LEGAL INTERVIEW: As election nears, Mintz attorney discusses Biden's tax incentives proposal

Federal tax incentives have been a primary financing mechanism behind renewable energy expansion over the last decade. The investment tax credit (ITC) has served as a major driver of solar growth across the U.S., while the production tax credit (PTC) has spurred the wind industry by giving wind developers access to critical capital to build new projects.

In July, Democratic presidential nominee Joe Biden laid out his Build Back Better plan, an economic recovery agenda aimed at building a new, sustainable economy while creating millions of new jobs. 

The plan centers on manufacturing, innovation and new infrastructure, and includes the launch of a USD 2tn national effort aimed at tackling climate change that would put the U.S. on a path to economy-wide net zero emissions by 2050. 

The climate agenda also calls for reforming and extending federal tax incentives as a way to scale up best practices from state-level clean energy standards, which are being implemented in a way that provides renewable credits to developers.

“There is a general sense in the industry that more tax credit legislation is needed in light of COVID-19 and the growth of the battery and offshore industries,” Judy Kwok, an attorney with global law firm Mintz, told New Project Media. “So in that sense the industry is very alert to those sections of the Biden plan. I would expect most developers are just waiting to hear about the details.”

The clean energy sector has repeatedly called for an extension of start construction and safe harbor deadlines to allow renewable projects to qualify for the federal tax credits, despite delays associated with supply chain disruptions.

Industry leaders are also pushing for refundable, or direct pay, renewable tax credits to facilitate their monetization due to reduced availability of tax equity.

“In general, there are many in the industry who believe that extending the expiring or phased-out statutes—including those pertaining to the wind production credit and the investment tax credit for wind and solar--is the way to go,” Kwok said. “That would make a lot of sense given that many believe that COVID-19 has slowed down development of the renewables sector. There is a lot of technological development going on in the wind and solar sectors that is very exciting, and a straightforward extension is the first thing that everyone thinks about.”

Offshore wind incentives

While it is unlikely that any federal renewables tax legislation will pass before November's election, many in the industry have expressed optimism around the Growing Renewable Energy and Efficiency Now Act of 2020 (GREEN Act), now part of the Moving Forward Act that passed the House in July.

Notably, the legislation includes an extension of the wind PTC at 60 percent for five years and extends the offshore wind ITC for five years. 

“One of the main federal incentives that people are really excited about, apart from just extending wind production tax credits and investment tax credits for wind and solar, is offshore,” Kwok said. “Right now the main incentive on the table for offshore is the investment tax credit. The credit for offshore projects, because it’s a wind credit, is phasing out faster than the credit for solar projects. This year it’s phased out to 60 percent of the maximum credit and last year it was phased out to 40 percent of the maximum credit. One major issue is that in order to qualify for a certain percentage of the maximum credit, you need to start construction by 31 December of a certain year, and what constitutes starting construction is highly technical.”

Under current IRS guidance, a project must show continuous construction from the start construction date until project completion, or it must be placed in service by four calendar years after the start of construction. 

But while the four-year window may not pose significant issues for conventional onshore wind and solar projects, it could become a major barrier to offshore wind.

“When the IRS instituted this rule, it is unlikely they were contemplating offshore projects, which frequently take at least several years to develop—you’re anchoring turbines to the ocean floor,” Kwok said. “Under current law, that time frame typically puts you in the continuous construction/continuous efforts rule, which creates interpretive uncertainty. The second point is that the current phase-out schedule for the wind production tax credit may not fully take into account offshore projects, which in the last few years have really started to take off and are generating a great deal of interest. Those are two reasons why the prospect of a separate investment tax credit for offshore is so compelling.”

Last week, Republican Senators introduced a bill to completely phase out the federal PTC for renewable energy sources. The legislation specifies that new projects must begin construction by the end of this year to qualify for the credit, as it stands under current law, and affirms the 2020 extension as the last extension the credit would receive.

What stakeholders want

While extenders go a long way towards supporting renewables, previous proposals reveal a host of creative, more radical ideas for implementing clean energy through federal tax incentives.

“The landscape of what can be done is very large,” Kwok said. “In at least one area, carbon capture, the main issue is not necessarily legislation. We finally got to the point in February 2020 where the IRS issued key guidance, in the context of Section 45Q on partnership flip structures and start of construction, that was needed to get financial institutions and other large tax equity investors comfortable with carbon capture tax credit eligibility and credit allocation. In other words, similar guidance to what exists for wind and solar projects that is expected to open up the tax equity markets. And then COVID-19 hit two weeks later. So in the context of carbon capture credits, it’s not just about legislation, it’s also about helping the major investors to feel comfortable enough to take the first leap and to get interested in these new projects.”

The Energy Tax Credit Direct Payment Act of 2020, introduced in July, would revive a section of the American Recovery and Reinvestment Tax Act of 2009, which provides for a cash grant equal to 30 percent of qualifying wind and solar energy facilities.

“Since COVID-19, a refundable credit has been talked of as a possibility," Kwok said. "Historically, production tax credits and investment tax credits in general have not been refundable. But in times of financial crisis, a refundability concept would support the renewables industry, even when major investors do not have tax capacity, and would not be unprecedented. There was a period just after the 2008 crash when the refundability concept was temporarily implemented for a couple of years as the Section 1603 grant.”

Tax incentives for stand-alone storage have also taken center stage, with the U.S. Energy Storage Association (ESA) and other industry leaders calling on Congress to make energy storage technologies eligible for the ITC, with the option to elect “direct payment.” 

The argument for an energy storage ITC centers on scarcity of tax equity in the near term due to COVID’s economic fallout. The ITC for stand-alone energy storage would either be refundable or allow taxpayers to elect direct payment of the credit as tax already paid.

“In addition to extenders and offshore incentives, battery storage is another sector where many people recognize the need for a separate investment tax credit,” Kwok said. “Under current law, the ITC is available for batteries only if they are powered by a solar project above a certain threshold. A separate and expanded incentive for batteries would be a game changer because there are so many other uses for batteries in the renewables space.”