Glossary Category 5: Incentives & Finance
Covering the key financial mechanisms, tax credits, and market terms that make renewable energy projects viable in the U.S.
Investment Tax Credit (ITC)
Definition: A federal tax credit that allows renewable energy project owners to deduct a percentage of the project’s capital cost from their federal tax liability.
Example: A developer installing a 20 MW solar farm in Arizona claims a 30% ITC, reducing its tax burden by $6 million on a $20 million project.
Note: Under the Inflation Reduction Act (IRA), the base ITC is 30%, with potential adders for domestic content, energy communities, and low-income siting.
Production Tax Credit (PTC)
Definition: A federal tax credit based on the actual electricity produced from certain renewable energy facilities (mainly wind), measured per kilowatt-hour over 10 years.
Example: A 200 MW wind farm in Oklahoma earns a PTC of ~2.75¢/kWh for each MWh produced in the first decade of operation.
Choice: Developers can elect either ITC or PTC based on project economics and technology type.
Transferable Tax Credits
Definition: Under the IRA, developers can now transfer (sell) unused ITCs or PTCs to other entities with a tax liability, providing more flexible financing options.
Example: A battery project developer with low taxable income sells its $5 million in tax credits to a bank or energy buyer for cash.
Result: More players can access federal incentives without needing complex tax equity partnerships.
Direct Pay (Elective Pay)
Definition: A new IRA provision allowing certain entities—like nonprofits, tribes, and local governments—to receive tax credits as cash payments even if they have no tax liability.
Example: A school district installs rooftop solar and receives a direct pay reimbursement from the IRS for 30% of the system cost.
Use: Expands renewable access beyond for-profit developers.
MACRS (Modified Accelerated Cost Recovery System)
Definition: A federal depreciation schedule that allows renewable energy systems to be depreciated over 5 years for tax purposes, reducing taxable income.
Example: A solar project uses MACRS to deduct most of its capital costs in the first few years of operation, enhancing cash flow.
Bonus: Under current tax rules, 100% bonus depreciation may apply in the first year, subject to phaseout schedules.
Power Purchase Agreement (PPA)
Definition: A contract in which an energy buyer (offtaker) agrees to purchase electricity from a renewable project at a fixed price over a long term (usually 10–25 years).
Example: A data center signs a 15-year PPA with a 100 MW solar farm at $35/MWh to meet its clean energy goals.
Benefits: Provides price certainty to the offtaker and revenue certainty to the project.
Virtual Power Purchase Agreement (VPPA)
Definition: A financial PPA where the energy isn’t physically delivered to the buyer, but instead they receive renewable energy credits (RECs) and pay or receive the market difference from a fixed price.
Example: A corporate buyer in New York signs a VPPA with a Texas wind project. They get RECs and settle financial differences, but the power stays on the Texas grid.
Use Case: Common for corporations seeking to offset carbon footprints without taking physical delivery.
Renewable Energy Certificates (RECs)
Definition: Tradable credits representing 1 MWh of renewable electricity generated and delivered to the grid, used to prove the use of clean energy.
Example: A tech company buys 10,000 RECs to match the electricity used at one of its data centers.
Note: Some states have compliance markets (like California’s RPS), others have voluntary markets.
Renewable Portfolio Standard (RPS)
Definition: A state policy requiring utilities to source a specific percentage of electricity from renewable sources.
Example: Illinois has an RPS target of 40% renewables by 2030, which drives demand for solar and wind projects.
Impact: Projects in RPS states may qualify for additional value through REC sales.
Clean Energy Standard (CES)
Definition: A broader version of an RPS that may include other non-emitting sources like nuclear or CCS.
Example: New York’s CES targets 100% clean electricity by 2040, including renewables and large hydro.
Market Effect: Opens additional value streams for zero-carbon resources beyond renewables.
Net Metering
Definition: A billing arrangement that allows solar customers to receive credit for excess electricity they export to the grid.
Example: A small commercial rooftop system exports excess energy during the day and draws from the grid at night, receiving bill credits for the net difference.
Note: Policies vary widely by state—some have been replaced with “net billing” or time-of-use compensation.
Energy Arbitrage
Definition: The practice of storing electricity when prices are low and selling or discharging when prices are high, often done by battery storage projects.
Example: A BESS in California charges at midday when solar oversupply lowers prices, and discharges in the evening peak to earn revenue.
Revenue Stream: Key business model for standalone batteries.
Capacity Payment / Resource Adequacy (RA)
Definition: A payment to generators or storage facilities for being available to deliver power during times of peak demand.
Example: A battery project in PJM earns capacity payments for being on standby during peak summer hours, even if it doesn’t discharge.
Purpose: Ensures grid reliability by compensating readiness, not just energy delivered.
Interconnection Cost Allocation
Definition: The rules and processes that determine who pays for transmission upgrades or new infrastructure needed to connect a renewable project to the grid.
Example: A solar project is assigned $8 million in network upgrades during its CAISO interconnection study—costs it must cover upfront.
Note: Cost allocation is a major factor in project viability and has led to reform efforts in many regions.
Tax Equity Financing
Definition: A common structure where a third-party investor with a large tax appetite (like a bank or insurance company) partners with a developer to monetize ITCs and depreciation.
Example: A solar developer partners with a tax equity investor who contributes capital and receives the tax benefits in return.
Challenge: Complex legal structuring and limited pool of investors—being addressed through transferable credits under the IRA.