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The Inflation Reduction Act increased several key tax incentives and expanded eligibility for accelerated depreciation, which could benefit federal distributed energy projects. Expanded tax incentives include the Investment Tax Credit (ITC) and the Production Tax Credit (PTC), among others.
Disclaimer: The content on this page does not constitute professional tax advice or other professional financial guidance. Details/requirements may change based on additional guidance from the Treasury Department. It should not be used as the only source of information when making purchasing decisions, investment decisions, tax decisions, or when executing other binding agreements. All prospective recipients of tax incentives should seek qualified tax counsel prior to developing a project to confirm incentive program eligibility and details.
Federal agencies have two primary procurement options to take advantage of these incentives to improve cost-effectiveness and maximize project scope.
See the chart below for a summary of potential on-site procurement options. With ESPC ESAs and On-Site Electricity Purchase Contracts, a private owner can monetize ITC/PTC incentives to benefit agencies. For more information about all of the options below, refer to the Federal On-Site Distributed Energy Procurement Options page.
Federal On-Site Distributed Energy Procurement Options
|UESC||Utility Energy Service Contract||ESPC ESA*||ESPC Energy Sales Agreement|
|USC||Utility Service Contract||EUL||Enhanced Use Lease|
|ESPC||Energy Savings Performance Contract|
* System is privately owned initially; government must retain title by end of the contract (OMB Memo requirement).
Investment and Production Tax Credits
Although federal agencies other than the Tennessee Valley Authority do not appear eligible for the ITC or PTC, they can still benefit if eligible technologies on federal buildings or land are privately owned and operated.
The ITC and PTC are available for taxable business entities, local and tribal governments, and certain tax-exempt entities that own and operate qualified energy technologies.
Federal agencies can use an energy savings performance contract energy sales agreement (ESPC ESA) or an on-site electricity purchase contract to install privately-owned technologies eligible for the tax incentives, with savings passed on to the agency in the form of a lower electricity price. The project can benefit from either the ITC or PTC, but not both.
The ITC is a tax credit that reduces the federal income tax liability for a percentage of the cost of a qualified system that is installed during the tax year.
The PTC is a per kilowatt-hour (kWh) tax credit for electricity generated for the first 10 years of a qualifying system's operation. It reduces the owner's federal income tax liability and is adjusted annually for inflation.
Technologies eligible for the ITC or PTC may also be eligible for accelerated depreciation, which provides an additional tax benefit. Table 1 summarizes the tax credit amounts available for projects meeting various requirements.
Table 1. Investment and Production Tax Credit Amounts
|Category||Amount for Projects <1MW AC (Cumulative)||Amount* for Projects >1MW AC (Cumulative)|
|Investment Tax Credit||Production Tax Credit||Investment Tax Credit||Production Tax Credit|
|Base Tax Credit||30%||2.75¢/kWh||6%||0.5¢/kWh|
|Wage & Apprenticeship Requirements||N/A||+24%||+2.25¢/kWh|
|Domestic Content Minimums||+10%||+0.3¢/kWh||+10%||+0.3¢/kWh|
|Siting in Energy Community||+10%||+0.3¢/kWh||+10%||+0.3¢/kWh|
|Siting in Low-Income Community or on Indian Land (<5 MW AC)||+10%||N/A||+10%||N/A|
|Qualified Low-Income Residential Building Project or Economic Benefit Project||+20%||N/A||+20%||N/A|
|*The ITC amount is a percentage of the total qualifying project cost basis. For projects >1MW AC, Domestic Content and Energy Community adders also assume labor requirements are met for full value.|
ITC and PTC Technology Eligibility Comparison
The following technologies are eligible for the ITC and/or PTC until 2025. Note that a project can benefit from either the ITC or PTC, but not both. See Updates to the ITC and PTC below for more information.
*The PTC value is reduced by one-half for facilities using municipal solid waste or biomass. See 26 U.S.C. §45(b)(4) for additional detail.
Table: ITC and PTC Technology Eligibility Comparison
|ITC Eligible Technologies||ITC and PTC Eligible Technologies||PTC Eligible Technologies*|
|*The PTC value is reduced by one-half for facilities using municipal solid waste or biomass. See 26 U.S.C. §45(b)(4) for additional detail.|
Updates to the ITC and PTC
Major changes to the ITC and PTC from the Inflation Reduction Act include:
ITC value of 30% through at least 2032 (compliance with prevailing wage and qualified apprenticeship requirements necessary for full value).
PTC values of at least $0.0275/kWh through 2025 and at least $0.026/kWh through 2032 (compliance with prevailing wage and qualified apprenticeship requirements necessary for full value).
Inclusion of standalone energy storage, microgrid controllers, and interconnection upgrades as eligible property for the ITC (subject to certain restrictions). This could be particularly beneficial for comprehensive microgrid projects on federal sites.
Clean Electricity ITC/PTC
Starting in 2025, the ITC and PTC will be available for any zero-greenhouse-gas-emitting technology (i.e., not limited to those listed above), including those that use carbon capture.
Certain entities are eligible for direct payment of the ITC or PTC, including tax-exempt entities, states and their political subdivisions, the Tennessee Valley Authority, Indian Tribal governments, Alaska Native Corporations, and corporations that operate on a cooperative basis to engage in furnishing electric energy to people in rural areas.
Establishment of new ITC and PTC bonus credits for projects that meet specific criteria (Energy Communities, Domestic Content, and Environmental Justice).
The ITC can be transferred once to an unrelated taxable entity in exchange for cash, which may simplify financing for private owners.