Renewable Energy Technology Assessments - Kauai Island Utility ...

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Kaua’i Island Utility Cooperative Renewable Energy Technology Assessments 6.0 Renewable Energy Financial Incentives 6.1.2 Investment Tax Credit The Investment Tax Credit is a 10 percent federal tax credit for purchases of solar and geothermal energy equipment. Only commercial entities can take this tax credit; there is no corresponding residential tax credit yet (the Bush administration has proposed a 15 percent solar tax credit for homes). Solar equipment eligible for the incentive includes solar electric and solar thermal systems. Up to 25 percent of the energy input to the system can be from non-solar sources (e.g., small gas turbines used to firm production), but this portion does not qualify for the credit. If an investment in or purchase of solar property has been financed in part or in whole by subsidized energy financing or tax-exempt private activity bonds, then only the unsubsidized portion of the investment or purchase is eligible for the tax credit. For example, if $25,000 of a $50,000 purchase of solar property was financed by tax-exempt private activity bonds, then only a credit of $2,500 can be taken (10 percent of the $25,000 that was not subsidized). If financing for the entire $50,000 was subsidized, no tax credit can be taken. Further, the tax credit is limited to $25,000 per year, plus 25 percent of the total tax remaining after the credit is taken. The credit may be applied to the three preceding years and carried forward 15 years. 50 As discussed previously, the production tax credit has been expanded to include geothermal and solar technologies. The language of the production tax credit extension does not allow claiming of both the PTC and the ITC. Project developers must choose one or the other. Further, the ITC also interacts with accelerated depreciation, as discussed further below. Implication for KIUC: As with the other tax credits, the Investment Tax Credit is not directly applicable to KIUC. Additionally, for capital intensive solar projects, it is likely not advisable to surrender tax-exempt financing capability for the one-time 10 percent credit. 6.1.3 Accelerated Depreciation Section 168 of the Internal Revenue Code contains a Modified Accelerated Cost Recovery System (MACRS) through which certain investments in biomass, solar, wind, and geothermal property can be recovered through accelerated depreciation deductions. There is no expiration date on the program. Under this program, certain power plant equipment may qualify for 5-year, 200 percent (i.e., double) declining-balance 50 US Department of Energy, “Financial Incentives for a Business to Invest in Renewable Energy Systems,” available at http://www.eren.doe.gov/consumerinfo/refbriefs/la7.html, December 2000, accessed August 19, 2001. 21 March 2005 6-5 Black & Veatch
Kaua’i Island Utility Cooperative Renewable Energy Technology Assessments 6.0 Renewable Energy Financial Incentives depreciation, while other equipment may also receive (less) favorable depreciation treatment. Renewable energy property that will receive the 5-years MACRS includes: 51 • Solar property that meets the same standards for eligibility required by the federal 10 percent investment tax credit. • Wind property, including wind turbines, wind electric generators, storage devices, power conditioning equipment, transfer equipment, and related parts, up to the electrical transmission stage, subject to the same 25 percent limit on dual-fueled equipment required for solar property. • Geothermal property including equipment used to produce, distribute, or use energy derived from a geothermal deposit, but only in the case of electricity generated by geothermal power, up to the electrical transmission stage. • Biomass plants 80 MW or less that directly burn at least 50 percent biomass to generate electricity. Equipment that qualifies includes material handling, boilers, pollution controls, and other equipment involved in the production of electricity. If the facility is not considered a qualifying small power production facility, it can still qualify for 7-year, 200 percent decliningbalance depreciation on certain equipment. The power plant must burn the biomass directly to qualify. Landfill gas and digester gas are not eligible under this definition. 52 The accelerated depreciation law also specifies that the depreciable basis is reduced by the value of any cash incentives received by the project, and by half of any federal investment tax credits (e.g., the ITC). This provision has the effect of lowering the depreciable basis to 95 percent for projects that receive the ITC but no other cash incentives. Implication for KIUC: Accelerated depreciation has a significant benefit for taxable entities, especially when combined with the Production Tax Credit above, but would not be applicable to KIUC unless working through a taxable entity. 6.1.4 Renewable Energy Production Incentive The Renewable Energy Production Incentive (REPI) program was developed as a public sector counterpart to the PTC (Section 45) discussed previously. The program had 51 US Department of Energy, “Financial Incentives for a Business to Invest in Renewable Energy Systems,” available at http://www.eren.doe.gov/consumerinfo/refbriefs/la7.html, December 2000, accessed August 19, 2001. 52 Keith Martin, “Tax Issues and Incentives for Biomass Projects,” available at: http://www.chadbourne.com/briefings/taxissues/Tax%20Issues%20and%20Incentives%20for%20Biomass %20Projects.htm, March 1995. 21 March 2005 6-6 Black & Veatch
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