A year ago, it would have been unimaginable to consider the gains the renewable energy industry has experienced in the past 45 days. From COP21 (aka the Paris Agreement) affirming the world’s position on the action and innovation needed to ensure climate stability, to the subsequent federal budget deal extending renewable tax credits, it’s clear December 2015 will go down in history as one of the major turning points in our reliance on fossil fuels.
Both of these milestones will have far-reaching impacts and play significant roles as we move away from fossil fuels, but it’s the tax credit extension for solar and wind projects that will have the most immediate and significant impact to U.S. businesses and the energy industry.
UNDERSTANDING THE TAX CREDIT EXTENSIONS
The Omnibus Appropriations Act, a $1.1 trillion spending bill passed by both the Senate and House and signed by President Obama on December 18, included two beneficial business tax credits: continuation of the Investment Tax Credit (ITC) for solar projects and re-establishment of the Production Tax Credit (PTC), previously concluded in 2014, for wind projects.
Investment Tax Credit (ITC):The ITC, originally implemented in 2006, is an un-capped 30 percent tax credit for most commercial and residential solar energy systems that can be claimed in entirety the year in which a system is placed in service. The new legislation extends the current version of the ITC through 2019. The tax benefit will then decline annually based on the year in which system construction commenced as shown below:
|Year Commenced||Tax Credit|
|2022 and beyond||10%|
Production Tax Credit (PTC):
The PTC is a tax credit based on the amount of energy produced by a renewable energy system; and the spending bill extends the start of construction deadline for eligibility for wind projects. Projects commencing before 2017 will receive 2.3 cents/kWh produced annually over the first 10 years of the system. From there, the tax credit is ratcheted down as follows:
|Year Commenced||Tax Credit|
|2020 and beyond||none|
TOP 3 IMPACTS OF THE ITC/PTC EXTENSIONS
- Solar & Wind Economic Boom
The extension of both the ITC & PTC will lead to sustained growth in the U.S. solar and wind industries. Combined, these tax extensions are expected to deliver upwards of $50 billion into the U.S. economy’s energy sector by the time they expire. By 2020, Bloomberg New Energy Finance (BNEF) estimates an additional 24 GW of solar capacity will be installed (a 54 percent increase over projections without an ITC extension) and 19 GW of additional wind capacity.
- Energy Storage (Batteries)
One of the bigger impacts resulting from the ITC extension will be realized in residential and commercial energy storage. Batteries, seen by many as “the Swiss army knife of the grid,” are capable of providing a stack of value to different stakeholder groups across the energy lifecycle. For example, batteries can swallow up excess daytime solar production to meet overnight demand, they can charge off the grid in the evenings to reduce energy costs for consumers during daytime peaking hours, and they can also rapidly switch from charge to discharge in order to stabilize the grid. These are just a few of the benefits energy storage will introduce. Because this technology introduces so much value, utility companies across the country are preparing for a rapid introduction that will likely have significant impacts on their business models.
- Future of Net Metering
With ITC/PTC extensions and resultant boon to the solar and wind industries, utilities are likely to ramp up efforts to reign in net metering legislation (net metering is a billing mechanism that credits on-site energy generating system owners for the electricity they add to the grid). Across the country, utilities are experiencing major shifts in how customers consume energy; and for many utilities, distributed/client-sited solar and storage technologies represent a growing challenge to their traditional business models. As a result, the ITC/PTC may cause some utilities to set their sights on changing and/or eliminating (in some states) net metering as a way to slow the coming wave of client-sited generation technologies.
To learn more about the impacts of COP21, ITC/PTC extensions and other news on renewables and energy procurement, please join one of ENGIE Insight’s upcoming webinars from our Inside Energy & Sustainability series. Here, ENGIE Insight experts will delve deeper into these topics and host live Q&A sessions to help you navigate this changing landscape.