ITC vs PTC: Key Factors You Should Consider When Choosing The Right IRA Credit

The Inflation Reduction Act (IRA) came into effect in 2022 and created 11 transferable tax credits. In the fast-developing clean energy landscape, these credits added significant fuel.  The federal tax incentives are designed to reduce capital costs and improve the project returns.

The important matter is choosing the right tax credit for your project. The instant cashflow benefit of the investment tax credit (ITC) or the long-term returns of the production tax credit (PTC) – what do you choose?

In this article, we shall explore the different factors that you should consider before deciding on your ITC vs PTC verdict.

ITC vs PTC: Understanding the Credits

Before you choose between ITC vs PTC, take a look at what these tax credits offer precisely.

ITC offers an immediate dollar-for-dollar tax reduction, depending on a percentage of the project’s total capital investment. This upfront credit helps with initial project expenditure, like large-scale solar installations. Enhancements like direct pay and transferability have made ITC more flexible. Project sponsors now have the chance to monetize the credits they cannot utilize.

PTC provides a per-kilowatt-hour credit for a predecided period, depending on the energy produced. This long-term benefit is particularly important in projects where performance and sustained output matter significantly. With consistent energy production, projects can gain a long-term income source that can be added to financial models.

ITC vs PTC: Factors to Consider

When deciding between ITC vs PTC, timing plays a major role. There are some more factors to evaluate.

Project Eligibility

Certain projects may be eligible for both ITC and PTC. It will be an individual decision to choose. For now, here are the projects eligible for ITC and PTC:

Technology Fit

The nature of technology also matters in the ITC vs PTC decision. For instance:

• Since solar projects require a large initial capital investment, the immediate benefit of ITC will be useful.
• On the other hand, wind projects can benefit from PTC better as the ongoing energy production is crucial in driving revenue.

Calculation Considerations

ITC calculation is quite simple, considering how it provides an upfront benefit based on a certain percentage. For example:

• Base Credit:
  • 30% of the eligible costs for projects of 1 MW or smaller in size
  • 6% for projects larger than 1 MW
• Increased Credit: 30% increase for projects larger than 1 MW, provided prevailing wage and apprenticeship requirements are met.
• Additional Bonuses:
  • A 10% point increase if the project uses domestic content
  • A 10% point increase if the project is located in an energy community
  • A 10% point increase is the project is smaller than 5 MW and is located either in low-income communities or on Native land
  • A 20% point increase if the project is a qualified low-income residential building or a low-income economic benefit project

The PTC offers ongoing benefits based on how much electricity a clean energy project produces, rewarding efficient long-term performance.

• For projects in service after Dec 31, 2021:
  • Wind, closed-loop biomass, geothermal, and solar: 0.6 cents per kilowatt-hour (or 3 cents per kilowatt-hour with prevailing wage + apprenticeship).
  • Open-loop biomass, landfill gas, trash, hydropower, and marine/hydrokinetic: 0.3 cents per kilowatt-hour (or 1.5 cents per kilowatt-hour with wage + apprenticeship).
• For projects in service after Dec 31, 2022:
  • Hydropower and marine/hydrokinetic: 0.6 cents per kilowatt-hour, or 3 cents per kilowatt-hour with wage + apprenticeship.
• Bonus Credits:
  • +10% for domestic content
  • +10% for projects in IRS-defined energy communities
• Manufacturing PTC (45X): Calculated differently depending on the component:
  • Solar subcomponents: credit based on size/weight
  • Finished solar products: credit based on electrical capacity
  • Critical minerals: typically 10% of production cost

Duration and Expiration

ITC is a one-time benefit and is eligible in the year when the project was placed into service. The existing ITC has been extended till 2032, including step-downs in subsequent years.

PTC is generally available for a period of 10 years after the equipment is placed into service.

Note: The 48 ITCs and 45 PTCs will not be available for projects starting construction post-December 31, 2024. The tech-neutral tax credits will replace them.

Tax Equity

It is important to factor in tax equity into the ITC vs PTC discussion. Here’s why:

• For ITC: Tax equity investors typically get a higher portion of the early tax benefits thanks to the upfront benefit.
• For PTC: A longer investment horizon is needed as the benefit is received over a longer period, which also affects the cash flow.

IRA Enhancements and Additional Provisions

IRA has enhanced both ITC and PTC with new enhancements, for instance:

• Transferability: Unused tax credits can be sold to third parties.
• Direct Pay: Cash can be availed instead of tax credits.
• Bonus Credits: Bonus credits and adders are available.

ITC vs PTC: A Quick Comparison

Here’s a quick recap of the factors to consider when exploring ITC vs PTC:

Wrapping Up!

ITC and PTC have respective advantages. The choice of ITC vs PTC depends on whether your project is eligible and which one is more suited for your project, cash flow requirement, and financial structure. A sound understanding of the federal tax incentives and the project characteristics will help you make the right decision.