IRS Corrects Inflation Adjustment and Revises Production Tax Credits Rates for 2022

The U.S. Internal Revenue Service (IRS) recently corrected its originally published inflation adjustment factor for the calculation of the Section 45 production tax credits (PTC), resulting in a reduction to the previously announced increase to the PTC rate for wind and other various renewable energy resources to 2.6 cents per kilowatt hour (kWh) (rather than 2.7 cents per kWh hour as originally published).

Section 45 of the Internal Revenue Code of 1986, as amended (Code), provides that the base amount of the PTC is 1.5 cents per kWh for electricity produced from a qualified facility using wind or closed-loop biomass and sold to an unrelated person during the 10-year period beginning on the date on which the facility is originally placed in service. Such amount is to 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 occurs.

The PTC amount is reduced by half for electricity produced from a qualified facility using open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources.

The PTC amount is also subject to a phaseout if the “reference price” for the calendar year in which the sale occurs exceeds eight cents per kWh. Due to the current rates of the PTC and the updated “reference price,” such phaseout provision is not applicable.

On April 14, 2022, the IRS published a notice (FR Doc. 2022-07967) that announced an increase to the “inflation adjustment factor” for calendar year 2022 to 1.8012.

On May 5, 2022, the IRS issued a correction to such notice (FR Doc. 2022-09695) (Revised Notice) that reduced the inflation adjustment factor for calendar year 2022 from the initially announced 1.8012 to 1.7593.

Applying the corrected inflation adjustment factor as issued in the Revised Notice, the PTC for renewable electricity produced from qualified energy resources of wind, closed-loop biomass, and geothermal energy is increased from 2.5 cents per kWh in 2021 to 2.6 cents per kWh in 2022 (rather than 2.7 cents per kWh as originally announced). The PTC for electricity produced from qualified open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy resources remains unchanged at 1.3 cent per kWh (rather than 1.4 cents per kWh as originally announced).

Although this is a lower increase in the PTC rate from the initially published notice, the Revised Notice and its corresponding increase in the PTC rate for 2022 will nevertheless improve the economics of the currently operating qualified renewable projects and allow developers and sponsors to adjust their models and pricing of projects in development or during construction, resulting in a better monetization of the relevant tax benefits. Due to inflation, we may see additional increases in the rate in 2023 or 2024. As indicated in our prior alert, additional consideration should be given in modeling future projects to account for an appropriate rate of inflation and projected PTC increases.

This alert revises our prior alert that was issued following the original notice and reflects the appropriate changes in the Revised Notice.