What is the Business Energy Investment Tax Credit?
The Business Energy Investment Tax Credit, or ITC is a federal corporate tax credit that can be claimed by commercial, industrial, agricultural and utility companies. The ITC gives rebates of 30% for solar, fuel cell and wind energy systems. In February of 2018 the Bipartisan Budget Act of 2018 returned the ITC for some other forms of technology that used to receive credit. This means that there is now a 10% rebate for geothermal, microturbine and combined heat and power systems.
There are some limits to the ITC. First, the system must be built by the taxpayer or the taxpayer must be the first to use the equipment. Next, all the equipment must meet the quality and performance rules that are in effect when the equipment is bought. This means that rules can change so the taxpayer must educate themselves on current rules. Lastly, the system must be up and running in the year that the credit is first collected.
Energy Systems Covered by ITC
It is important to know which energy systems the investment tax credit covers. There are around sixteen categories including municipal solid waste, renewable fuels, and solar heat. All the valid systems can be gathered into six major groups. The Department of Energy’s website, arranges these groups as follows:
- Solar Technologies—These systems have equipment that uses solar energy to heat, cool or provide electricity. Examples are solar water and space heat, solar thermal electric, and solar thermal process heat. Some solar lighting also works for the ITC, but passive solar systems and solar pool-heating systems are not valid. The rebate amount for valid solar systems at this time is 30% but as of 12/31/20 it will drop to 26%. On 12/31/21 it will fall to 22%. Then on 12/31/22, and all future years it will be at 10%.
- Fuel Cells—For a place to be valid it must have fuel cells, “with a minimum capacity of 0.5 kilowatt (kW) that have an electricity-only generation efficiency of 30% or higher”. The rebate for fuel cells is like the rebate amount as solar systems. Right now, the credit is 30% of all costs with no maximum credit, but there is a cap of $1,500 per 0.5 kW of space. The 30% rebate will last until 12/31/20 when it will drop to 26%. Then it will drop down to 22% from 12/31/21 through 12/31/22. After that, it will no longer be available.
- Small Wind Turbines—All small wind turbines must meet “The American Wind Energy Association Small Wind Turbine Performance and Safety Standard” or the “International Electrotechnical Commission” standard and performance requirements. Also, small wind locations must have wind turbines up to 100 kW in size. Small wind turbines have the same rebate of 30% as fuel cells and the credit drops the same amount over the same time frame.
- Geothermal Systems—To get the ITC one of these places must have, “geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit”. The tax credit for these systems is set at 10% with no credit limit. But, unlike solar systems, fuel cells, and small wind turbines geothermal systems keep the same 10% credit with no listed end date.There is one exception to this, geothermal heat pumps end as of 12/31/22.
- Microturbines—Places which have microturbines with up to two megawatts (MW) of space are valid for ITC if they have an electricity-only generation effectiveness of 26% or higher. The tax credit of these systems is equal to 10% of costs with no limit. But there is a cap of $200 per kW of space. The 10% credit stays with no changes until 12/31/22 when it ends and is no longer valid.
- Combined Heat and Power (CHP)—Systems that have up to 50 MW capacities and that beat 60% energy productivity are usually present at valid CHP places. Depending on the size of the system and its limits the energy use requirement can change. For example, CHP systems that use biomass for at least 90% of its energy source do not have a productivity requirement. The tax credit for CHP is 10% of costs and there is no limit. The credit will remain at 10% until it is no longer valid as of 12/31/22. Depending on the size of the system the full 10% credit may not be due and instead a partial credit may be applied.
Benefits of the Investment Tax Credit on Combined Heat and Power Systems
In the months and years leading up to December of 2016 the investment tax credit had helped to support the growth of combined heat and power across the country. But, in December of 2016 the ITC for CHP ended which stopped the 10% credit that was given to companies who were using or installing CHP energy systems. So, when Congress passed the 2018 budget act which returned the ITC for CHP it was approved of by many in the energy field. Utility companies, developers and end-users started taking a closer look at how much the finances of CHP developments had improved. Especially since CHP projects can take advantage of the credit as long as they start construction by the end of 2021.
There are a lot of benefits of combined heat and power. CHP makes both electricity and heat from one source while using local fuel. This makes it two times as effective as older power generation methods CHP also lets companies work separate from the electrical grid. This means that they use less energy and can keep working even in bad weather where power may be lost on the grid. By restarting the 10% credit, companies can save money, increase their reliability and reduce their energy use all while improving our nation’s energy independence and economic success.
The investment tax credit for combined heat and power is not the only factor boosting the CHP market. The new tax law lowered the corporate tax rate to 21% and allows a 100% write-off of capital investments in the first year, both of which help increase after-tax internal rates of return (IRR) for CHP investments. On top of all these incentives, it’s also important to remember that CHP allows a company to become energy independent which will prevent possible power outages that can affect production. Since time is money, no company wants to lose revenue because of a power outage. When you take all these incentives and factor in the low and stable costs of natural gas and the steady increases in electrical rates, the positives of investing in CHP systems have never looked so good.