How do the energy communities bonus or domestic content bonus impact the decision?
The credits in the IRA can be augmented with several bonuses. For projects that pay prevailing wages and meet certain apprenticeship requirements, the base credits are multiplied by five. We assume most projects will realize these credits and this is factored into the assessments above, which results in a PTC starting at around real 2022 $26/MWh increasing with inflation and an ITC of 30%.
These credits can be further increased by two stackable bonuses of 10% each, which are based on prescribed additional sourcing and siting requirements. A sourcing bonus is available to projects procuring 100% of steel and iron and certain percentages of manufactured content from domestic sources. A siting bonus is available to projects constructed in “energy communities,” defined as regions with high unemployment and traditionally dependent on conventional energy projects, as well as regions where a coal plant was retired after 2009 and/or a coal mine was closed after 1999.
Figure 3 shows IRA bonuses and credits available for solar projects. Not shown are two additional “energy justice” bonuses provided to small projects over the 2023-2025 period.
Additional factors in the PTC or ITC decision
While capacity factor, investment costs, and bonus eligibility are the most determinative factors of the decision between PTC and ITC, other factors may also need to be considered such as the level of risk for congestion and curtailment, which may affect production levels and may in turn reduce the benefits of the PTC option.
For example, the ITC and PTC have differential impacts on power markets to the extent that one emphasizes the degree of capital intensity versus production. The PTC creates additional downward pressure in electricity markets, all else equal because of its incentive to increase output.
As PTC becomes increasingly deployed, there will be more projects contributing to negative pricing in the market. This is because solar has zero variable costs, but the PTC means that there is an opportunity cost of not producing—and hence negative marginal costs. Investors are effectively indifferent between the two credit structures, as long as they maximize net present value. However, from the perspective of market conditions, our analysis shows that there are important implications for having different subsidies for solar.