The Inflation Reduction Act (the "Act"), signed into law by President Biden on August 16, 2022, will significantly impact clean energy. This White Paper contains a summary of the provisions most relevant to the renewable energy industry.
The Act offers robust energy tax incentives designed to enhance energy security through the Internal Revenue Code (the "IRC"). The Act directs approximately $369 billion toward energy and climate spending, including wind, solar, clean energy storage, and other clean energy manufacturing projects. The Act extends and expands existing tax credits for wind and solar energy that have either lapsed or were set to expire, and offers tax credits and accelerated depreciation to technologies previously ineligible for incentives, such as energy storage and clean hydrogen. To be eligible for the headline credits, however, projects must generally comply with prevailing wage and apprenticeship requirements. Bonus credits may be available for projects that utilize U.S. domestic suppliers or are located in certain lowincome or other specified communities. Additionally, it may now be significantly easier to monetize renewable energy credits, because the Act permits a "direct pay" election for taxexempt entities, and also allows taxpayers to sell the credits to unrelated parties for cash.
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EXTENSION AND MODIFICATION OF EXISTING PRODUCTION TAX CREDIT (IRC § 45) (ACT § 13101) |
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Effective Date |
Generally applies to facilities placed in service after December 31, 2021. The provisions related to domestic content, energy communities, and marine and hydrokinetic facilities apply to facilities placed into service after December 31, 2022. |
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Current Law |
Current law allows a production tax credit (i.e., a credit per kilowatt hour ("kWh")) for electricity produced from renewable resources at certain facilities, to be claimed over a 10-year period from when the facility is placed in service. The credit is available for electricity produced from wind facilities as well as closedloop biomass, open-loop biomass, geothermal, landfill gas, trash, qualified hydropower, and marine and hydrokinetic energy facilities, but only if the construction of such facilities began before January 1, 2022. The ability to claim production tax credits for solar facilities has lapsed. Under current law, the amount of the credit is 1.5 cents per kWh (subject to an inflation adjustment) of electricity produced from wind, solar, closed-loop biomass, and geothermal energy, subject to certain phaseouts applicable to each type of facility. Credits for electricity produced from qualified hydropower, marine and hydrokinetic energy, and certain other facilities are generally reduced by 50%. For certain types of facilities, taxpayers can generally elect to claim an investment tax credit (as described below) rather than a production tax credit.
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Change |
The Act extends the deadline for starting construction to January 1, 2025, for all technology types. It also allows solar facilities to qualify for the production tax credit and eliminates the phaseouts for wind facilities placed in service on or after January 1, 2022. The Act makes qualified hydropower and marine and hydrokinetic energy facilities eligible for the full production tax credit (rather than the 50% credit). The Act maintains the statutory credit amount of 1.5 cents per kWh (subject to an inflation adjustment), but taxpayers must comply with certain prevailing wage and apprenticeship requirements (as described below) to earn the full amount of the credit. Compliance with these requirements is not necessary for small facilities (i.e., facilities with a maximum output of less than 1 megawatt) or for facilities where construction starts before the publication of relevant guidance (with a 60-day grace period). The Act provides for a 10% credit bonus for facilities that meet certain domestic content requirements. Generally, these requirements are met if the taxpayer certifies that certain steel, iron, or manufactured components were produced in the United States. The Act provides for an additional 10% bonus for facilities located in "energy communities," which includes brownfield sites; certain locations with minimum tax revenues from the extraction, processing, transport, or storage of coal, oil, or natural gas; and certain census tracts that were where, or were adjacent to a tract where, certain coal production or generation occurred. Limitations apply where the taxpayer uses tax-exempt bonds to finance the facilities. Prevailing Wage and Apprenticeship Requirements: All laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) in the construction or repair (for a certain period of time) of a facility must be paid prevailing wages for the location in which the facility is located, as determined by the Secretary of Labor. Additionally, the taxpayer must ensure that at least 15% of labor hours be performed by qualifying apprentices (or 10% or 12.5% for facilities the construction of which begins in 2022 or 2023, respectively). Further, the taxpayer must comply with the applicable apprentice-to-journeyworker ratios set by the Department of Labor. Failure to meet these requirements reduces the credit by a factor of 5. |
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Insights |
For the first time in years, solar facilities are eligible for the production tax credit. Together with other changes in the Act, this should bring renewed attention on solar projects. The Act all but mandates that taxpayers comply with the prevailing wage and apprenticeship requirements. Taxpayers may wish to start construction as soon as possible, because those requirements do not apply to facilities that begin construction before 60 days after the publication of guidance relating to those requirements. The Act creates significant bonuses for projects that use domestic suppliers and/or that are located in energy communities. Currently, U.S. manufacturing may not be in a position to meet the domestic content requirements Revenue Estimate: ($51 billion) |
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EXTENSION AND MODIFICATION OF EXISTING INVESTMENT TAX CREDIT (IRC § 48) (ACT § 13102) |
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Effective Date |
Generally applies to property placed into service after December 31, 2021. The additions to the definition of "energy property" and the changes relating to domestic content and energy communities apply to property placed in service after December 31, 2022. |
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Current Law |
Current law allows for an investment tax credit—i.e., a credit for a certain percentage of dollars invested in certain types of qualifying energy property. Under current law, there is an investment tax credit equal to 26% for qualifying solar equipment, fuel cell power plants, fiber-optic solar equipment, small wind energy facilities, and waste energy recovery facilities; 30% for offshore wind facilities; and 10% for microturbines, combined heat and power systems, and geothermal heat pumps, each subject to significant phaseouts. |
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Change |
The Act allows a 30% investment tax credit for solar equipment if construction starts before January 1, 2025 (reverting to 10% if construction starts thereafter). The Act allows a 30% investment tax credit for fiber-optic solar equipment, fuel cell power plants, waste energy recovery facilities, combined heat and power facilities, and small wind energy facilities, and a 10% investment tax credit for microturbine property if, in each case, construction starts before January 1, 2025. The Act allows a 30% investment tax credit for geothermal heat pumps, if construction starts before January 1, 2035 (with phasedowns to 26% and 22% in 2033 and 2034, respectively). The Act expands the 30% investment tax credit to apply to qualifying energy storage technology, biogas property, electrochromic glass, microgrid controllers, electromechanical fuel cells, and linear generator assemblies, if construction starts before January 1, 2025. The Act also expands the credit to include amounts paid or incurred for qualifying interconnection property in connection with the installation of energy property. The Act includes provisions similar to those described above relating to prevailing wage and apprenticeship requirements, bonus amounts for using domestic content, bonus amounts for locating facilities in "energy communities," and limitations on projects financed with tax-exempt bonds. |
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Insights |
The Act extends the investment tax credit to several new technologies and increases the credit amount for technologies already covered under current law, including combined heat and power systems and geothermal heat pumps. Like in the case of the production tax credit, the Act all but mandates that taxpayers comply with the prevailing wage and apprenticeship requirements. Revenue Estimate: ($14 billion) |
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