A GUIDE TO THE GAME-CHANGING INFLATION REDUCTION ACT OF 2022 AND THE EXTENSION OF TAX CREDITS, AND WHAT THE INCENTIVES MEAN FOR CLEAN ENERGY
The Inflation Reduction Act (IRA) is a game changer for businesses in the industrial sector looking to reduce operating costs and carbon emissions and support a cleaner environment with renewable energy sources.
While the IRA is similar to its predecessor, the Build Back Better Act (BBBA), it has several new provisions and significant tax credit incentives for renewable energy resources. The act has the potential to transform the tax landscape surrounding energy investments and improve not just the industrial sector but also the environment.
The 730-page act, signed into law by President Joe Biden on Aug. 16, 2022, will enable companies to develop and finance U.S. clean energy projects to reduce carbon emissions to 40 percent below the level of 2005 by 2030. The act contains $369 billion in federal incentives and is the most significant climate investment in U.S. history.
The act significantly changes the structure of tax credits applied to renewable energy by replacing the current credit structure with a two-tier system. The new structure requires taxpayers to comply with wage and apprenticeship requirements to qualify for bonus credit. If applicants do not comply with the conditions, the project will only be eligible for the base credit. The Internal Revenue Service is in charge of issuing regulations to ensure compliance.
Wage and Apprenticeship Requirements
Wage Requirements specify that applicants must ensure contractors and subcontractors pay laborers prevailing wages during the applicable tax credit period and for any repairs and alterations.
The U.S. Secretary of Labor determines prevailing wages based on the pay laborers receive for similar work on projects in an applicant’s area.
If an applicant fails to meet these requirements, they can remedy the situation by paying each worker the difference between what they paid and the prevailing wage. Plus, they have to pay an additional $5,000 with an interest charge to each worker. The penalty will be even higher if the actions are proven intentional.
Under Apprenticeship Requirements, the IRA requires a certain percentage of labor hours to be performed by qualified apprentices. The rate of labor hours will depend on the year construction begins.
Pari Kasotia, senior director of policy at DSD Renewables, said of the requirement:
“I cannot underscore [enough] the need to ensure appropriate levels of training programs to meet the growing demand for labor that would come from this bill.”
Applicants do not have to comply with the requirements until 60 days after the IRS publishes the official guidance. Projects within the 60 days will still automatically qualify for the increased credits. Projects with a maximum output of less than one megawatt (1MW) are exempt from the requirements.
Wind and Solar Tax Credits
The IRA includes an extension of the Investment Tax Credits (ITC) and Production Tax Credits (PTC) for renewable energy projects involving wind and solar that begin construction before Jan. 1, 2025.
Before the IRA, projects would be eligible for a 26 percent ITC tax credit for projects executed in 2022. Subsequently, decreasing to 22 percent in 2023. With the IRA, 30 percent is available for the near future and will significantly impact renewable energy projects that otherwise would have fallen off this year.
While the extension for ITC and PTC isn’t long-term, wind, and solar projects that begin construction after Jan. 1, 2025, can qualify under the new ITC and PTC benefiting projects for years to come.
“The changes to the ITC are monumental,” said SEIA president and CEO Abigail Ross Hopper. “They are things that will create a longer runway for clean energy growth in America. The ITC, as we know, is the No. 1 policy driver in the solar industry and has helped us build the industry to what we have today.”
The new ITC (similar to the current ITC) has a base rate of 6 percent and can increase to 30 percent if the applicant complies with the wage and apprenticeship requirements. The ITC will apply to facilities placed-in-service following Dec. 31, 2024.
The new PTC (similar to the current PTC) is worth 0.3 cents a kilowatt-hour (kWh) and can increase to 1.5 cents if an applicant complies with the Wage and Apprenticeship Requirements.
The Carbon Capture (45Q) Credit
The 45Q Credit for carbon capture will continue under the IRA until Jan. 1, 2033. The act will increase its credit while reducing the capture requirements. The amended incentive will apply to equipment and facilities placed-in-service following Dec. 31, 2022.
The IRA incentive amount is $60 per metric ton (M.T.) of carbon oxide captured in an industrial process and $85 per M.T. of carbon oxide captured and sequestered. Projects that utilize direct air capture technology will receive $130 per M.T. of carbon oxide captured and $180 per M.T. of carbon oxide captured and sequestered.
The IRA reduces the annual amount of carbon oxide captured by an electric generating facility from 500,000 MT to 100,000 MT.
New Clean Hydrogen and Nuclear Power Tax Credits
The IRA also includes a new 10-year production incentive that involves the kilograms (kg) of qualifying hydrogen a facility produces. The credit rate is 60 cents a kg multiplied by the percentage of greenhouse gas left following the hydrogen production process.
Applicants must comply with the Wage and Apprenticeship Requirements and meet emissions requirements to receive the full tax credit. The incentive will apply to properties placed-in-service following Dec. 31, 2022. Projects beginning before Jan. 1, 2023, can be eligible for the incentive depending on when modifications to produce clean hydrogen are placed-in-service.
The new Nuclear PTC applies to nuclear-generated electricity projects placed-in-service before the IRA’s enactment date. The rate is 3 cents a kWh at a qualified nuclear power plant. To receive full credit (equal to five times the base credit), applicants must comply with the Wage Requirements. The incentive will be active between Dec. 31, 2023, and Dec. 31, 2032.
Other Incentives
The IRA is extending the Advanced Energy Project Credit. The program has $10 billion in allocations, with $4 billion allocated explicitly to energy communities. The base rate is 6 percent but can increase to 30 percent if the applicant complies with the Wage and Apprenticeship Requirements. Applicants have two years to provide evidence of compliance. The incentive takes effect on Jan. 1, 2023.
IRA’s newly created Advanced Manufacturing Production Credit is for domestic production and sale of solar and wind components. The incentive rate depends on component type and will apply only to qualifying components produced and sold between Dec. 31, 2022, and Dec. 31, 2032.
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