2021.
The new legislation also provides a significant benefit to offshore wind projects. In particular, offshore wind projects that begin construction after 2016 and prior to 2026 will now be eligible for the full 30% ITC.3 As more offshore wind projects are being developed, this extension provides a significant boost to the industry, especially in light of the increased development and construction times typically associated with offshore wind projects.
Solar Projects
As noted above, the most recent COVID-19 relief package also provides extensions to the beginning of construction deadlines for solar projects seeking to claim the ITC. Under prior law, the ITC available for qualifying solar projects starts at 30% of qualifying basis and then decreases as follows:
- 30% if construction began prior to 2020;
- 26% if construction begins in 2020; and
- 22% if construction begins in 2021.
Under prior law, in order to claim the above ITC percentages, the relevant solar project was required to be placed in service prior to 2024. Otherwise, the solar project is eligible only for a 10% ITC.
The revised beginning of construction deadlines for solar ITC qualification set forth in the new legislation are as follows:
- 30% if construction began prior to 2020;
- 26% if construction begins between 2020 and 2022; and
- 22% if construction begins in 2023.
In addition, the placed-in-service deadline has been extended from 2024 to 2026. Solar projects that fail to meet such deadlines remain eligible for the 10% ITC.
Carbon Capture Projects
The COVID-19 relief package also revises the beginning of construction deadlines for carbon capture projects seeking to claim the 45Q Credit. Under prior law, the 45Q Credit is available to qualifying carbon capture projects that began construction before January 1, 2024. Qualifying facilities are generally eligible for the 45Q Credit as follows:
- For tax years beginning after 2016 and before 2027, (a) based on a linear interpolation between $2.66 and $50 per metric ton for projects that capture qualified carbon oxide for secure storage underground and (b) based on a linear interpolation between $12.83 and $35 per metric ton for projects that capture qualified carbon oxide to pressurize existing oil reservoirs to push remaining oil to the surface (“EOR”).
- For tax years beginning after 2026, (a) $50 per metric ton, as adjusted for inflation, for projects that capture qualified carbon oxide for secure storage underground and (b) $35 per metric ton, as adjusted for inflation, for projects that capture qualified carbon oxide for EOR.
The COVID-19 relief package extends the beginning of construction deadlines for carbon capture projects from January 1, 2024 to January 1, 2026, but does not alter the amount of the 45Q Credit the carbon capture projects are otherwise eligible to receive.
Conclusion
The new legislation provides welcome relief to renewable energy developers and investors who have been facing challenges in 2020 arising from the COVID-19 pandemic. Please contact Arthur Hazlitt, Alex Roberts, Dawn Lim, or your O’Melveny counsel for questions regarding the information discussed herein.
1 Likewise, the legislation extends the beginning of construction deadlines for wind farms that elect to claim the ITC in lieu of the PTC.
2 All section references are to the Internal Revenue Code of 1986, as amended from time to time (the “Code”), and to the Treasury Regulations promulgated thereunder.
3 As with onshore wind projects, offshore wind projects were subject to the same beginning of construction requirements described herein with respect to PTC and ITC qualification.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O’Melveny partner licensed to practice law in New York, Alexander Roberts, an O’Melveny counsel licensed to practice law in New York, and Dawn Lim, an O’Melveny partner licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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