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Senate Democrats Introduce Energy Proposal That Would Overhaul Production Tax Credit and Investment Tax CreditSeptember 28, 2015
On September 22, 2015, a group of Senate Democrats released the American Energy Innovation Act of 2015, a wide-ranging energy proposal that, if enacted, would significantly modify the production tax credit (the “PTC”) and the investment tax credit (the “ITC”) for renewable energy projects. Although commentators do not expect the current Congress to enact the legislation in its current form, the proposed changes to the PTC and ITC could provide some insight into future legislative developments (depending, in part, on the current and future legislative focus of Congress) and demonstrate a continued desire to legislatively extend and expand renewable and carbon/climate “friendly” initiatives.
Under current law, taxpayers are entitled to a production-based tax credit (the PTC) for energy produced from certain specified renewable resources (including wind), provided that various requirements are met. Current law also provides for an alternative credit, the ITC, for certain qualifying assets. The ITC is based on the taxpayer’s cost or tax basis in such assets. Under current law, both the PTC and the ITC are only available for assets that meet certain beginning of construction and placed in service deadlines.
The proposed legislation would drastically change the structure of these credits, focusing more on climate and carbon emission impact. In particular, a project’s eligibility for the PTC or ITC would be determined and scaled based on the carbon emissions related to the electricity generated at the project, rather than based on the resource used to produce such electricity. Projects that produce at least 25 percent less carbon than the nationwide average would meet the threshold applicable for the smallest amount of the relevant credit, with the amount of available PTC or ITC increased for projects that produce less carbon.
Under the carbon emission reduction and inflation scaling set forth in the proposed legislation, a zero carbon emission project would qualify for a 2.3 cents per KWh PTC or a 30 percent of eligible basis ITC. These are the current PTC and ITC rates for many technologies under current law (e.g., wind, in the case of the PTC and ITC and solar, in the case of the ITC). As is the case with the PTC under current law, the PTC would be available to a qualifying project for a period of 10 years beginning on its placed in service date under the proposed legislation.
The proposed legislation would also extend the availability of the current PTC and ITC regimes through December 31, 2017. Under current law, a wind project is only eligible for the PTC or ITC if construction of the project already commenced prior to January 1, 2015 and a solar project (which is not eligible for the PTC under current law) must be placed in service prior to January 1, 2017 in order to qualify for the 30 percent ITC (the ITC is 10% of eligible basis for solar projects placed in service on or after such date).
The proposed legislation also contains several other tax incentives, including provisions that would make available the 30 percent ITC to certain projects that are in service as of December 31, 2017 that add energy storage or carbon capture technology and that would create scaling tax credits for renewable transportation fuels that have “lifecycle” carbon emissions that are at least 25 percent less than the current United States average emissions.
Although it is unlikely that Congress will pass the legislation in its current form, many of the energy tax proposals could be revisited in the future and, if such proposals become law, they could have a significant impact on the landscape of renewable energy development and investment.
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. Mark Caterini, an O'Melveny partner licensed to practice law in New York, Arthur Hazlitt, an O'Melveny partner licensed to practice law in New York, Junaid Chida, an O'Melveny partner licensed to practice law in California and New York, and Alexander Roberts, an O'Melveny counsel 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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