United States: Bipartisan Budget Act Partially Reinstates Orphaned Energy Tax Credits

Last Updated: February 19 2018
Article by David K. Burton

The Bipartisan Budget Act of 2018 (H.R. 1892) (the "Act") was enacted on February 9, 2018. The Act is a two-year budget agreement that includes a number of provisions extending lapsed renewable energy-related tax credits; however, the Act does not change the amount or timing of the tax credits for utility scale wind or for solar.

The Act retroactively renews the tax credits for the so-called orphaned technologies that were left out of the 2015 extension for wind and solar, but for some of the orphaned technologies the tax credits are only available for projects that started construction prior to 2018; thus, limiting the tax planning opportunities, while rewarding bold developers that started construction in 2017 while the credits were lapsed.

Excise tax matters and energy related tax credits for homes, buildings, vehicles, nuclear power plants, Indian coal, biodiesel and biofuel are beyond the scope of this blog post.

I. Technologies Provided Prospective Extensions

The Act favors five technologies by providing a prospective extension of their tax credit, rather than merely a retroactive extension for 2017. The favored technologies are (i) fuel cells, (ii) wind turbines with a nameplate capacity of 100 kilowatts or less ("Small Wind"), (iii) solar lighting equipment, (iv) gas fired power plants with a nameplate capacity of less than 2 megawatts which produces both electricity and thermal energy ("Microturbine Power Plants"), and (v) combined heat and power systems ("CHP").

A. Thirty Percent Investment Tax Credit ("ITC") Technologies

For Small Wind, fuel cells and solar lighting, there is an ITC of 30 percent for projects that begin construction before 2020; a 26 percent ITC for projects that begin construction in 2020; a 22 percent ITC for projects that begin construction in 2021. Projects using these technologies that either (i) being construction after 2021 or (ii) are placed in service after 2023 are not eligible for any ITC. This schedule is similar to the schedule for the phaseout for the ITC for equipment that generates solar electricity; however, the ITC for equipment that generates solar electricity has a ten percent permanent ITC that these technologies do not.

B. Ten Percent ITC Technologies

Two technologies (i) CHP and (ii) Microturbine Power Plants qualify for a 10 percent ITC, so long as they begin construction before 2022. There is no phase-down of the ITC these two technologies: their ITC goes from 10 percent to zero. Also, there is no outside placed-in-service date; therefore, as a technical matter, such a project could, for instance, begin construction in 2021 and be placed in service in 2024 and qualify for the 10 percent ITC.

II. Technologies with Retroactive Extensions Only

Seven other renewable energy technologies had their tax credits renewed only if they began construction before 2018. These technologies are (i) open loop biomass, (ii) closed loop biomass, (iii) geothermal, (iv) landfill gas, (v) trash to energy, (vi) incremental hydroelectric, and (vii) and marine and hydrokinetic (the "Retroactive Only Technologies"). Projects that employ the Retroactive Only Technologies qualify for $24 per megawatt hour of production tax credit for their first 10-years of operations; alternatively, the owner of the project may elect a 30 percent ITC.

This extension is good news for project developers who in 2017 had confidence that Congress would eventually reinstate these tax credits and began construction in 2017. However, developers who waited and wanted to see the credit extended before beginning construction lose out: the legislation they were waiting for was enacted in 2018 but only helps projects that began construction before 2018.

In the coming months, the developers of the projects using the Retroactive Only Technologies may join forces with renewable energy industry participants concerned about the unfavorable treatment of tax credits under the base erosion anti-abuse tax ("BEAT") enacted in so-called the Tax Cuts and Jobs Act. The BEAT tax rate increases from five percent to 10 percent in 2019, so the opponents of BEAT like the proponents of Retroactive Only Technologies may advocate for another tax bill to maintain the BEAT tax rate at five percent and provide an extension through 2018 or longer for the tax credits for the Retroactive Only Technologies.

The Act on balance is good news. It should in particular boost investment in and deployment of fuel cells, Small Wind and solar lighting.

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© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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