Joint LBNL/NREL report analyzes choice of PTC, ITC, or cash grant

Lawrence Berkeley National Laboratory (LBNL) and the National Renewable Energy Laboratory (NREL) are pleased to announce the release of a joint LBNL/NREL report titled “PTC, ITC, or Cash Grant? An Analysis of the Choice Facing Renewable Power Projects in the United States.” This report was funded by the U.S. Department of Energy.

Signed into law one month ago, The American Recovery and Reinvestment Act of 2009 (“the stimulus bill”) contains a number of provisions that could have a significant impact on how U.S. renewable power projects are financed over the next few years. Among these provisions is one that allows projects eligible to receive the production tax credit (PTC) to instead elect the investment tax credit (ITC). Another provision enables ITC-eligible projects (which now include most PTC-eligible renewable power projects) to instead receive a cash grant of equivalent value. Both of these provisions are in place for a limited time only.

The purpose of this report is to both quantitatively and qualitatively analyze, from the project developer/owner perspective, the choice between the PTC and the ITC (or equivalent cash grant) for a number of different renewable power technologies. Technologies analyzed include wind, open- and closed-loop biomass, geothermal, and landfill gas projects.

Quantitative analysis of these five technologies reveals that only two clearly favor one credit over the other: open-loop biomass receives more value from the ITC in every combination of installed cost and capacity factor modeled, while geothermal mostly receives more value from the PTC. The other three technologies -- wind, closed-loop biomass, and landfill gas -- are more evenly split between the two credits, with the difference between the PTC and ITC likely to be rather modest in most cases.

As such, qualitative considerations may play as much or more of a role in driving the choice of PTC or ITC (or equivalent cash grant), particularly among these other three technologies. Although the PTC provides greater investment liquidity, all other qualitative considerations discussed in this report favor the ITC. These include the option to elect an equivalent cash grant, no performance risk, more immediate use of tax base (if the equivalent cash grant is not elected), no penalty for subsidized energy financing, no power sale requirement, and the availability of leasing structures.

In combination, therefore, the quantitative and qualitative factors addressed in this report suggest that most wind, open- and closed-loop biomass, and landfill gas projects may benefit more from the ITC than they will from the PTC. Furthermore, based on qualitative considerations alone, it is reasonable to expect those projects that are placed in service or begin construction in 2009 or 2010 to elect the equivalent cash grant rather than the ITC itself. Geothermal projects, on the other hand, are likely to prefer the PTC, unless qualitative considerations overwhelm quantitative.

The full report can be freely downloaded from:

http://eetd.lbl.gov/EA/EMP/reports/lbnl-1642e.pdf