IRS Corrects Inflation Adjustment and Revises Production Tax Credit Rates for 2022 | Knowledge
The U.S. Internal Revenue Service (IRS) recently corrected its originally published inflation adjustment factor for calculating Section 45 Production Tax Credits (PTCs), which which resulted in a reduction of the previously announced increase in the PTC rate for wind and other renewables. resources at 2.6 cents per kilowatt hour (kWh) (instead of 2.7 cents per kWh hour as originally published).
Section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), provides that the base amount of PTC is 1.5 cents per kWh for electricity generated from a qualified facility using wind or biomass in a closed circuit and sold to an unrelated person during the 10-year period beginning on the date of initial commissioning of the facility. This amount must be adjusted annually by multiplying the base credit amount (i.e. 1.5 cents per kWh) by the “inflation adjustment factor” for the calendar year in which the sale takes place.
The PTC amount is halved for electricity produced from a qualified facility using open loop biomass, landfill gas, waste, qualified hydroelectricity and marine and hydrokinetic resources.
The amount of PTC is also subject to phasing out if the “benchmark price” for the calendar year in which the sale takes place exceeds eight cents per kWh. Due to current PTC rates and the updated “reference price”, this sunsetting provision is not applicable.
On April 14, 2022, the IRS issued a notice (FR Doc. 2022-07967) announcing an increase in the “Inflation Adjustment Factor” for calendar year 2022 to 1.8012.
On May 5, 2022, the IRS issued a correction to this Notice (FR Doc. 2022-09695) (Revised Notice) which reduced the inflation adjustment factor for calendar year 2022 from the original 1.8012 announced at 1.7593.
By applying the inflation-corrected adjustment factor published in the revised notice, the PTC for renewable electricity produced from qualified energy resources of wind energy, closed loop biomass and geothermal energy changes from 2.5 cents per kWh in 2021 to 2.6 cents per kWh in 2022. (instead of 2.7 cents per kWh as initially announced). The PTC for electricity generated from qualified open-loop biomass, landfill gas, waste, qualified hydropower, and marine and hydrokinetic renewable energy resources remains unchanged at 1.3 cents per kWh ( instead of 1.4 cents per kWh as initially announced).
Although this is a lower increase in the PTC rate compared to the notice originally published, the revised notice and its corresponding increase in the PTC rate for 2022 will nevertheless improve the economics of qualified renewable projects currently in operation and will allow developers and promoters to adjust their models. and the pricing of projects under development or under construction, resulting in better monetization of the corresponding tax benefits. Due to inflation, we may see additional rate increases in 2023 or 2024. As noted in our previous alert, additional care should be taken in modeling future projects to account for an appropriate inflation rate and planned increases in the PTC.
This alert revises our previous alert that was issued as a result of the original advisory and reflects the appropriate changes in the revised advisory.