Beyond Subsidy Levels: The Effects of Tax Credit Choice for Solar and Wind Power in the Inflation Reduction Act

Within the Inflation Reduction Act (IRA), corporate tax credits are the largest source of clean energy funding, so understanding how these credits function is important to market participants and policymakers. In this report, I focus on the IRA’s authorization for both utility-scale solar and wind projects to choose between the investment tax credit (ITC) and production tax credit (PTC). After reviewing the history of the ITC and PTC, including the changes made by the IRA, I consider how the three primary owners of utility-scale solar and wind projects—project sponsors, tax equity investors, and regulated utilities—will decide between incentives. I find that the PTC, in most cases, will be strongly preferred by regulated utilities and project sponsors, but the latter’s preference must be weighed against the interests of tax equity investors, which may favor the ITC. Next, I assess how the ITC and PTC may distort project decisions, with the ITC leading to higher-cost electricity and the PTC leading to lower-value electricity. Because the PTC is likely to be the incentive chosen by most utility-scale solar and onshore wind projects, I discuss technology and policy options to raise the value of electricity from PTC projects.