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Tax Credits for Renewable Energy

As you develop your strategy for renewable energy, cost is inevitably part of that equation. In fact, understanding the available incentives, including tax credits, may help clarify and refine your strategy.

The Inflation Reduction Act contains a variety of new tax credits designed to boost technologies to advance local climate action. It also enhances established tax credits, like the Investment Tax Credit (ITC) and Production Tax Credit (PTC), to incentivize investment in and production of renewable energy in the United States. Most of these tax credits start at a base credit level, and then offer “adders” — further incentives for developers to use certain materials, support labor requirements, or benefit specific communities.

Determine Whether Tax Credits Enhance Your Strategy

You should factor in tax credits into your financial strategy and project models, even though this is not a typical consideration for a tax-exempt entity. Previously, cities and other tax-exempt entities had to use more complex financing mechanisms, like a power purchase agreement, green tariff, or virtual power purchase agreement, to capture the full value of the federal tax credits for renewable energy. To be clear, these are still options and will likely remain competitive options as the market adjusts to the Inflation Reduction Act. However, new structures like direct pay will also make each of these tax credits more accessible to tax-exempt entities.

Tax credits that are directly applicable to municipalities through the direct pay provisions enacted by the IRA include: the ITC, PTC, other commercial tax credits, and other consumer tax credits. For a full list of direct pay-eligible tax credits, check out this chart here.

Understand Key Tax Credits 

  • The Investment Tax Credit (ITC)

    The Investment Tax Credit (ITC) offers an upfront credit on a project’s full eligible cost basis. Through updates in the Inflation Reduction Act, the ITC now offers a base rate credit worth 6% of eligible project costs, with an increased rate of up to 30% if prevailing wage and apprenticeship requirements are met for utility-scale projects (typically defined as 1 MW or greater). There are new adders, discussed below, that may make your project even more financially competitive. The IRA also expands the ITC to cover qualifying stand-alone energy storage technologies and qualified interconnection properties related to projects that are otherwise eligible for the ITC. The ITC will become technology-neutral in 2025 and is scheduled to phase out by 2035.

  • The Production Tax Credit (PTC)

    The Production Tax Credit (PTC) offers an inflation-adjusted 0.3 cent per kilowatt-hour (kWh) base credit on the energy produced from a qualifying project. This will be available to facilities including wind, solar, biomass, geothermal, landfill gas, trash, qualified hydropower, and others. That base credit increases to 1.5 cents per kWh for projects that meet prevailing wage and apprenticeship requirements (and may adjust further for inflation). New adders may make your projects even more financially competitive. The PTC will become “technology neutral” in 2025 and is scheduled to phase out by 2035 or when greenhouse gas emissions from the electricity sector in the United States have been reduced by 75% from 2022 levels.

  • Commercial Tax Credits

    Other relevant commercial tax credits that support local decarbonization include:

    • The Advanced Manufacturing Production Credit, which creates a PTC for the domestic production and sale of solar and wind components. This credit will phase out in 2031, but since the passage of the IRA, solar component manufacturers have already begun to announce plans to build or expand American manufacturing facilities.
    • The Advanced Energy Project Credit will provide a 30% credit for qualifying projects that reequip, expand, or establish a manufacturing facility to produce components for a variety of renewable technologies, fuel cells, energy storage, transmission components, carbon capture and storage, renewable fuels, or electric vehicles.
    • The Commercial Clean Vehicles Credit will provide up to $40,000 to buy a qualifying medium- or heavy-duty commercial clean vehicle, or, in the case of a vehicle under 14,000 pounds, $7,500.
  • Consumer Tax Credits

    Other relevant consumer tax credits that support local decarbonization include:

    • The Qualified Plug-In Electric Drive Motor Vehicle Credit was increased to $7,500, but now has higher domestic content and domestic manufacturing requirements.
    • The Credit for Previously Owned Clean Vehicles will provide up to a $4,000 tax credit to buy a used electric vehicle.
    • The Alternative Fuel Vehicle Refueling Property Credit will provide up to 30% of cost, or $1,000, whichever is less, to qualifying electric vehicle chargers in rural or low-income areas.
    • The Energy Efficient Home Credit (for contractors building energy-efficient homes) and the Residential Energy Efficiency Credit (for homeowners making qualified energy-efficiency improvements) offer incentives for greater energy efficiency in residential buildings.

Note: This is an illustrative, not comprehensive list of commercial and consumer tax credits.

Though not all of the above credits are directly applicable to municipalities, cities can play an important role in ensuring that their residents and small businesses are aware of and able to take advantage of these tax credits.