Fitch: Tax Credit Changes to Add Stability to Renewable Projects

US tax credits extended at the end of 2015 for solar and wind power projects are expected to increase renewable energy capacity installation, as will the EPA's Clean Power Plan (CPP), if resumed, Fitch Ratings says. Both of these pieces of legislation will lead to longer term stability for the solar and wind sectors.

The tax credits will wind down in 2022. The 30% investment tax credit (ITC) for solar energy was scheduled to fall to 10% in 2017, while the 2.3 cents per kilowatt-hour production tax credit (PTC) for wind facilities expired in 2014. Now the ITC will remain at 30% through 2018, then step down to 10% by 2022. The PTC will stay at 2.3 cents per kWh in 2016 before phasing down by 60% by 2020.

Prior tax credit extensions were short-term and sometimes retroactive, creating a boom-bust cycle of project development. Without a clear understanding of how long and at what level the tax credits would remain in effect, the long-term investment and financing decisions necessary for industry stability did not appear. With the new legislation, projects that would have been rushed into construction to beat previous tax credit expiration dates can optimize their schedules, and more new projects will qualify for development with the cost advantages of the favorable tax treatment.

Growth in renewable energy will be an important component of meeting greenhouse gas reduction objectives required under the CPP. It requires aggressive cuts in carbon dioxide emissions for electric generators by 2030, with the first performance period beginning in 2022 under the current schedule, although this may be revised due to recent legal challenges. The tax credit program through 2022 will support increasing proportions of zero-emissions renewable capacity in the overall generation mix, enabling states to rely on renewables to achieve final CPP goals. Similarly, the tax credit extension will support further development of utility-scale renewable energy projects needed for states to meet current and future renewable portfolio standard requirements.

Solar installations grew by 6500% from the first year of the ITC in 2006 through 2014, and utility-scale costs for solar energy have dropped by more than 60% since 2010. With continued capacity growth and cost reductions, both wind and solar energy industries will be in improved competitive positions by 2022 and less reliant on continuing subsidies.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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