U.S. Renewable Energy Tax Credits - Hitachi ABB Power Grids

While the country is in the process of opening the economy following pandemic-driven restrictions, we still face a long road to recovery. The government’s recent extension of the investment tax credit (ITC) and production tax credit (PTC) programs for renewable energy can play a crucial role in driving the U.S. economy. Additionally, these tax credits will help generate the momentum needed to further address state and national renewable energy goals. 

Not only do they provide an economic incentive for the development of renewable energy infrastructure, but with unemployment still over 6%, renewable energy projects offer a viable way to create jobs and employ workers while modernizing our aging energy infrastructure [1]. 

The extension of these tax credit programs came in two forms, the Consolidated Appropriations Act (CAA) and Treasury Notice 2021-05, “Extension of Continuity Safe Harbor for Offshore Projects and Federal Land Projects.” 

Energy tax credit 2020

Both extensions were passed at the end of December 2020, and combined, they provide wide-ranging economic and regulatory incentives across the renewable energy industry. 

These pieces of legislation include three main components for the near-term development of renewable energy: extension of the already existing PTC for onshore wind by one year, an extension of the already existing ITC for solar P.V. by two years, and creation of a new five-year ITC for offshore wind. 

Long term development

While one- and two-year extensions for onshore wind and P.V. might not seem very impactful, they may be just the push developers need to start new projects. Further, the new five-year ITC for offshore wind is a huge step forward. It creates long-term feasibility for offshore wind projects that typically have a long and costly development path.

We see the new ITC for offshore wind as a major growth opportunity for the industry. 

High construction demands 

Offshore wind projects require significant infrastructure, from turbines to transmission systems and grid interconnections. Compared to other forms of renewable energy, like solar and onshore wind, offshore wind has very substantial infrastructure requirements [2].

Wind turbine costs

The average levelized cost of energy (LCOE) for offshore wind projects sits around $115/MWh, over 3.5 times higher than onshore wind and solar [3]. Fortunately, the LCOE of offshore wind is now steadily decreasing, like both solar and onshore wind generation have done over the past decade. The new offshore wind ITC adds to this trend by providing a 30% tax credit, which drops the LCOE for offshore wind by 12-25%. This level of reduction makes offshore wind a more viable energy generation source while also promoting economic development at regional and national levels. 

The path to 2030

The ITC for offshore wind is available for projects that start by 2025 and are completed within ten years. This means some offshore wind projects that benefit from the ITC may not be coming online until 2030 [2]. This 10-year time frame dramatically reduces the risk for investors, as projects take on average 5-10 years to go from permitting to completion [4].

The PTC and ITC extensions for onshore wind and solar can offer a short but significant boost to the industry as we emerge from the COVID-19 pandemic.

PTC project deliverables

The extended PTC for onshore wind gives developers until the end of 2021 to begin projects and until 2025 before they need to be online. Projects that meet these criteria qualify for a PTC at 60% of the total credit amount, or $18/MWh, which effectively drops the LCOE for onshore wind by 20-35%. 

ITC project deliverables 

The ITC extension for solar includes a tiered system based on the project start date. The tiered ITC system for solar is as follows:

• Projects that start by the end of 2022 qualify for a 26% ITC

• Projects that begin by the end of 2023 qualify for a 22% ITC

• Projects that start after 2023 qualify for a 10% ITC

The projects must be online by the end of 2025 to qualify for both the 26% and the 22% ITCs. This will effectively reduce the LCOE of solar by 15%.

Enhancing geographical reach

While these short extensions don’t leave much time to design and develop new projects, they give a nudge to start already planned projects sooner. This is critical in our current economic climate. A very high percentage of these projects are expected to materialize in rural parts of the country [5]. These areas have been hit particularly hard by the COVID-19 pandemic and typically have higher poverty rates, less employment opportunity, and are more vulnerable to labor market shocks. 

For example, while rural communities saw less immediate impacts from the 2008 financial crisis, they have been relatively slow to recover compared to urban regions (although some of that growth can be attributed to gentrification, rather than more broad-based investment) [6]. Still, pulling project start dates forward may give a boost to economies under stress.

Accelerating opportunities

While the timeframe to take advantage of some incentives has been expanded, that's no reason to slow down. All things considered this is an opportune time for developers to get an early start building out their projects. This is especially true considering the long lead times required for components of these projects, such as high-power equipment and platforms. Developers may benefit from investing in equipment, smaller components, or system design for early-stage projects because tax credits are available now. From a longer perspective, supply chains can require time to ramp up – if developers wait too long, they may find themselves facing a supply bottleneck.

The U.S. has already set a total combined procurement target of 30,000 MW of offshore wind energy for the coming decades, so the pipeline is clearly filling quickly.

These tax credit programs will play a key role in keeping the momentum going in the renewable sector. 

Long term investments 

In particular, the 10-year offshore wind ITC promises to keep investment flowing into the space for many years to come. This is critical because investment in utility-scale projects is a significant driver for developing the industry as a whole, such as fostering research to improve renewable technologies.

Transition into a sustainable future

We are now at a crucial point where the cost of P.V. and solar technologies have become competitive with fossil fuel infrastructure [8]. Since 2010, the cost of utility-scale P.V. technology has fallen at a year-over-year rate of approximately 10% [9]. If these trends continue, the National Research Laboratory (NREL) predicts that by 2030 the LCOE for solar and onshore wind energy will be about 1/3rd the cost of the cheapest form of coal energy [10], and offshore wind will be about ½ the cost. The recent tax credit extensions can play a major role in maintaining and even accelerating these technology trends.

That said, estimates show more than 86,000 MW of offshore wind capacity is available for development in the United States. Projects in the next decade will capitalize on this opportunity and likely create substantial demand for further offshore wind generation. Taking advantage of the ITC and PTC now could be an ideal way of securing the needed resources while minimizing future risk against the market for components and labor tightening.

Simply put, we think this is a great time to leverage these incentives to make offshore wind and other renewable energy projects feasible and state procurement targets attainable.

1. https://www.bls.gov/news.release/pdf/empsit.pdf
2. https://www.energy.gov/sites/prod/files/2018/04/f50/offshore_erl_lbnl_format_final.pdf
3. https://www.eia.gov/outlooks/aeo/pdf/electricity_generation.pdf
4. https://aws-dewi.ul.com/offshore-wind-energy-in-the-us-when-will-it-take-off/
5. https://hitachienergy.com/us/en/news/local-news/blogs/top-4-reasons-the-u-s-should-extend-federal-renewable-energy-tax-credits
6. https://www.pnas.org/content/118/1/2019378118
7. https://cleanpower.org/facts/offshore-wind/
8. https://www.iea.org/reports/world-energy-outlook-2020
9. https://www.irena.org/newsroom/pressreleases/2020/Jun/Renewables-Increasingly-Beat-Even-Cheapest-Coal-Competitors-on-Cost
10. https://atb.nrel.gov/electricity/2019/summary.html
11. https://pv-magazine-usa.com/2021/03/09/lawmakers-propose-energy-storage-system-tax-incentive/