US Offshore Wind: the Vital Role of Tax Credit
Fact
With a 30GW target of installed offshore wind by 2030, the US set high ambitions in 2021 within the Inflation Reduction Act (IRA). To do so, the IRA has reset the rules on renewable energy taxes support with variations depending on the project. Offshore wind is concerned by two principal mechanisms that existed previously, for onshore wind and solar: the electricity Production Tax Credit (PTC) and the Investment Tax Credit (ITC).
The announcement of impairments related to tax credit issues up to DKK6bn has highlighted once again the high dependency of renewables projects on tax support.
Analysis
Overview of the measures currently in place
Investment Tax Credit
The current key federal tax incentive backing renewable energies as applied to onshore/offshore wind, solar, geothermal, storage and some network costs is the investment tax credit (ITC), which grants a 30% tax credit to projects of over 1MW. ITC is a one-time credit based on the amount of the investment and is earned when the equipment is placed into service.
Basically, ITC offers a base rate of 6%, increased to 30% if the ‘prevailing wage’ and the ‘registered apprenticeship requirements’ are met. These conditions do not seem to pose problems in being obtained but, nevertheless, they add risk in the equation.
The IRA extends the current ITC system to 1 January 2025 and then will replace it by the Clean Electricity Investment Tax Credit (§ 48E Section 13702). The 30% ITC level will be kept but ceiling levels for prevailing wage and apprenticeship requirements will be increased every year.
In addition to this 30%, developers can qualify for a local content credit of 10% for projects which incorporate a certain amount of materials produced in the US such as steel, iron or manufactured products. Another 10% tax credit called energy community can also be added if the project is located in special areas such as brownfield sites which are old coal, oil or gas sites. In total it is therefore possible to achieve 50% in ITC.
The required percentage of Domestic Content for Offshore Wind For Construction is progressive and set at 20% if construction begins before January 2025, 27.5% before January 2026, 35% before January 2027, 45% before January 2028, 50% after 1 January 2028.
Section 13502 of the IRA also provides manufacturers with a 10% tax credit for the domestic production of wind components and related goods such as blades, nacelles, towers, platforms or specialised offshore wind installation vessels.
Orsted had set up its business plan on a 40% ITC (30% + 10%) but said it was struggling to obtain the domestic content eligibility due to difficulties in sourcing American-made material.
ITC monetisation
The direct pay option allows non-taxable entities to directly monetize their tax credits. Operators that have to spend capex and will not receive any income before the park is commissioned will enter into a deal with a Tax Equity Partner. This investor will pay cash for the tax credit amount upfront to the developer, in return for which it will receive a pre-agreed return from the developer and the tax credit amount from the IRS once the project has been launched. The return is generally non-cash which means the investor does not pay the developer the full value of the tax credits.
Production Tax Credit
PTC is a federal subsidy paid directly to green energy producers in the form of an inflation-adjusted per-kilowatt-hour (kWh) tax credit for the electricity generated and sold. The duration of the credit is 10 years after the date the facility is placed in service.
Like the ITC, the IRA has extended, to the end of 2024, the application of the current PTC for electricity produced from renewable energy sources. The Act applies retroactively to projects which “began construction” after 1 January 2022 and applies to projects that “begin construction” before 1 January 2025. Starting on 1 January 2025, the existing PTC will be replaced with the Clean Energy Production Tax Credit (§ 45Y Section 13701). As with the ITC, prevailing wage and apprenticeship requirements levels for additional credit will be raised every year.
The IRA has extended PTC for projects larger than 1MW, at 0.3cents/kWh. Last year, it could have been increased to up to 2.6cents/kWh (i.e. $26/MWh) for electricity generated from wind if the wage and apprenticeship requirements were met plus certain conditions such as employing qualified union workers or usage of US-produced components.
This year, an update provided by the IRS on 21 June raised the credit to 2.8cents/kWh, after adjustment for inflation, for wind, solar, closed-loop biomass and geothermal energy facilities in service before January 2022. Open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy are eligible to up to 1.4cents/kWh.
For facilities placed in service after December 2021, the credit for wind, solar, closed-loop biomass and geothermal energy facilities is 0.55cents/kWh and 0.3cents/kWh for the other energies. These amounts could increase from 0.55cents and 0.3cents to 2.75cents and 1.5cents/kWh, respectively, or $27.5/MWh and $15/MWh, if prevailing wage and apprenticeship requirements are satisfied.
These two measures remain with conditions and, if a group fails to comply with prevailing wages and registered apprenticeship requirements, the IRA will reduce the ITC to 6% and the PTC to 0.55cents/kWh ($5.5/MWh).
IRA encourages rapid investment as new rules include a phased-out approach starting in 2032 once greenhouse gas emission reduction goals are met. Nevertheless, should the US fail to achieve a 75% reduction in emissions from 2022 levels by 2032, the ITC and PTC will retain their full credit value until the emissions target is reached. This 10-year life span is intended to provide clarity for developers and thus reduce political changes.
With a 30GW target of installed offshore wind by 2030, the US set high ambitions in 2021 within the Inflation Reduction Act (IRA). To do so, the IRA has reset the rules on renewable energy taxes support with variations depending on the project. Offshore wind is concerned by two principal mechanisms that existed previously, for onshore wind and solar: the electricity Production Tax Credit (PTC) and the Investment Tax Credit (ITC).
The announcement of impairments related to tax credit issues up to DKK6bn has highlighted once again the high dependency of renewables projects on tax support.
Analysis
Overview of the measures currently in place
Investment Tax Credit
The current key federal tax incentive backing renewable energies as applied to onshore/offshore wind, solar, geothermal, storage and some network costs is the investment tax credit (ITC), which grants a 30% tax credit to projects of over 1MW. ITC is a one-time credit based on the amount of the investment and is earned when the equipment is placed into service.
Basically, ITC offers a base rate of 6%, increased to 30% if the ‘prevailing wage’ and the ‘registered apprenticeship requirements’ are met. These conditions do not seem to pose problems in being obtained but, nevertheless, they add risk in the equation.
The IRA extends the current ITC system to 1 January 2025 and then will replace it by the Clean Electricity Investment Tax Credit (§ 48E Section 13702). The 30% ITC level will be kept but ceiling levels for prevailing wage and apprenticeship requirements will be increased every year.
In addition to this 30%, developers can qualify for a local content credit of 10% for projects which incorporate a certain amount of materials produced in the US such as steel, iron or manufactured products. Another 10% tax credit called energy community can also be added if the project is located in special areas such as brownfield sites which are old coal, oil or gas sites. In total it is therefore possible to achieve 50% in ITC.
The required percentage of Domestic Content for Offshore Wind For Construction is progressive and set at 20% if construction begins before January 2025, 27.5% before January 2026, 35% before January 2027, 45% before January 2028, 50% after 1 January 2028.
Section 13502 of the IRA also provides manufacturers with a 10% tax credit for the domestic production of wind components and related goods such as blades, nacelles, towers, platforms or specialised offshore wind installation vessels.
Orsted had set up its business plan on a 40% ITC (30% + 10%) but said it was struggling to obtain the domestic content eligibility due to difficulties in sourcing American-made material.
ITC monetisation
The direct pay option allows non-taxable entities to directly monetize their tax credits. Operators that have to spend capex and will not receive any income before the park is commissioned will enter into a deal with a Tax Equity Partner. This investor will pay cash for the tax credit amount upfront to the developer, in return for which it will receive a pre-agreed return from the developer and the tax credit amount from the IRS once the project has been launched. The return is generally non-cash which means the investor does not pay the developer the full value of the tax credits.
Production Tax Credit
PTC is a federal subsidy paid directly to green energy producers in the form of an inflation-adjusted per-kilowatt-hour (kWh) tax credit for the electricity generated and sold. The duration of the credit is 10 years after the date the facility is placed in service.
Like the ITC, the IRA has extended, to the end of 2024, the application of the current PTC for electricity produced from renewable energy sources. The Act applies retroactively to projects which “began construction” after 1 January 2022 and applies to projects that “begin construction” before 1 January 2025. Starting on 1 January 2025, the existing PTC will be replaced with the Clean Energy Production Tax Credit (§ 45Y Section 13701). As with the ITC, prevailing wage and apprenticeship requirements levels for additional credit will be raised every year.
The IRA has extended PTC for projects larger than 1MW, at 0.3cents/kWh. Last year, it could have been increased to up to 2.6cents/kWh (i.e. $26/MWh) for electricity generated from wind if the wage and apprenticeship requirements were met plus certain conditions such as employing qualified union workers or usage of US-produced components.
This year, an update provided by the IRS on 21 June raised the credit to 2.8cents/kWh, after adjustment for inflation, for wind, solar, closed-loop biomass and geothermal energy facilities in service before January 2022. Open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy are eligible to up to 1.4cents/kWh.
For facilities placed in service after December 2021, the credit for wind, solar, closed-loop biomass and geothermal energy facilities is 0.55cents/kWh and 0.3cents/kWh for the other energies. These amounts could increase from 0.55cents and 0.3cents to 2.75cents and 1.5cents/kWh, respectively, or $27.5/MWh and $15/MWh, if prevailing wage and apprenticeship requirements are satisfied.
These two measures remain with conditions and, if a group fails to comply with prevailing wages and registered apprenticeship requirements, the IRA will reduce the ITC to 6% and the PTC to 0.55cents/kWh ($5.5/MWh).
IRA encourages rapid investment as new rules include a phased-out approach starting in 2032 once greenhouse gas emission reduction goals are met. Nevertheless, should the US fail to achieve a 75% reduction in emissions from 2022 levels by 2032, the ITC and PTC will retain their full credit value until the emissions target is reached. This 10-year life span is intended to provide clarity for developers and thus reduce political changes.
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