The Inflation Reduction Act - Current Guidance

A year ago, senators Chuck Schumer and Joe Manchin reached a historic deal to advance the clean energy economy in the US. The Inflation Reduction Act was signed into law in August 2022, but the administrative guidance for the legislation has taken months to clarify. Of particular interest to the commercial and community solar industry are the requirements for federal Investment Tax Credit adders, direct pay, and transferability.

A lot of guidance from the Internal Revenue Service has arrived in the last few weeks, with more expected soon. While key uncertainties remain, we found it helpful to summarize some of the most important items for solar’s middle market. Here’s our take on what we know so far and what seems most important for commercial and community solar projects. Thanks to the folks at Sheppard Mullin and Norton Rose Fulbright for their accessible and timely write ups on key IRS announcements referenced below.

Guidance Overviews

• ITC Transferability - Guidance Overview

• Energy Community - Guidance Overview

• Energy Community - Map

• Domestic Content - Guidance Overview

• Domestic Content - Qualification Analysis

• Environmental Justice / LMI - Guidance Overview

• Wage and Apprenticeship - Guidance Overview (>1MWac)

Conductor’s Analysis

• IRA Key Takeaways - Conductor’s Analysis

• The IRA’s ITC Growth Spiral - Conductor’s Analysis

• Impacts of Direct Pay and Transferability - Conductor’s Analysis

• ITC vs. PTC for Solar Projects - Conductor’s Analysis

ITC Direct Pay
At the time of this writing, we are still awaiting guidance from the IRS on how ITC Direct Pay will work for nonprofit and public organizations.

ITC Transferability
Entities structured as a “for profit” who wish to sell an ITC for cash can now do so, and market pricing for these transfers looks to be in the range of 90 to 95 cents on the dollar. So the owner of a solar project with an ITC worth $100,000 might expect to receive between $90,000 and $95,000 in cash from a one time transfer of this credit. It’s important to note that depreciation benefits remain with the system owner and are not transferred along with the ITC.

While the seller of the tax credit is required to maintain the system and continue owning and operating it, the buyer is at risk of losing the tax credit if something changes. So in practice, buyers will require indemnities from sellers with protection from these events. And buyers will perform due diligence on the projects they are considering for tax credit transfers. Transfers are considered passive investments for tax credit buyers, which can only be used to offset passive income. So most individuals will have a hard time being tax credit buyers.

Here’s more information on ITC transferability

Energy Communities Bonus Credit
A solar project located in an energy community can receive a 10% bonus credit on top of the base 30% ITC and any other applicable adders. The project must be in an energy community either when it starts construction or when it is placed in service. This safe harbor certainty is important as some locations could technically lose their energy community status in the middle of construction. Any of three types of location can qualify as an energy community:

• Brownfields

• Locations near closed coal mines

• Statistical areas with employment and local tax collection tied to fossil fuels and higher than average unemployment

Here is a Map from the Department of Energy identifying the latter two. 

Here’s more information on the  Energy Communities Bonus Credit

Domestic Content Bonus Credit
A solar project can also receive a 10% bonus credit if it is made with sufficient domestic content - construction materials and manufactured components produced in the US. Construction materials, primarily structural components made of steel or iron, must be 100% US made. Manufactured products, including most electrical components, must meet a threshold for the percentage of costs manufactured within the US. The formula for this can be complicated. The threshold for qualification requires domestic content in manufactured products of 40% initially, shifting to 55% over time.

While many solar panel and inverter manufacturers are moving production to the US to help projects qualify for this bonus credit, several have expressed concern about the requirement to share their detailed cost information. Because most of these new manufacturing facilities for solar panels are still in construction, few panels are yet available that meet the criteria. 

Here’s more information on the Domestic Content Bonus Credit Qualification and Guidance.

LMI Bonus Credit
A solar project can also receive a 10% or 20% bonus credit if it is located in a low- and moderate-income area or aimed at serving low-income households. Unlike the other bonus credits, which apply to an unlimited number of new solar projects, the LMI bonus credit has an annual cap of 1,800 MWdc of tax credits per year. 

Importantly, no credits will be given to projects that are already in service when the awards are made. But developers have four years to complete a project after receiving an allocation.

Priority for the LMI bonus credit will be given to projects owned by non-profits, governments, Indian tribes, electric purchasing cooperatives, and specific types of organizations with experience installing or operating PV systems in low income areas. Priority will also be given to projects in areas with persistently high poverty rates over the last 30 years and disadvantaged census tracts. 

Here’s more information on the LMI Bonus Credit

Wage and Apprenticeship Requirements
For projects over 1MWac, the IRS has additional wage and apprenticeship requirements. Mechanics and laborers must be paid the same “prevailing wages” that are paid on federal construction jobs. And between 10% and 15% of the total labor hours for a project must use qualified apprentices. 

Importantly, prevailing wage requirements apply not only to the initial construction of a project but also to any alteration or repair on the project for the next 5 to 12 years.

For more information, here is a summary of guidance on Wage and Apprenticeship Requirements

Remaining Uncertainty
While the guidance from the IRS has been helpful in clarifying how key aspects of the Inflation Reduction Act will be implemented, significant uncertainty remains. For example:

• Which manufacturers will be willing to share their cost information sufficient to support the calculations required for their products to qualify for domestic content?

• And which components by which manufacturers will ultimately qualify? 

• How quickly will the blocks for the LMI adder be allocated and “used up” within a particular calendar year?

How the Market is Managing Uncertainty
These and other key questions remain for pricing projects. In the context of uncertainty about ITC adders, developers and investors are managing this situation with pricing scenarios. Developers are requesting and investors are providing bids at multiple ITC values (e.g. 30%, 40%, or 50%) and contracting at the more conservative value with specified increases in the budget or decreases in the offtake rate tied to specific adders coming through for the project. With Energy Community guidance out, most investors are now contracting at a 40% ITC base rate for those projects.