Figuring out the PTC one step at a time (Steps 1-2)

Let’s lead with what is important: What could this bonus mean for your facilities?

We’ll talk another day about the trade-offs between ITC and PTC especially when considering the domestic content bonus. For today let’s focus on the PTC which is more advantageous for higher availability/capacity factor projects and lower CAPEX projects.

In essence the PTC values outlined above are a tax credit calculated on the following basis:

1. [The base PTC 0.3 cents x the kWh produced per Tax Year]

   1. Produced by the taxpayer

      1. From “Qualified energy resources (see below)

      2. At a qualified facility during 10 years following COD (aka “placed in service” date)

   2. Sold to an unrelated 3rd party during the taxable year
      

2. This base PTC is then bonified:

   1. Through inflation adjustment (1.7593 in 2022) (the 0.3 cents become 0.53 cents)

   2. By meeting Inflation Reduction Act (“IRA”) labor requirements [0.53 cents x 5 ) = 2.6* cents x the kWh per Tax Year] (*rounded)

   3. Through other Credit Enhancements:

      1. Domestic Content Bonus = 10% x 2.6 cents if so obtained = 0.26 cents

      2. Energy Communities Bonus = 10% x 2.6 cents another 0.26 cents

In summary:

We’ll have to wait for the inflation adjustment factor for 2023 but given the inflation this year this could be an interesting amount.

In any case, this means it really matters that your organization look diligently into capturing and securing this incentive and related bonus. You should build your approach to be able to diligently and tangibly demonstrate compliance with all requirements.

Today we’ll cover the first 2 steps for you to follow:

1. Make sure you are building a “qualified facility”

To have a qualified facility your project must use “qualified energy resources” to generate electricity.

The term "qualified energy resources" means:

(A) wind, (B) closed-loop biomass, (C) open-loop biomass, (D) geothermal energy, (E) solar energy, (F) small irrigation power, (G) municipal solid waste, (H) qualified hydropower production, and (I) marine and hydrokinetic renewable energy.

2. Then your project needs either to:

1. Have a maximum net output of less than 1 megawatt (as measured in alternating current).

2. Start construction before the full rules and guidance are published… but before January 29, 2023 (yes that has passed)

3. Follow applicable rules & guidance once published

   1. So far we have received guidance on Labor requirements and are expecting more rules to come

In conclusion

Small projects automatically get the bonified PTC (e.g. base PTC x 5).

Larger projects however will need to meet the applicable rules and guidance or begin construction before January 29th, 2023 and pass the IRS closely scrutinizing your project by meeting the continuity requirements… e.g. meet the 5% safe harbor or the Physical Work Test.

For the Physical Work Test you will need to demonstrate to the IRS that you have begun work of a significant nature (either on or off site) and that you then maintain a continuous program of construction of the facility.

In the case of the Five Percent Safe Harbor you will qualify if you incurred 5% (or more) of the costs of the facility before Jan 29, 2023 and that you then maintain a continuous program of construction of the facility.

In both case most type of facilities also need to be placed in service in the next 4-6 years at depending on the underlying technology.

If you are wondering how you will comply will labor requirements or can benefit from the energy communities or domestic content bonus you will have to read our next article where we will dig into the current draft rules and their related implications.