Small-scale renewable energy systems enjoy many incentives from the Energy Improvement and Extension Act signed into law this month as part of the “bailout bill” legislation.”  Many tax credits considered essential to the renewable energy industry were set to expire at the end of the year.  Provisions in the bill, combined with various state and local incentives, are set to make renewable technologies more accessible and affordable for homes and businesses.      

The Production Tax Credit (PTC), a cent per-kilowatt hour credit, has historically promoted wind energy in United States.  Because the PTC is structured to offset only passive income, such as investment income, the PTC is unavailable for many smaller-scale wind developments absent a partner to take advantage of the credits.   Under Section 104 of the bill, a 30 percent credit investment tax credit (ITC) is available to offset costs toward installing small wind energy properties, defined as turbines having a name plate capacity under 100 kilowatts, through December 31, 2016.  Because the credit is not linked to passive income like the PTC, more small-wind developers may benefit from the credit, which is capped at $4,000.  Similarly, Section 105 of the Act extends a 10 percent investment tax credit to geothermal heat pump systems using groundwater as a thermal energy source to heat a structure or a thermal energy sink to cool a structure through December 31, 2016.

Businesses investing in solar technologies will enjoy a 30 percent ITC through December 31, 2016.  The ITC can be used to offset both regular and alternative minimum taxes (AMT) beginning the next taxable year.  Importantly, the legislation removes barriers for utility investments in solar projects: utilities may invest in solar property and claim the ITC after February 13, 2008.  This will allow utilities to act directly as developers in large-scale commercial solar energy projects, which will be beneficial in meeting various renewable portfolio standards.

Renewable energy systems installed on residential property can take advantage of a 30 percent ITC through December 31, 2016.  Section 106 of the bill makes ITCs available for the installation and equipment costs of solar electric, solar water heating, geothermal heat pump systems, small wind systems and fuel cell expenditures on residential property.  Importantly, beginning January 1, 2009 the ITC will offset individual AMT liability and carry forward unused credits toward the next taxable year.  The maximum ITC varies upon technology.  Currently, residential solar electric systems placed into service by December 31, 2008 have a maximum credit of $2,000.  Between January 1, 2009 and December 31, 2016 residential solar electric systems have no maximum credit.  The maximum allowable credits for solar water heating systems and geothermal heat pumps are $2,000.  Qualified fuel cell expenditures and small wind systems have a maximum credit of $500 per half kilowatt and the small wind system credit is capped at $4,000.

Combined with various state and local-level incentives, such as rebates, tax breaks and loans, and the increased willingness of solar companies to provide small-scale financing, the extension of the tax credits provide favorable incentives for commercial and residential renewable energy investment.

For further information about this topic, please contact Akin Gump.