In the past two years, tax incentives have played a pivotal role in driving innovation and growth in the U.S. clean energy sector. The investment tax credit (ITC) and production tax credit (PTC) are two powerful mechanisms that benefit both developers and manufacturers. These ITC vs PTC tax credits not only stimulate project development, but they also catalyze advancements in manufacturing processes and technologies.
Developers, manufacturers, and tax credit buyers need to understand how these tax credits shape investment decisions and project development. This comprehensive guide will explore the intricacies of these two types of credits, including their differences, applications, and important strategic considerations for both.
Key points
Table of contents:
An investment tax credit, or ITC, is a dollar-for-dollar reduction in income taxes for clean energy developers based on a percentage of the total capital investment in the project. When comparing the investment tax credit vs production tax credit, the ITC provides an immediate benefit based on the total capital investment in a qualifying project.
Qualified investments in clean energy manufacturing facilities are also eligible for the investment tax credit under the Section 48C Advanced Energy Credit. This applies to companies that manufacture or recycle clean energy components, or projects that re-equip industrial facilities to reduce carbon emissions by at least 20%.
A production tax credit, or PTC, is a per-kilowatt-hour (kWh) tax credit for electricity generated by qualified energy resources. Unlike the ITC, the PTC offers ongoing benefits based on the actual energy production over time, typically for 10 years.
Similarly to the ITC, there’s also a production tax credit available for U.S. manufacturers of eligible components in the clean energy and critical minerals sectors. The 45X advanced manufacturing PTC is not calculated on a per-kWh basis; it can be determined based on a fixed value per component size or weight, derived per unit of electrical capacity (e.g., cents per watt), or as a percentage of the total cost of production.
While both tax incentives aim to incentivize clean energy development and U.S. manufacturing, the structure and application of the investment tax credit vs production tax credit differ significantly.
The fundamental distinction in the PTC vs ITC is how the credit is calculated.
For clean energy projects, the PTC provides ongoing benefits based on how the project produces energy over time, rewarding operational efficiency. It is calculated based on the amount of electricity produced and varies depending on the type of renewable energy source and when the facility was placed into service.
For projects placed into service after December 31, 2021:
Wind, closed-loop biomass, geothermal, and solar energy facilities are eligible for a PTC of 0.6 cents per kilowatt-hour (kWh) of energy produced. Open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy projects are eligible for 0.3 cents per kWh. That base rate increases to 3 cents per kWh and 1.5 cents per kWh, respectively, if the developer or manufacturer meets prevailing wage and apprenticeship requirements.
For projects placed into service after December 31, 2022:
Qualified hydropower and marine and hydrokinetic renewable energy facilities are eligible for a PTC of 0.6 cents per kWh, or 3 cents if they meet prevailing wage and apprenticeship requirements.
Projects can also earn additional increases in PTC value: 10% for projects using domestic content and 10% for projects located in an “energy community,” as defined by the IRS.
The calculation method for the advanced manufacturing PTC is a little different. There are three primary methods used to calculate the value of the 45X credit for a manufactured product: a fixed dollar amount per unit of production, per unit of electrical capacity, or as a percentage of the cost of production. For example:
The ITC, by contrast, provides an upfront tax benefit based on a percentage of the project’s eligible costs. For clean energy projects, eligible costs typically include capital investments in clean energy equipment. That percentage of costs varies based on several factors:
The maximum potential investment tax credit is 50% of eligible project costs when combining all bonuses.
Similarly, manufacturers can claim up to an investment tax credit on eligible investments in clean energy manufacturing facilities. The base rate for the Advanced Energy Credit is 6%, but that increases to 30% of eligible costs if the manufacturer meets prevailing wage and apprenticeship requirements.
Some projects will qualify for both credits, so developers and manufacturers will need to determine if it makes more sense to claim the investment tax credit vs production tax credit.
The production tax credit has historically incentivized wind energy production, but federal legislation expanded its scope to include a number of other technologies.
Project scale plays a crucial role in determining the financial implications of the PTC vs ITC. Larger projects might benefit more from ITC due to the immediate cash-flow advantage, while smaller projects may find the PTC advantageous over time, especially if developers and manufacturers anticipate high production levels.
The current investment tax credit of 30% (or 6%, depending on project size) has been extended through 2032, with step-downs in subsequent years. The ITC is a one-time credit, and a project is typically eligible in the year that project is placed into service.
Clean energy projects claiming the production tax credit typically have an eligibility period of 10 years after the equipment is placed into service.
It’s important to note that, beginning in 2025, clean energy projects have access to the new 48E clean electricity investment tax credit and 45Y clean electricity production tax credit. The legacy section 48 ITCs and section 45 PTCs will no longer be available to projects that start construction after December 31, 2024, and will instead be replaced by the tech-neutral tax credits. Changes in tax policy in the upcoming administration could also affect timelines for both the ITC and the PTC.
For manufacturers, the investment tax credit has a total allocation of $10 billion. Manufacturers must apply and receive certification with the IRS to claim the ITC.
The 45X advanced manufacturing credit is generated and claimed on an annual basis. Manufacturers must ensure that the credits claimed are tied to eligible products that were sold to a third party within a given year. The products could have been produced in the preceding tax year, but the manufacturer cannot claim the credit until they are sold.
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The Inflation Reduction Act (IRA) made certain ITCs and PTCs transferable. Developers and manufacturers can monetize these transferable tax credits by selling them to third parties, who in turn can reduce their tax liability. Transferability creates a powerful new market mechanism to drive abundant clean energy and a strong domestic supply chain
When comparing the investment tax credit vs production tax credit, developers and manufacturers stand to gain several benefits.
For developers, these credits substantially reduce the financial barriers to entry, making clean energy projects more economically viable. Energy is a capital-intensive sector; projects typically require significant up-front capital and have long pay-back periods.
The ITC helps offset initial capital costs with a predictable benefit, making it easier for developers to plan capital investments and enabling the realization of projects that might otherwise be financially unfeasible.
The PTC creates a long-term revenue stream, providing a stable source of income. This credit can also make projects more financially attractive, especially in markets where certain technologies are already cost-competitive.
Clean energy manufacturers, on the other hand, benefit from increased demand for their products and technologies. As more products become financially attractive due to these credits, manufacturers experience heightened demand for solar panels, wind turbines, and other clean energy components. This surge in demand drives innovation, economies of scale, and falling costs across the industry.
Banks and investment firms can also reap substantial benefits from these tax credits, including by lowering their tax liability reduction, opening up new investment opportunities, and diversifying investment portfolios with low-risk, tax-advantaged assets.
To assess the benefits of the ITC vs the PTC when financing renewable energy projects, financial institutions will consider a range of factors:
Policymakers are instrumental in creating and sustaining tax incentives for clean energy, shaping the landscape for both the ITC and the PTC. Policymakers have leveraged the tax code to support U.S. energy production for more than a century. The investment tax credit was first introduced in 1978 for clean energy and was supplemented by the production tax credit in 1992. Both credits have been extended and expanded by every partisan configuration of the House, Senate, and presidency since then.
Expansions and extensions of the ITC and PTC during the first Trump administration led to huge growth in U.S. clean energy. The IRA significantly expanded and extended energy tax credits and introduced new tax credits for nuclear, standalone battery storage, advanced manufacturing, hydrogen, and other technologies.
Developers and manufacturers should consider several factors when determining the benefits of the investment tax credit vs production tax credit to their project:
Both investment tax credits and production tax credits offer myriad benefits to clean energy developers and manufacturers and have accelerated investment in American energy. While recent legislation has increased eligibility for these tax credits to more technology categories, project owners need to determine whether the ITC or PTC will provide the biggest benefit given their technology type, project capacity, and more.
Tax credit transferability has created new avenues for project owners to monetize investment and production tax credits. Crux is the market leader in helping developers and manufacturers sell their transferable tax credits. By tapping into Crux’s platform and purpose-built tools, project owners can connect to the right tax credit buyers, transact faster, and achieve higher net prices for their tax credits.
Approximately $26 billion of credits have been listed on Crux and more than $22 billion of bids were placed on the platform in 2024. Get in touch to learn more about entering the transferable tax credit market.
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