24 October 2023

Government Tax Incentives For Offshore Wind Investments

Offshore wind investments have become increasingly popular within the renewable energy sector due to the vital role they play in the global transition to clean energy.
United States Energy and Natural Resources
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Offshore wind investments have become increasingly popular within the renewable energy sector due to the vital role they play in the global transition to clean energy. United States congress has created federal tax benefits to incentivize innovation, capital investment, and employment growth and to lower costs, resulting in more affordable clean energy. The first step toward increasing offshore wind development for the foreseeable future began on August 16, 2022 when President Joe Biden signed into law the Inflation Reduction Act of 2022 (IRA).

Inflation Reduction Act

The IRA is the most extensive climate legislation in U.S. history. In addition to its other goals, it works to extend and increase investment tax credits (ITC) and production tax credits (PTC) through 2024 for any wind energy project beginning construction prior to January 1, 2025. In 2025, the tax credits for wind will be replaced with technology-neutral credits for low-carbon electricity generation. This is on track to phase out in the year 2032, or when U.S. power sector greenhouse gas emissions decline to 25% of 2022 levels, whichever happens later.

Under the ITC and PTC, taxpayers can reduce their federal tax liability in an amount equal to a percentage of the cost of renewable energy systems. To be eligible to receive the full PTC amount of 2.6 cents per kilowatt-hour or full ITC of 30%, offshore wind projects of at least 1 megawatt (MW) must meet certain prevailing wage and apprenticeship requirements. Projects are only eligible for 20% of the full credit amount. Certain projects are exempt from the wage and apprenticeship requirements, including those that were under construction on or before January 29, 2023 and facilities of under 1 MW.

Prevailing Wage and Apprenticeship Requirements

For those offshore wind projects that are 1 MW or over, the general wage and apprenticeship requirements are as follows:

Under the prevailing wage requirement, the taxpayer, as well as its contractors and subcontractors, must pay prevailing wages to laborers and mechanics in the construction of the facility and, during the first 5 (ITC projects) or 10 (PTC projects) years of operation after the facility is placed in service, the alteration and repair of the facility. The prevailing wage is the same prevailing wage (which varies by geographic region) that applies to federal contractors and subcontractors under the Davis-Bacon Act and is published by the Department of Labor. If no prevailing wage has been determined for a particular geographic location, the taxpayer can request a determination from the Department of Labor.

Under the apprenticeship requirement, a certain percentage of the total labor hours for certain work with respect to the facility (including work by contractors or subcontractors) must be performed by qualified apprentices. A "qualified apprentice" is someone employed by the taxpayer (or its contractors or subcontractors) who participates in certain registered apprenticeship programs. The required percentage is 10% for projects beginning construction before 2023, 12.5% for projects beginning construction in 2023, and 15% for projects beginning construction after 2023. There is, however, an exception to the apprenticeship requirement if the taxpayer requested qualified apprentices from a program and either was denied or there was no response from the apprenticeship program within five days.

Failure to comply with the prevailing wage and apprenticeship requirements can result in substantial penalties.

Tax Credit Opportunities: ITCs and PTCs

The tax credit opportunities set out under the IRA, most notably ITCs and PTCs, are available to taxable businesses entities and certain tax-exempt entities that are eligible for direct payment of tax credits. The standard for eligibility comes down to whether these entities meet, in connection with a certain offshore wind project, the prevailing wage and apprenticeship requirements among other criteria.

The Investment Tax Credit (ITC), a federal income tax credit for capital investments in renewable energy projects, is a one-time credit based on the dollar amount of the investment and is earned only when the equipment is placed into service. Thus, the value of the credit depends on when the facility starts construction. For projects beginning construction by December 31, 2024, the IRA extends the ITC for up to 30% of the cost of installed equipment, subject to apprenticeship and prevailing wage requirements. This is appealing for the offshore wind sector, which is more capital-intensive and will tend to benefit more from the up-front tax benefits than from the longer-term PTC.

The Production Tax Credit (PTC) allows owners and developers of wind energy facilities (land-based or offshore) to claim a federal income tax credit on every kilowatt-hour of electricity sold to an unrelated party for a period of 10 years after a facility is placed into service. PTCs previously expired for wind at the end of 2021, however the IRA extended the renewable energy PTC through 2024. Wind energy projects placed into service after December 31, 2021 that satisfy the prevailing wage and apprenticeship requirements will receive an inflation-adjusted credit of 2.6 cents per kilowatt-hour for the first 10 years of electricity generation. Additionally, owners and developers of large land-based wind energy facilities can elect to claim the ITC instead of the PTC.

Finally, there are other, less popular, tax credits available for qualifying entities such as the Residential Renewable Energy Tax Credit and the Advanced Manufacturing Tax Credit. However, like their counterparts, the ITC and the PTC, these tax credits require the entity to meet certain requirements prior to receipt. Thus, despite the federal incentives for affordable clean energy, the incentives are not without several rules and regulations set out under the IRA. Notwithstanding these strict regulatory regimes, those compliant with them will be part of an investment surge in the US offshore wind market, paving the way for innovation in the industry like that of the cutting-edge floating turbine technology under development on the West Coast. This cycle of incentive, investment and innovation is critical for building America's clean energy economy.

Originally published 28 June 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

24 October 2023

Government Tax Incentives For Offshore Wind Investments

United States Energy and Natural Resources


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