As Congress was completing final negotiations of the stimulus package dealing with the public health and economic impacts of the coronavirus pandemic, several key energy provisions made their way into the 5593-page omnibus spending bill passed by the House and Senate on December 21, 2020, particularly much needed extensions of several renewable energy and energy efficiency tax incentives.
Specifically, the Consolidated Appropriations Act, 2021 (the "Act")1 addresses, among other things, the concerns of renewable energy developers regarding the potential expiration of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) and, for the first time, includes provisions for offshore wind projects. In addition, the Act provides for the expansion and enhancement of significant research and development programs related to renewable energy, energy efficiency, energy storage, and carbon capture and sequestration, and adds certain other provisions to reduce greenhouse gas emissions.2
Existing energy tax credits and deductions have been extended as follows:
Production Tax Credit. The PTC under Internal Revenue Code (IRC) Section 45 for large wind facilities has been extended for one year, permitting wind facilities that begin construction before January 1, 2022 to qualify at 60% of the statutory rate, which rate adjusts for inflation. For calendar year 2020, the full statutory rate is 2.5 cents per kilowatt hour and 60% of the statutory rate is 1.5 cents per kilowatt hour. The Act leaves in place the phase-down to 40% of the credit for wind facilities that began construction in 2019.
Additionally, the credit has been extended through 2021 for biomass (closed and open loop), geothermal, landfill gas, municipal solid waste-to-energy, certain hydro, and marine and hydrokinetic facilities, at various levels (2.5 cents per kilowatt hour for closed-loop biomass and geothermal energy and 1.3 cents per kilowatt hour for the other categories). As under current IRC Section 48(a)(5)(C)(ii), renewable energy developers may elect to take the ITC in lieu of the PTC. The election has been extended by one year for projects for which construction begins before January 1, 2022, however, the ITC for wind, if elected by January 1, 2022, will be reduced by 40% from the standard credit of 30% to 18%.
Investment Tax Credit. The ITC under IRC Section 48 has been extended for two years through 2023 for solar facilities, fuel cells, small wind projects, microturbines, and combined heat and power systems.
With regard to solar photovoltaics and solar water heating facilities, the ITC was 30% for such solar facilities that began construction before January 1, 2020. Afterward, the credit fell to 26% through 2020, and would have continued to be reduced to 22% through 2021 and 10% for 2022 going forward. Congress extended the applicability of the 26% credit for two years until January 1, 2023 and the applicability of the 22% credit for another year until January 1, 2024. For any facility beginning construction before January 1, 2024, but not placed into service by January 1, 2026, the tax credit will be reduced to 10%. There is no expiration date for the 10% credit.
With regard to the credits for fiber-optic solar, fuel cells and small wind projects, the phase-down is the same as for other solar projects, except that the credit expires completely for such projects not placed into service by January 1, 2026.3 The 10% ITC for microturbines, and combined heat and power systems has been extended until January 1, 2024, after which it expires. The 10% credit for energy derived from a geothermal deposit does not expire.
Congress has also now included waste energy recovery projects as eligible for the ITC under IRC Section 48(a)(2)(A)(i). The credit will be phased out in the same way as the credit for fiber-optic solar, fuels cells and small wind projects, as discussed above. Waste energy recovery is defined as property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity.
It should be noted that the new legislation did not provide a tax credit for stand-alone energy storage facilities but storage related to the functioning of a solar facility has been determined to be eligible for the solar ITC per Internal Revenue Service rulings.4
Offshore Wind Tax Credits. Importantly, the Act establishes a new subsection in IRC Section 48(a)(5)(F) to extend the ITC for five years to offshore wind projects which begin construction before January 1, 2026, and allowing the ITC with no comparable reduction in the investment tax credit. As such, the ITC for offshore wind projects remains at 30%.
Carbon Sequestration Tax Credit. The tax credit for carbon capture and sequestration projects under IRC Section 45Q of up to $50 per metric ton of carbon captured for geologic storage ($35 per metric ton for enhanced oil recovery projects) was set to expire at the end of 2023 and instead has been extended for two years through 2025, for construction beginning before January 1, 2026.
Commercial Energy Efficiency Deduction. The commercial building energy efficiency tax deduction under IRC Section 179D allows for up to a $1.80 per square foot tax deduction for use of qualifying energy efficiency technologies in commercial buildings. The deduction was set to expire at the end of 2020. Congress has now made the commercial energy efficiency deduction permanent and provided for an annual cost of living adjustment.5
Other Tax Credit Extenders. The Act extended certain other tax credits for one year to January 1, 2022, such as (1) the credit for second generation biofuel producers under IRC Section 40(b)(6)(J)(i); (2) the credits for fuel cell (hydrogen fueled) motor vehicles under IRC Section 30B(k)(1) and two-wheeled plug-in electric vehicles (motor cycles and scooters) under IRC Section 30D(g)(3)(E)(ii); and (3) the credit for Alternative Fuel Refueling Property under IRC Section 30C.
Some highlights of the significant research and development programs contained in the Act to reduce energy use and address the effects of climate change are as follows:
Energy Efficiency. The energy efficiency provisions include assistance for energy efficiency retrofitting of schools and significant requirements for increasing energy and water efficiency in Federal buildings. Also required is a "Federal Smart Building Program" to demonstrate innovative energy efficiency policies and approaches. There are provisions for developing energy information data centers and energy savings information technologies in conjunction with the national laboratories, academia and industry. Weatherization programs in low-income communities will also be expanded.
Renewable Energy Research and Development. The Act provides for expanded support for research and development of renewable energy technologies, primarily wind, advanced geothermal, solar and marine (tidal and wave) power. There are specific programs related to offshore wind projects including the operation of an offshore research facility to facilitate the development of greater offshore wind and the integration of offshore wind power into the electrical grid, focusing on transmission, distribution, microgrids, demand response and storage. In supporting such projects, the Department of Energy must give special consideration to demonstration projects in "economically distressed areas and areas disproportionately impacted by pollution" and prioritize domestic manufacturing of wind energy technologies.
Energy Storage Research and Development. There are provisions for a 10-year strategic plan for the development of significant energy storage resources in coordination with grid modernization. The Act sets up a joint program between the Departments of Energy and Defense to develop long duration, commercially viable, energy storage technologies.
Carbon Management, Capture and Sequestration. The Act discusses the development of more efficient natural gas turbines for use with renewable natural gas and hydrogen, and provides support for demonstration projects using "transformational technologies" including biofuels and hydrogen. The Act also continues significant Federal support grants for carbon capture and sequestration projects (including long-term geologic storage) to increase the performance of coal and natural gas facilities and provides further incentives for testing and validation programs. New features include significant support for research and development of direct air capture and storage technologies and the award of competitive prizes for certain direct air projects of up to $180 per metric ton of carbon captured and stored, or lesser amounts available under IRC Section 45Q as determined by the Department of Energy.6
Reduction in HFCs. Finally, in addition to programs such as carbon capture and sequestration, the Act contains other important provisions related to reducing greenhouse gas emissions to address the effects of climate change. For example, the Act requires an 85% reduction over 15 years in the production and consumption of hydroflourocarbons (HFCs), a strong greenhouse gas emitted through cooling and refrigeration systems.7
1 Rule Committee Print 116-68, Text to House Amendment to the Senate Amendment to H.R. 133 (Coronavirus Relief), dated December 21, 2020.
2 Division EE of the Act, entitled the Taxpayer Certainty and Disaster Tax Relief Act of 2020, covers the extensions of various energy tax credits and incentives. Division Z of the Act, entitled the Energy Act of 2020, provides many of the provisions related to new and expanded energy research and development programs. Several provisions of the Energy Act of 2020 are drawn from the draft American Energy Innovation Act, drafted primarily by Senator Lisa Murkowski and the Senate Committee on Energy and Natural Resources. See https://www.energy.senate.gov/american-energy-innovation-act-aeia. Although not formally introduced, the Senate bill was developed in response to the Clean Energy and Jobs Innovation Act, H.R. 4447, passed by the House on September 24, 2020. See https://www.congress.gov/bill/116th-congress/house-bill/4447/text.
3 Residential renewable energy tax credits under IRC Section 25D for solar equipment, fuel cells, small wind, and geothermal heat pumps were also extended for two years and will be phased down and expire after January 1, 2024. Certain qualified biomass projects will also now be eligible for this credit. In addition, certain energy efficiency tax credits for non-business energy property under IRC Section 25C were extended for one year.
4 See, e.g., IRS Ruling No. 201809003, dated March 2, 2018.
5 In California, the 179D deduction allows for use of the most recent California Nonresidential Alternative Calculation Method approved by the Department of Energy two years before the date that construction of the property or energy efficiency improvements begin.
6 See also Division S (Innovation for the Environment) of the Consolidated Appropriations Act which requires streamlining of permitting for carbon capture and sequestration projects, including direct air capture.
7 The requirement for HFC reductions is also contained in Division S of the Act (Innovation for the Environment).
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