On August 16, 2022, President Biden signed into law H.R. 5376, referred to as the Inflation Reduction Act (IRA). The nearly $369 billion of new spending is intended to transform entire sectors of the American economy and will have profound consequences across the clean energy landscape, including for manufacturers, developers, owner-operators, utilities and investors. Bradley has been actively monitoring the bill and will provide deeper-dive updates on the nuances of the bill’s provisions and roll out in the coming weeks. We are specifically tracking the following items, which appear most consequential to the energy and manufacturing sectors:
Extension of the Advanced Energy Project Credit
This extension provides up to $10 billion of credits for manufacturers of certain clean energy products, including energy conversion technologies, light, medium or heavy duty electric or fuel cell vehicles, technology components or materials for such vehicles, and associated charging or refueling infrastructure. Manufacturers may also qualify for the credit to re-equip, expand, or establish an industrial facility for the processing, refining, or recycling of critical materials and components due to the changing requirements of material sourcing for electric vehicle credits.
Advanced Manufacturing Production Tax Credit
This tax credit provides strong incentives for the manufacture of clean energy products and technologies, as well as their supply chains. For example, up to $35 per kWh for each battery cell, $10 per kWh for each battery module, and various amounts for clean energy components for both residential and commercial uses such as wind blades, inverters, torque tubes, and solar modules. This credit coupled with the Advanced Energy Project Credit could produce extensive savings for a new firm set to begin construction, an existing firm who wants to expand or pivot towards new products, or an existing manufacturer who wants to ensure they comply with the program’s requirements to be awarded tax credits.
Restoration of the 30% ITC and Expansion of the PTC
The IRA restores the 30% federal investment tax credit (ITC) and expands the 1.5 cents/kWh production tax credit (PTC) for renewable energy, expressly expanding the ITC to include energy storage and microgrid controllers (as well as certain costs relating to interconnection facilities) and resurrecting the production tax credit for solar energy. Realization of the full 30% ITC and 1.5-cent PTC is contingent upon satisfaction of new prevailing wage and apprenticeship requirements. Projects smaller than 1 MWac or that begin construction prior to the date that is 60 days after the IRS publishes guidance with respect to prevailing wage and apprenticeship requirements are eligible for the full ITC and PTC without compliance with those requirements.
Creation of “Bonus” ITC Eligibility for Domestic Content, Energy Communities, and Low-Income Benefits
Projects will be eligible for an additional 10% ITC for meeting each bonus qualification: (a) certification that an adjusted percentage (generally 40%) of the total cost of components of steel, iron, or manufactured products are produced in the United States; (b) location on a brownfield site, in coal, oil, or natural gas areas, or an area with higher-than-average unemployment; or (c) for projects less than 5MWac, serving low-income residences or on American Indian land. The 10% bonus for domestic content has the potential to greatly expand the role of domestic manufacturing in the clean energy supply chain.
Provision of Certain Direct Pay Benefits and Credit Transferability Options
Certain tax-exempt entities, state and local governments, TVA, and tribal governments may elect for direct payment of the tax credit, and taxpayers not eligible for direct pay may sell ITCs and PTCs. This significantly expands options for transferability of tax credits and has the potential to significantly shift investment strategies for some market segments.
Many of the programs and tax credits will have additional rules and application processes that will be released in the coming months. Bradley’s Economic Development, Tax, Governmental Affairs, and Renewable Energy teams will continue to monitor these areas.