IRS Publishes Inflation Adjustment for Production Tax Credits with Slight Bump for Certain Facilities

The Internal Revenue Service published the annual inflation adjustment factor used to calculate the value of production tax credits (“PTCs”) generated in 2020 on May 13, 2020. There is a one-cent per kilowatt-hour (“kWh”) increase for certain facilities as described below, but the rate for wind, closed-loop biomass and geothermal facilities remained unchanged from 2019.

The amount of PTCs available to a taxpayer is calculated by multiplying a base rate that is adjusted annually for inflation by each kWh of electricity the taxpayer produces and sells to third parties during the year. The unadjusted base rate is 1.5 cents per kWh for electricity produced from wind, closed-loop biomass and geothermal facilities. The base rate is cut by 50% in the case of power produced by open-loop biomass, landfill gas, trash, hydropower and marine and hydrokinetic facilities (e.g., facilities that generate electricity from waves or ocean currents).

With the inflation adjustment factor for 2020, we now have a full picture of PTC values for the year. The values are 2.5 cents per kWh for wind, closed-loop biomass and geothermal facilities — the same rate as 2019 — and 1.3 cents per kWh for open-loop biomass, landfill gas, trash, hydropower and marine and hydrokinetic facilities. The PTCs for this second group of facilities received a one-cent increase to 1.3 cents per kWh from 1.2 cents per kWh in 2019.

It is important to keep in mind that wind PTCs are subject to a haircut based on the year in which the construction of the facility began. The chart below illustrates the current phase down schedule for wind projects.

Thus, if a wind project began construction in 2016, its owner can claim the full 2.5 cents per kWh for electricity it sells in 2020. However, if construction of the wind project began in 2018, that same 2020 rate is reduced by 40% to 1.5 cents per kWh.

Other types of facilities that qualify for PTCs are not subject to the same phase down schedule as wind, but the construction of these facilities must begin by the end of 2020 in order for them to qualify for PTCs.