In August, President Biden signed the Inflation Reduction Act (IRA) into law (H.R. 5376), providing both personal income and business investment tax credit for the installation of solar generating capacity and stand-alone energy storage. Perhaps most importantly, the IRA provides new tax credits for energy storage development in an attempt to address the intermittent nature of renewable energy. For energy industry leaders, these programs create opportunity to expand and reduce the cost of renewable energy sources as the nation continues its transition away from fossil fuels.
In line with the President’s climate agenda, the IRA seeks to speed up this transition by increasing the stability of renewable resources across the board, from utility to end-user scaled development. There are three primary tax credit “buckets” that energy business leaders and manufacturers should keep in mind as they seek to take advantage of the IRA.
Business Investment Tax Credits for Project Developers
The IRA provides two main avenues for tax credits: Investment Tax Credits (ITCs) that reduce tax liability by a dollar amount calculated from a percentage of eligible investment costs; and Production Tax Credits (PTCs) measured in a fixed amount of dollars per kilowatt hour (kWh) of capacity developed. Under the IRA, project managers choose whether to access ITCs or PTCs. However, only ITCs are available to stand-alone storage projects.
The IRA extends and increases the existing ITC for solar projects that have started or will start construction before the end of 2024. Further, the IRA provides add-on credits for projects meeting certain domestic content requirements (dubbed the “Made in America” provision by the Biden Administration), and projects created to serve environmental justice communities (referred to in the IRA as “energy communities”). The precise percentage of the applicable ITC to a project depends, in part, on the project’s capacity:
- Projects under one megawatt alternating current (MWac) receive a base ITC of 30% for 10 years, followed by a two-year credit phase-down from 30% to 0%. These projects have the ability to qualify for increases of 10-20% in additional credits for meeting domestic content minimums, siting in an energy community, or serving low-income communities.
- Projects over one MWac that commence construction less than 60 days after the Department of Treasury issues IRA guidance receive a base ITC of 30% per project for two years, with no phase-down. These projects are still eligible for the same increase of 10-20% in additional credits for meeting domestic content minimums and serving energy and low-income communities. The IRS started accepting comments on how to implement certain provisions of the IRA on October 5, 2022. Typically, rulemaking procedures take at least a year to complete.
- All projects over one MWac that commence construction more than 60 days after the Department of Treasury issues IRA guidance receive a 6% base ITC for 10 years, with a two-year phase-down period, and the ability to qualify for an additional 2% of credit for meeting domestic content and serving energy communities. However, projects over one MWac that meet certain labor requirements receive a 24% base ITC for 10 years, with a two-year phase-down. These projects qualify for an additional 8% credit when they meet domestic content minimums or serve energy communities.
The PTC follows the same structure to incentivize projects under one MWac, quick-start projects, and projects meeting labor requirements. As an added bonus, the IRA extends the ITC to costs of interconnection for projects with a net output of less than five MWac. This combination of tax incentives is a major step toward increasing the amount of renewables in the nation’s energy portfolio. It encourages rapid development of all sizes of facilities that can get new renewable capacity online, now. But these incentives alone do not provide a complete path for renewable energy development. That’s where credits for storage come into play.
The IRA also extended the same ITC structure to stand-alone storage projects, which previously needed to pair with an applicable solar project to qualify for ITCs. With this, the federal government greatly increases the financial feasibility of installing storage capacity alongside solar facilities. Energy storage enables new solar projects to provide a consistent flow of power to the grid. Without storage, fossil fuels or other sources are necessary to step up production during off-hours and make up for the lack of round-the-clock production from solar facilities.
Business Investment Tax Credits for Manufacturers
In line with the credits extended to developers for using “Made in America” components, the IRA provides an Advanced Manufacturing Production Credit (AMPC) for each component manufactured by a U.S. taxpayer. The AMPC is available to manufacturers in two forms: a 30% ITC for eligible investment costs in facilities and equipment, and as a credit for particular components tied to the volume manufactured.
The ITC for manufacturers starts at a base rate of 6%, with the ability to increase to a full 30% where a manufacturer meets certain wage and apprenticeship requirements. The PTC tied to component manufacturing differs based on the product at hand. For solar component manufacturers, the PTC is available for panel components, including photovoltaic (PV) modules, PV cells, solar grade polysilicon, and polymer backsheets; inverters; trackers; and battery components.
With these credits, the IRA provides numerous, buildable incentives that businesses can capitalize on when investing in solar and storage projects. Additional provisions of the IRA help advance the concept of well-rounded renewable energy development by cutting administrative red tape for solar development, opening loan funds for new transmission construction, financing rural co-ops to purchase renewable energy from solar projects, and establishing a Greenhouse Gas Reduction Fund to provide more financial incentives for renewable development. Overall, the IRA can act as a key tool to reliably transition away from fossil fuel dependence.
This article first appeared in RealClear Energy on November 14, 2022.
This article is intended to provide readers with general information and not legal advice. Consult professional counsel for help regarding specific situations.
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