The investment and production tax credits valued side by side on one illustrative solar project, with the break-even capacity factor and cost.
Compare the present value of each credit, not its headline: the ITC is 30 per cent of the eligible cost, paid once but net of the depreciation it takes away, while the PTC pays on every megawatt-hour for ten years. On an illustrative 200 MW solar project costing 250.0 million with a 24 per cent capacity factor, the ITC is worth 59.9 million and the PTC 82.2 million in present value at 8 per cent, so the PTC wins by 22.3 million. It stops winning below a 17.5 per cent capacity factor, or above about 1.72 million a megawatt of cost.
Worked in full in The Project Finance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The two US federal credits reward different things. The investment tax credit rewards spending: it is a percentage of the project's eligible cost basis, claimed in the year the project is placed in service. The production tax credit rewards output: a rate per megawatt-hour, indexed, for the first ten years of operation. Which is worth more is therefore a function of how much the project costs against how much it generates, and the arithmetic is short enough to do before the tax advisers are engaged. The project below is illustrative, the PTC rate is an illustrative figure, and the comparison ignores bonus adders and the cost of monetising either credit. It is not tax advice.
| Input | Value |
|---|---|
| Capacity, MWac | 200 |
| Net capacity factor | 24% |
| Degradation a year | 0.5% |
| Project cost ($m per MW: 1.25) | 250.0 |
| Share of cost in the ITC basis | 95% |
| ITC rate | 30% |
| PTC, $ per MWh in year 1, indexed 2% a year | 27.50 |
| Tax rate / after-tax discount rate | 21% / 8% |
Which rules apply. For projects placed in service from 2025 the two credits are the technology-neutral clean electricity credits created by the 2022 Inflation Reduction Act, the Section 48E investment credit and the Section 45Y production credit, and a project elects one or the other. The full rates used here, 30 per cent and a per-MWh rate indexed to inflation each year, assume the prevailing wage and apprenticeship requirements are met; without them the base rates are one fifth as large, 6 per cent and the matching base production rate. The 2025 One Big Beautiful Bill Act shortened the window for wind and solar: as enacted, a facility must begin construction by 4 July 2026 or be placed in service by the end of 2027, and it added foreign-entity restrictions, while storage keeps a longer phase-down. Construction-start guidance and depreciation rules have also moved, so eligibility, rates and timing depend on current law and the project's facts. Treat every rate in this article as illustrative.
The credit is 30 per cent of the eligible basis. The cost of taking it is that the depreciable basis falls by half the credit, so the project loses the tax shield on that amount over the five-year MACRS schedule (20.00, 32.00, 19.20, 11.52, 11.52 and 5.76 per cent). Bonus depreciation, or a different recovery class under current law, would move that lost shield earlier or later; it is a small part of the result either way.
Eligible basis = 250.0 × 95% = 237.5; ITC = 237.5 × 30% = 71.25, received at the end of year 1
Basis reduction = 71.25 / 2 = 35.6; tax shield lost = 35.6 × 21% = 7.48, spread 1.50, 2.39, 1.44, 0.86, 0.86, 0.43
PV of the ITC = 71.25 / 1.08 − PV of lost shield = 65.97 − 6.07 = 59.90
Excel: =B1/1.08-NPV(8%,C5:H5), with the lost shield in C5:H5
Generation in year 1 is 200 × 8,760 hours × 24% = 420,480 MWh, falling 0.5 per cent a year to 401,932 MWh in year 10. The rate starts at 27.50 and is indexed to 32.87 by year 10. Multiply, discount, add.
| Year | Generation, MWh | Rate, $/MWh | PTC | PV at 8% |
|---|---|---|---|---|
| 1 | 420,480 | 27.50 | 11.56 | 10.71 |
| 2 | 418,378 | 28.05 | 11.74 | 10.06 |
| 5 | 412,133 | 29.77 | 12.27 | 8.35 |
| 10 | 401,932 | 32.87 | 13.21 | 6.12 |
| Ten years | 4,111,442 | 123.70 | 82.23 |
PV of the PTC = Σ MWht × 27.50 × 1.02t−1 / 1.08t = 82.23
Excel: =NPV(8%,D2:D11), with the yearly credit in D2:D11
The PTC is worth 82.2 million against 59.9 million for the ITC, 1.373 times as much, or 411 thousand a megawatt against 300 thousand. As a share of cost, 32.9 per cent against 24.0. Nothing about the headline 30 per cent tells you that: the ITC looks larger in year 1 and is smaller in value, because a cheap, productive solar plant earns more from a decade of output than from a percentage of a modest cost.
Two break-evens frame the decision. At this cost, the PTC needs a capacity factor of 17.5 per cent to match the ITC. At this capacity factor, the ITC needs the project to cost 1.72 million a megawatt to catch up. Storage is the exception that settles itself: a battery does not generate, so its share of a hybrid project can only take an investment credit.
| Capacity factor | PTC | ITC at 1.00/MW | ITC at 1.25/MW | ITC at 1.50/MW |
|---|---|---|---|---|
| 18% | 61.7 | 47.9 | 59.9 | 71.9 |
| 21% | 72.0 | 47.9 | 59.9 | 71.9 |
| 24% | 82.2 | 47.9 | 59.9 | 71.9 |
| 27% | 92.5 | 47.9 | 59.9 | 71.9 |
| 30% | 102.8 | 47.9 | 59.9 | 71.9 |
The break-even capacity factor rises with cost: 14.0 per cent at 1.00 million a megawatt, 17.5 at 1.25 and 21.0 at 1.50. Only the expensive project in a poor resource, the top right of the table, prefers the ITC. The discount rate changes the margin but not the answer: at 6 per cent the PTC leads by 29.6 million, at 10 per cent by 16.2, because the PTC is spread over ten years while the ITC arrives in one.
The common mistake is to compare the undiscounted ITC, 71.25 million, with the undiscounted PTC, 123.70 million, or the ITC at 71.25 with a discounted PTC. The first overstates the PTC's lead; the second hides most of it. The subtler error is forgetting the basis reduction, which overstates the ITC by 6.1 million here, about 10 per cent of its value. And because the PTC depends on output, a lender's P90 generation case, not the P50, is the honest input when the credit is being financed rather than simply valued.
Where the credit is the difference between a project that works and one that does not, the equity return is the place to see it, as in project IRR vs equity IRR and, for the cost side, how to calculate the LCOE of a solar project. The solar and storage case in The Project Finance Handbook is there precisely because the credit decides it: with a thirty per cent ITC it returns 5.59 per cent to equity, without one 0.13. Its model is in the free workbooks for the book.
When the project is expensive relative to what it generates. On an illustrative 200 MW plant at 1.25 million a megawatt, the ITC only wins below a 17.5 per cent capacity factor; at 1.50 million a megawatt the break-even rises to 21.0 per cent. Storage, which produces nothing, can only take an investment credit, so hybrid projects often split the decision.
Claiming the investment tax credit reduces the asset's depreciable basis by half the credit. On a 71.25 million ITC the basis falls by 35.6 million, and at a 21 per cent tax rate the project loses 7.48 million of tax shield over the MACRS schedule, worth 6.07 million today at 8 per cent. Ignoring it overstates the ITC by about 10 per cent.
Multiply each year's expected generation by the indexed credit rate and discount the ten years of credits. With 420,480 MWh in year 1, 0.5 per cent degradation, an illustrative 27.50 per MWh indexed 2 per cent a year and an 8 per cent discount rate, the credits total 123.70 million and are worth 82.23 million today.
This article is one calculation from The Project Finance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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