The recently enacted federal Inflation Reduction Act of 2022 (the “IRA”) is designed to create major growth and opportunity for companies focused on solar, wind, and renewable energy in Massachusetts and across the country. The Act has numerous provisions intended to address the impacts of climate change by promoting development of residential and commercial solar, offshore wind, renewable energy technology, and manufacturing. With federal goals set to reduce carbon emissions by 40% by the year 2030, combined with the Commonwealth’s mandate for “net zero” emissions by 2050, the Act will jump start solar and wind energy installations, promote electrification, and encourage non-fossil energy use. The legislation is an unprecedented first in federal clean energy policy.
This alert addresses significant provisions in the Act primarily related to expansion of the Production Tax Credit and the Investment Tax Credit, as well as expanded incentives for manufacturers. We will cover other important elements of the Act and the key provisions of MA HB 5060 in subsequent alerts.
Section 45 Production Tax Credit and Section 48 Investment Tax Credit
The Act extends the existing Section 45 production tax credit (or “PTC”) for qualified facilities and Section 48 investment tax credit (or “ITC”), and adds a Clean Energy Production Tax Credit and a Clean Energy Investment Tax Credit. Qualified facilities include solar (the Act reinstates the PTC for solar energy), wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities with reductions for open-loop biomass, small irrigation power facilities, landfill gas facilities, and trash. The expanded provisions serve to extend the ITC and the PTC at their full credit rates to eligible facilities on which construction begins before 2034.
PTC: Key components of the PTC provisions include:
- The Act extends the PTC for qualified facilities on which construction begins prior to January 1, 2025 with certain conditions.
- The Act provides incentives regarding prevailing wage and apprenticeship requirements as a condition of expanded credit eligibility. To qualify for the full rate, project laborers must be compensated at or above “prevailing wages” and a percentage of all labor hours must be performed by “qualified apprentices” who participate in a registered apprenticeship program. Small solar projects, like residential projects, automatically qualify for the full rate. Projects that do not meet these worker standards will be eligible for the credits at only 20% of the full rate. The Secretary of Labor establishes the prevailing wages and qualified apprentices (“Wage Guidance”).
- Taxpayers are eligible for the increased credit amount, currently 2.6 cents per kWh of electricity produced and sold in 2022, if construction begins prior to 60 days after the issuance of Wage Guidance regarding prevailing wage and apprenticeship requirements as set forth in the Act.
- Any facility that has already been placed in service this year or has yet to be placed in service may qualify for the full increased credit amount if construction began prior to the issuance of Wage Guidance, including facilities that intended to qualify for 60% of the full credit amount by beginning construction in 2020 or 2021.
- Following the issuance of Wage Guidance, for facilities that were placed in service prior to January 1, 2022, historical PTC rules apply.
- For facilities for which construction begins after the issuance of Wage Guidance, extended credits are available only if the new facility has a net output of less than 1 MW (AC) or the newly enacted prevailing wage and apprenticeship requirements are satisfied.
Bottom line: following IRS Guidance, facilities larger than 1 MW must satisfy the prevailing wage and apprenticeship requirements to be eligible for the increased credit of 2.6 cents per kWh for 2002.
ITC: Key components of the ITC provisions include:
- The ITC for eligible projects, now including solar, is 30% if construction of the facility begins prior to Wage Guidance.
- Any facility that has been placed in service in 2022 or has yet to be placed in service may now qualify for the 30% ITC if construction of such facility began prior to Wage Guidance, including facilities originally intended to qualify for the 26% ITC by beginning construction in 2020, 2021, or 2022.
- For facilities that were placed in service prior to January 1, 2022, the historical ITC phase-downs remain intact.
- For facilities for which construction begins following Wage Guidance, extended credits are available only if the new facility has a net output of less than 1 MW (AC) or the newly enacted prevailing wage and apprenticeship requirements are satisfied.
- ITC credit applies to energy storage whether it is co-located or installed as standalone energy storage. This enables the retrofit of a battery to a solar array while taking advantage of the credit.
- The credit also includes the “direct pay” option which would allow a developer, with little or no tax liability, to treat the credit as an overpayment of tax, resulting in a cash payment refund to the developer.
Bottom line: following IRS Guidance, facilities larger than 1 MW must satisfy the prevailing wage and apprenticeship requirements to be eligible for the 30% ITC. Otherwise, the ITC percentage defaults to the base credit amount of 6%.
Both programs will be extended until 2025 and then converted to a clean electricity production tax credit (CEPTC) and clean electricity investment credit (CEITC). This means that production and investment tax credits will be in place for 10 years, until 2032 – a long-term commitment important for development and, particularly, large-scale solar and wind projects.
Incentives for Manufacturing
The Act creates several advanced manufacturing production tax credits for clean energy components like modules, film, wafers, and cells. These credits will remain over 10 years to promote American manufacturing of solar panels and components, wind turbines, inverters, and batteries for electric vehicles and the power grid, including for mining and processing of the critical minerals used in these products. The amount of each credit is designated by specific component and based upon a price per watt or an amount per production quantity. For example, the credit for a battery cell is $35 per battery cell capacity kwh, and for a photovoltaic cell, 4 cents multiplied by the wattage capacity for photovoltaic cells. These incentives are expected to significantly expand solar manufacturing in the United States, including wafer and cell manufacturing.
Clients will need to evaluate these new provisions and incorporate them into their planning and development programs. Solar, storage, and other renewable technologies will be incentivized to expand dramatically over the next few years and beyond. We can help with the next steps. Contact Renewable Energy Chair and Partner Richard Kanoff or any member of Prince Lobel’s Renewable Energy team.