Boost for developers via tax credit flexibility

2 April 2024

On 22 March the US federal government, via the US Treasury and the IRS, published tax credits guidance with the aim of encouraging more offshore developers to claim credits based on their SCADA systems. The intention is to give offshore wind developers greater flexibility in how they take projects to financial close – and make them look at their SCADA systems with fresh eyes.

The guidance is about how offshore wind developers could qualify for and secure bonus tax credits for their projects, based on the headline capacity of the project, as long as the supervisory control and data acquisition (SCADA) system is located within a qualifying ‘energy community’.

The main effect would be to improve the financial viability of their schemes. After two hard years where inflation has shown up the damaging effects of agreeing in ‘race to the bottom’ auction process, the prospect of extra tax credits can only help projects to reach financial close.

In short, the rules of engagement show renewable energy developers can gain a bonus of 10% on production tax credits at their projects, or up to 10 percentage points on investment tax credits, if the projects or associated facilities are located in communities that have historically relied on the energy industry for investment and jobs. This applies to both onshore and offshore renewables projects.

This follows legislation introduced by the Inflation Reduction Act in mid-2022, where these so-called ‘energy communities’ are defined in one of three ways:

former coal mining communities (areas where a coal mine was closed after 1999 or a coal-fired power plant was closed after 2009); areas with significant employment and local taxes from the fossil fuels sector, and higher-than-average unemployment; and brownfield sites - areas with sites contaminated by hazardous materials or other pollutants.

Federal government gave initial guidance about what ‘energy communities’ means in April 2023, and this March 2024 guidance elaborates on that.

For offshore wind specifically, it has introduced more flexibility for the ability to claim tax credits for offshore wind projects. It said developers would be able to qualify for those bonus tax credits as long as the SCADA system is located in a port in an eligible ‘energy community’.

SCADA systems have been called the nerve centre for an offshore wind farm as they link up the individual turbines, substations and meteorological stations in a central hub, they record activities on a regular basis to ensure that the project is working efficiently, and  they enable owners and operators to fix problems. The Treasury and IRS said that their guidance recognised the importance of onshore SCADA systems in ensuring the viability of offshore wind farms.

The guidance also gave developers more flexibility to gain tax credits based on other aspects of their onshore interconnection infrastructure. It said that “where a project has multiple points of interconnection… those projects may now look to any land-based power conditioning equipment up to those points of interconnection for purposes of determining energy community status”.

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