Design Tax Measures to Align with Overall Policy Goals

Renewable energy tax incentives are largely focused on supporting increased renewable energy deployment. However, tax incentives can also be used to spur development of new industries, benefitting economic development more broadly, and to support other high level goals. Ensuring the measure is aligned with these goals is an important first step (Lantz et al. 2010).

Determine the Appropriate Tax Incentive Level

Market information and data, as well as evaluation of similar policies and experiences in comparable country or jurisdictional contexts, can inform the tax incentive level and impact on various technologies (Lantz et al. 2010). Tax incentives must be well-aligned with available government budgets and robust plans should be in place to fund the incentive program. Maximum incentives or credit caps can also be considered to avoid “boom and bust” scenarios (Cox et al. 2015, Wiser and Bolinger 2014; IRENA 2012; American Wind Energy Association 2014a).

Establish the Incentive Timeframe

To achieve desired outcomes of a tax measure, the incentive period should be carefully considered. In cases where the objective is to support development of a new industry, incentive periods may need to be longer to ensure market development. Supporting market certainty through sending a longer-term policy signal can be critical in attracting investment (Lantz et al. 2010). Utility-scale renewable energy projects can also require longer incentive timeframes as multiple years may be necessary for project development. If the incentive period is shorter, project developers and investors operating on a longer timeframe may not participate. If shorter incentive timeframes are necessary, incentives can be provided in earlier stages of project construction. However, in these cases, complementary mechanisms to ensure project completion (e.g., requiring ownership for a certain number of years) should be put in place (Cox et al. 2015, Wiser and Bolinger 2014, IRENA 2012, American Wind Energy Association 2014a).

Consider Inclusion of Non-taxable Entities

Non-taxable or limited tax liability entities such as non-profit organizations, schools, religious organizations, and municipal government and utilities are increasingly engaged with renewable energy deployment. To ensure their inclusion, provisions can be made to allow tax equity provider partnerships and/or complementary incentives can be put in place to support their engagement, such as low cost finance mechanisms (Lantz et al. 2010, Bipartisan Policy Center 2011, Cox et al. 2015).