The Renewable Electricity Production Tax Credit: In Brief
Released: 2018-11-27T00:00:00

T he renewable electricity production tax credit (PTC) expired on January 1, 2018, for nonwind facilities. Thus, under current law, the credit is not available for nonwind projects that begin construction after December 31, 2017. Under current law, wind facilities that begin construction before the end of 2019 may qualify for the PTC. However, the PTC for wind started phasing down in 2017. Whether the PTC should be extended, modified, or remain expired is an issue that may be considered in the 116 th Congress. Legislation enacted during the first session of the 114 th Congress, the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), extended the PTC for wind for five years (with a phase down starting in 2017). Legislation enacted during the second session of the 115 th Congress, the Bipartisan Budget Agreement of 2018 (BBA18; P.L. 115-123 ), retroactively extended the PTC for nonwind technologies for tax year 2017.

This report provides a brief overview of the renewable electricity PTC. The first section of the report describes the credit. The second section provides a legislative history. The third section presents data on PTC claims and discusses the revenue consequences of the credit. The fourth section briefly considers some of the economic and policy considerations related to the credit. The report concludes by briefly noting policy options related to the PTC.

Description

The renewable electricity PTC is a per-kilowatt-hour tax (kWh) credit for electricity generated using qualified energy resources. To qualify for the credit, the electricity must be sold by the taxpayer to an unrelated person. The credit can be claimed for a 10-year period once a qualifying facility is placed in service. The maximum credit amount for 2013, 2014, 2015, and 2016 was 2.3 cents per kWh. The maximum credit amount for 2017 and 2018 is 2.4 cents per kWh. The maximum credit rate, set at 1.5 cents per kWh in statute, is adjusted annually for inflation. Wind (before applying the 2017-2019 phaseout rates), closed-loop biomass, and geothermal energy technologies qualify for the maximum credit amount (see Table 1 ). Other technologies, including open-loop biomass, small irrigation power, municipal solid waste, qualified hydropower, and marine and hydrokinetic energy facilities, qualify for a reduced credit amount, where the amount of the credit is reduced by one-half (see Table 1 ).

Under current law, nonwind facilities for which construction began before January 1, 2018, may qualify for the PTC. For wind facilities, the credit is available for facilities for which construction begins before January 1, 2020. However, for facilities that begin construction during 2017, the credit is reduced by 20%. The credit is reduced by 40% for facilities that begin construction in 2018, and reduced by 60% for facilities that begin construction in 2019. Before 2013, the PTC expiration date was a placed-in-service deadline, meaning that the electricity-producing property had to be ready and available for use before the credit's expiration date.

The amount that may be claimed for the PTC is set to phase out once the market price of electricity exceeds threshold levels. Since being enacted, market prices of electricity have never exceeded the threshold level and the PTC has not been phased out, nor is the PTC likely to be phased out under current law.

In the past, the ability to claim the PTC was also, in some cases, limited by the corporate alternative minimum tax (AMT). Before 2018, the PTC was available for taxpayers subject to the AMT for the first four years of the credit. While the PTC could not be claimed against the corporate AMT, unused credits could be carried forward to offset future regular tax liability. While few firms were subject to the corporate AMT, this limitation may have been significant for those affected. The corporate AMT was eliminated as part of the 2017 tax revision ( P.L. 115-97 ).

From 2009 through 2017, PTC-eligible taxpayers had the option of claiming the 30% energy investment tax credit (ITC) in lieu of the PTC. Property that was placed in service during 2009, 2010, or 2011, or which was placed under construction in one of these years, also had the option of claiming an American Recovery and Reinvestment Act (ARRA) Section 1603 grant in lieu of tax benefits.

There are also production tax credits for Indian coal and refined coal. Indian coal production facilities must have been placed in service before January 1, 2009, for coal produced before January 1, 2016, to receive credits. There is no placed-in-service limitation for coal produced and sold after December 31, 2015. Under current law, credits are not available for coal produced after 2017. The base rate for Indian coal is $2.00 per ton, but with the inflation adjustment the credit was $2.4 in 2017. For refined coal, the base credit amount is $4.375 per ton, and the 2018 credit with the inflation adjustment is $7.307 per ton. Refined coal facilities must have been placed in service before January 1, 2012, to qualify for credits. Refined coal facilities that were placed in service before this deadline may still be receiving credits, as the credit was allowed for production over a 10-year period.

Legislative History

The PTC was first enacted in 1992 as part of the Energy Policy Act of 1992 (EPACT92; P.L. 102-486 ). Since 1999, the PTC has been extended 11 times (see Table 2 ). In many instances, the PTC lapsed before being reinstated.

When first enacted as part of the EPACT92, the PTC was available for electricity generated using wind or closed-loop biomass systems. The credit was initially set to expire on June 30, 1999. In addition to extending the PTC through December 31, 2001, the Ticket to Work and Work Incentives Improvement Act of 1999 ( P.L. 106-170 ) added poultry waste as a qualifying technology. The PTC was again extended, through December 31, 2003, as part of the Job Creation and Worker Assistance Act ( P.L. 107-147 ). The Working Families Tax Relief Act of 2004 ( P.L. 108-311 ) included provisions extending the PTC through December 31, 2005.

Legislation enacted later in the 108 th Congress substantially modified the PTC. The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357 ) added new qualifying resources, including open-loop biomass (including agricultural livestock waste), geothermal energy, solar energy, small irrigation power, and municipal solid waste (landfill gas and trash combustion facilities). Instead of being able to claim the PTC for the first 10 years of production, these new qualifying resources were limited to a five-year PTC period. Further, open-loop biomass, small irrigation power, and municipal solid waste facilities had their credit amount reduced by one-half. The AJCA also introduced a PTC for refined coal, with a rate of $4.375 per ton (indexed for inflation after 1992), available for qualifying facilities placed in service before January 1, 2009.

The PTC was extended twice during the 109 th Congress. The Energy Policy Act of 2005 (EPACT05; P.L. 109-58 ) extended the PTC for all facilities except solar energy and refined coal for two years, through 2007. EPACT05 also added two new qualifying resources: hydropower and Indian coal. Hydropower was added as a half-credit qualifying resource. Indian coal could qualify for a credit over a seven-year period, with the credit amount set at $1.50 per ton for the first four years, and $2.00 per ton for the last three years, adjusted for inflation. EPACT05 also extended the credit period from 5 years to 10 years for all qualifying facilities (other than Indian coal) placed in service after August 8, 2005. The Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ) extended the PTC for one year, through 2008, for all qualifying facilities other than solar, refined coal, and Indian coal.

The PTC was again extended and modified as part of the Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343 ). The PTC for wind and refined coal was extended for one year, through 2009, while the PTC for closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, and qualified hydropower was extended for two years, through 2010. Marine and hydrokinetic renewable energy were also added by EESA as qualifying resources. A new credit for steel industry fuel was also introduced. This credit was set at $2.00 per barrel-of-oil equivalent (adjusted for inflation with 1992 as the base year). For facilities that were producing steel industry fuel on or before October 1, 2008, the credit was available for fuel produced and sold between October 1, 2008, and January 1, 2010. For facilities placed in service after October 1, 2008, the credit was available for one year after the placed-in-service date or through December 31, 2009, whichever was later.

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ) provided a longer-term extension of the PTC, extending the PTC for wind through 2012 and the PTC for other renewable energy technologies through 2013. Provisions enacted in ARRA also allowed PTC-eligible taxpayers to elect to receive a 30% investment tax credit (ITC) in lieu of the PTC. ARRA also introduced the Section 1603 grant program, which allowed PTC- and ITC-eligible taxpayers to receive a one-time payment from the Treasury in lieu of tax credits. Under ARRA, the Section 1603 grant program was available for property placed in service or for which construction started in 2009 or 2010. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ) extended the Section 1603 grant program for one year, through 2011.

The PTC for wind, which was scheduled to expire at the end of 2012, was extended for one year, through 2013, as part of the American Taxpayer Relief Act (ATRA; P.L. 112-240 ). In addition to extending the PTC for wind, provisions in ATRA changed the credit expiration date from a placed-in-service deadline to a construction start date for all qualifying electricity-producing technologies. The PTC, as well as the ITC in lieu of PTC option, was retroactively extended through 2014 as part of the Tax Increase Prevention Act of 2014 ( P.L. 113-295 ).

The Protecting Americans from Tax Hikes (PATH) Act of 2015, enacted as Division Q of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), extended the PTC expiration date for nonwind facilities for two years, through the end of 2016. The ITC in lieu of PTC option was also extended through 2016. For Indian coal facilities, the production credit was extended for two years, through 2016. Additionally, for Indian coal facilities, the placed-in-service limitation was removed, allowing the credit for production at facilities placed in service after December 31, 2008, to qualify. As part of Division P of the Consolidated Appropriations Act, 2016 ( P.L. 114-113 ), the PTC for wind was extended through 2019. The credit was extended at current rates through 2016. For wind facilities beginning construction in 2017, the credit is reduced by 20%. The credit is reduced by 40% for facilities beginning construction in 2018, and reduced by 60% for facilities beginning construction in 2019.

The PTCs for nonwind technologies and the PTC for Indian coal expired at the end of 2016, but were retroactively extended for tax year 2017 in the Bipartisan Budget Act of 2018 (BBA18; P.L. 115-123 ). Absent further legislative action, the PTC for nonwind technologies and the PTC for Indian coal will not be available for facilities the construction of which begins after December 31, 2017.

PTC Revenue Cost Estimates and Claims

Estimates of the cost, or foregone revenue, associated with tax expenditure provisions can be found in the Joint Committee on Taxation (JCT) annual tax expenditure tables. Because JCT's figures are estimates, they may differ from actual amounts of tax credit claims. Between 2018 and 2022, estimated revenue losses associated with the PTC are $25.8 billion (see Table 3 ). Most of these revenue losses, $24.0 billion, are due to the PTC for wind energy. An estimated $0.8 billion is for PTCs for electricity produced using geothermal, $0.5 billion for PTCs for electricity generated using open-loop biomass, $0.3 billion for PTCs for electricity generated using municipal solid waste, and $0.1 billion for PTCs for electricity generated using qualified hydropower. Over the same five-year period, the estimated revenue losses associated with the production credits for refined coal and Indian coal are $0.1 billion each. JCT's tax expenditure estimates are based on current law. A policy that further extends the PTC would increase these tax expenditure estimates.

Information on PTC claims by corporations is available from the IRS through the 2013 filing year. For 2013, 230 corporate taxpayers claimed the PTC (see Table 4 ). Most of the credits claimed were for production of renewable electricity, with only a few claims being made for refined coal, Indian coal, or steel industry fuel. In total, for 2013, taxpayers claimed PTCs of $2.8 billion. Because the PTC is paid out for 10 years, most PTCs awarded in any given year are the result of previous-year investments. Some taxpayers may not be able to use all of their tax credits to offset taxable income in a given tax year. In this case, taxpayers may carry forward unused credits to offset tax liability in a future tax year. In 2010, nearly $1.2 billion in PTCs were carried forward from previous tax years.

The IRS data on PTC claims highlight the effect that policy actions taken in response to the economic downturn had on renewable energy tax credit claims. While the number of taxpayers claiming the PTC increased between 2008 and 2009, this number decreased after 2009. With the Section 1603 grant option available, fewer taxpayers claimed the PTC. While Section 1603 grants were available in lieu of the PTC, $15.5 billion in grants was claimed for technologies that otherwise would have been PTC-eligible. This amount is not directly comparable to the costs of the PTC because Section 1603 grants were a one-time payment, while projects can claim the PTC for 10 years of production.

The effect of the economic downturn can also be seen in data on tax credit carry forwards. The amount of PTCs being carried forward more than doubled between 2008 and 2009, then doubled again between 2009 and 2010. During the economic downturn, taxpayers had less net income to offset with tax credits. Further, weakness in tax equity markets made it harder for renewable energy project developers to establish partnerships to monetize tax credits.

Other available estimates provide information on the cost of a long-term PTC extension. The Congressional Budget Office (CBO) estimates that a permanent PTC (or a PTC extended through the budget horizon) for nonwind technologies would reduce revenues by $1.4 billion between 2019 and 2028. Extending the Indian Coal Production Credit would reduce revenues by $0.4 billion between 2019 and 2028. Extending the wind construction start date through the end of the budget window, beyond 2019, would reduce federal revenues by an estimated $6.9 billion between 2018 and 2027.

Economic and Policy Considerations

The PTC was enacted in 1992 to promote the "development and utilization of certain renewable energy sources." The 1999 sunset was included to provide an "opportunity to assess the effectiveness of the credit." When the PTC was extended as part of a "tax extenders" package in 1999, Congress noted that the PTC had been important to the development of environmentally friendly renewable power, and extended the credit to promote further development of wind (and other) resources. Recent extensions of the PTC reflect a belief that the tax incentives contribute to the development of renewable energy infrastructure, which advances environmental and energy policy goals.

Research suggests that the PTC has driven investment and contributed to growth in the wind industry. While further extension of the PTC may lead to further investment and growth in wind infrastructure, this potential is limited in the case of short-term extensions. Further, retroactive extensions provide what are often characterized as windfall benefits, rewarding taxpayers that made investments absent tax incentives.

While the PTC has contributed to increased use of renewable electricity resources, research on its contribution to reducing greenhouse gas emissions is mixed. In a 2013 report, the National Academy of Sciences estimated that removing tax credits for renewable electricity would result in a small (0.3%) increase in power-sector emissions. In an evaluation of the renewable energy tax credit extensions enacted in P.L. 114-113 , the National Renewable Energy Laboratory concluded that the recent extensions of tax credits for wind and solar contribute to reduced emissions, particularly if natural gas prices are low.

A common rationale for government intervention in energy markets is the presence of "externalities," which result in "market failures." Pollution resulting from the production and consumption of energy creates a negative externality, as the costs of pollution are borne by society as a whole, not just energy producers and consumers. Because producers and consumers of polluting energy resources do not bear the full cost of their production (or consumption) choices, too much energy is produced (or consumed), resulting in a market outcome that is economically inefficient. Tax subsidies for clean energy resources are one policy option for addressing the inefficiencies and market failures in the energy sector. Here, the subsidies approach is not the most efficient way to achieve the policy objective. Subsidies reduce the average cost of energy, encouraging energy consumption, countering energy conservation initiatives, and offsetting emissions reductions. Additionally, tax subsidies do not necessarily provide a comparable incentive for all emissions reduction alternatives, and may favor more costly reductions over less costly ones. Finally, tax subsidies also reduce tax revenues. To the extent that these subsidies are financed by distortionary taxes on other economic activities, they reduce economic efficiency.

A more direct and economically efficient approach to addressing pollution and environmental concerns in the energy sector would be a direct tax on pollution or emissions, such as a carbon tax. This option would generate revenues that could be used to offset other distortionary taxes, achieve distributional goals, or reduce the deficit. A carbon tax approach would also be "technology neutral," not requiring Congress to select which technologies to subsidize.

Tax incentives are also not the most efficient mechanism for delivering federal financial support directly to renewable energy developers and investors. Stand-alone projects often have limited tax liability. Thus, project developers often seek outside investors to "monetize" tax benefits using "tax-equity" financing arrangements. The use of tax equity investors, often major financial institutions, reduces the amount of federal financial support for renewable energy that is delivered directly to the renewable energy sector. Tax incentives that reward production, as opposed to investment, are likely to lead to more renewable electricity per dollar of federal subsidy.

Another consideration is the interaction of the PTC with other policies designed to support the development of renewable electricity resources. More than half of U.S. states currently have renewable portfolio standards (RPS) policies in place. Subsidies for renewable energy at the federal level, including the PTC, reduce the cost of complying with state-level RPS mandates.

Policy Options and Proposals

Without legislative action, the PTC is not available to nonwind projects that began construction after December 31, 2017, or wind projects that begin construction after December 31, 2019. One option is to allow the PTC to expire as scheduled. Under this option, projects that meet specified construction start dates would receive the PTC for the first 10 years of qualified production.

Another option would be to provide a temporary extension of the PTC. With this option, the construction start date deadline could be extended by a set number of years. With the enactment of P.L. 114-113 , the expiration date for the PTC for wind is different than the expiration date for the PTC for other technologies. Thus, Congress may choose to extend the PTC for nonwind technologies. The extension could be made retroactive for 2018. If the PTC for nonwind technologies were extended, the phaseout that currently applies to wind could be applied to other technologies. Another alternative would be to extend the PTC for nonwind technologies, and remove the phaseout for wind, such that all PTC-eligible technologies qualified for the PTC at the same rate.

In 2014, House Ways and Means Committee Chairman Dave Camp proposed a form of PTC phaseout as part his tax reform proposal introduced in the 113 th Congress, the Tax Reform Act of 2014 ( H.R. 1 ). Under this proposal, the PTC inflation adjustment factor would have been eliminated. This would reduce the value of the PTC for renewable electricity to 1.5 cents per kWh, for all PTC-eligible properties still within the 10-year eligibility window. Thus, facilities that had received a 2.3 cent per kWh PTC in 2014, and were still within their 10-year PTC window in 2015, would have seen the value of the PTC fall to 1.5 cents per kWh for 2015 and beyond. Under Chairman Camp's proposal, the PTC would have been fully repealed after 2024. Because the value of the PTC would be reduced for existing facilities, the JCT estimates that this proposal would have raised $9.6 billion in additional federal revenues between 2014 and 2023, relative to current law at the time. A similar proposal was introduced in the 114 th Congress as the PTC Elimination Act ( H.R. 1901 ).

President Obama's FY2017 budget proposed a permanent extension of the PTC. Additionally, under President Obama's proposal, the PTC would be made refundable, solar facilities would be added as qualifying property, and the credit would be modified such that renewable electricity consumed by the producer could qualify for tax credits. Solar property that currently qualifies for the residential energy efficient property credit would also be eligible for the PTC. Additionally, the investment tax credit (ITC) for renewable energy would be made permanent. In analysis of President Obama's FY2017 budget, the JCT estimated that making permanent the PTC and ITC, along with these other changes, would cost $19.8 billion between 2016 and 2026.