an amount of money that can be offset against a tax liability dollar-for-dollar. In RE development, federal tax credits have come in two basic flavors: Investment Tax Credit (ITC, based on investment amount) or Production Tax Credit (PTC, given per unit of energy produced).
Increases the return on investment of an energy investment.
Can over-incentivize a particular technology. For example, the PTC allowed for wind PPA rates to be set below other energy sources in the marketplace, causing a distortion.
Federal tax credits were necessary to drive early investments in solar and wind, but now that these are cost-competitive with traditional generation, the tax credits are being sunsetted. Moreover, project investors need to have a tax basis to take advantage of tax credits.