Bonus credits play a significant role in the decision between the Investment Tax Credit (ITC) and the Production Tax Credit (PTC), particularly under the Inflation Reduction Act (IRA). Here are the key aspects of how bonus credits influence this choice:
Bonus Credits Overview
- Types of Bonuses: There are two stackable bonus credits that can increase the value of both the ITC and PTC:
- Domestic Content Bonus: Available for projects that use domestically produced equipment.
- Energy Community Bonus: For projects located in areas with high unemployment or those impacted by the decline of fossil fuel industries.
- Additional Bonuses: Such as prevailing wages and apprenticeships requirements.
- Impact on ITC: For ITC, these bonuses can increase the credit from 30% to as much as 40% of project costs, effectively reducing upfront capital costs by an additional 10 percentage points.
- Impact on PTC: For PTC, bonus credits increase the per kWh tax credits. For example, meeting prevailing wage and apprenticeship requirements can raise the PTC from 0.6 cents per kWh to 3 cents per kWh for certain technologies.
Decision Factors
- Capital Costs vs. Production: Projects with high upfront costs might benefit more from the ITC’s immediate cash flow advantage, especially when bonus credits are applied. Conversely, projects with high production levels or capacity factors might prefer the long-term benefits of the PTC, as these bonuses enhance the value of the per kWh credits over time.
- Financial Modeling: The choice between ITC and PTC involves comparing the net present value (NPV) of the upfront ITC benefit with the cumulative benefits of the PTC over a decade, considering inflation adjustments and any eligible bonus credits.
- Risk Considerations: Projects considering the PTC should account for potential curtailment risks, which could impact production levels and thus PTC benefits.
In summary, bonus credits can significantly impact the decision by enhancing the benefits of both credits, making them more attractive for specific project profiles. The choice ultimately depends on factors like project capital costs, production capacity, and compliance with bonus eligibility criteria.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-role-do-bonus-credits-play-in-the-decision-between-itc-and-ptc/
