New tax credits highlight need to start energy projects now
By Corey Bonkowski, Director of Finance - August 17, 2022
Getting energy projects started before 2023 makes it easier to lock in lucrative tax credits.
The Inflation Reduction Act includes $370 billion in spending for the fight against climate change and promotion of clean technology.
The investment and production tax credits have been altered and expanded to encourage new clean technology projects
Companies that act before 2023 benefit from a transitional grace period and lock in 30 percent tax credits.
The Inflation Reduction Act’s (IRA) was passed by the House of Representatives on Friday, August 12. Its investment in the fight against climate change is immense—$370 billion, or larger than 75 percent of the world’s economies.
The act is the largest commitment ever made by the federal government in the fight against climate change. New spending puts the U.S. on track to reduce emissions by 40 percent by 2030 (compared to 2005 levels).
Key provisions from the act include:
$30 billion to states and utilities to accelerate green energy transition.
$30 billion production tax credits for solar, wind, battery manufacturing.
$27 billion accelerator to support deployment of clean technology.
$6 billion to reduce emissions in industrial manufacturing plants.
$2 billion to retool existing auto plants to build clean vehicles.
Of particular note are changes to the Investment Tax Credit (ITC) and Production Tax Credit (PTC). For example, prior to the act, the ITC for solar PV was set at 26 percent for 2020-2022, falling to 22 percent in 2023 and 10 percent thereafter.
New rules make these credits even more enticing for companies. Solar and energy storage projects in particular are well positioned to benefit from these changes.
Companies that launch clean technology projects now can also take advantage of a transitional grace period. That means projects that get off the ground in 2022 enjoy easier access to higher credit rates.
What to know about the new ITC and PTC rules
The extension of the ITC through 2024 is an important development for the clean energy sector. Solar projects are now also eligible for the PTC, while standalone storage is eligible for the ITC if it has a nameplate capacity of at least five kilowatt hours (kWh). This includes thermal storage in HVAC systems.
Previously, energy storage projects could only draw on the ITC if it was part of another ITC-eligible project (e.g. wind or solar facility). Interconnection costs for projects below five megawatts (MW) now also benefit from the ITC.
The biggest change deals with how the ITC and PTC are calculated.
Under the new rules, the ITC’s base credit rate is six percent. The PTC’s base rate is 0.3 cents per kilowatt hour (kWh). If wage and apprenticeship requirements are met (discussed below), a 5x multiplier is added to both base rates (bringing the ITC to 30 percent and PTC to 1.5 cents per kWh).
A bonus 10-percent worth of ITC or PTC credits is available for meeting domestic content quotas. This threshold is met if 40 percent of total project costs are spent on goods manufactured in the U.S.
For the ITC, domestic content is calculated on a project-wide level, while the PTC operates on a facility-by-facility basis.
A $1 million solar project could get $600,000 worth of ITC credits.
A further 10 percent bonus can be gained if your project is located in a community with a closed coal mine or where coal-fired generation facilities have been retired. And an additional ITC bonus of 10 percent (up to 30 percent in some cases) is available for projects in low-income communities.
For example, this means a $1 million solar project that meets labor and domestic content requirements (40 percent) and is located in a low-income community (10 percent) with a closed coal mine or coal power plant (10 percent) could receive $600,000 worth of ITC credits.
It’s important to note that projects with a maximum net output of less than one MW are exempt from these requirements. This means the act makes smaller projects even easier to undertake.
For larger projects, the higher the capital costs, the more attractive the ITC becomes. Companies can also claim the ITC in conjunction with debt financing—a powerful savings combination.
Companies must act now to lock in credits
Tax credits can make a big difference in the race to cut emissions, but only if companies act now—and this is compounded by an already high cost of waiting.
For example, new wind projects in the U.S. fell by 25 percent in 2021 after the expiration of the wind production tax credit. Companies that waited too long missed out on substantial savings.
When it comes to the new provisions in the act, companies that move now will be better positioned to take advantage of the ITC and PTC.
As already mentioned, projects that meet prevailing wage and apprenticeship requirements benefit from the base rate plus the 5x multiplier (e.g., totalling 30 percent for ITC, 1.5 cents per kWh for PTC).
To meet these requirements, 10 percent of a project’s total labor hours must be filled by qualified apprentices—this rises to 12.5 percent in 2023 and 15 percent after that.
Moreover, contractors and subcontractors who employ four or more people must keep at least one qualified apprentice on staff. Companies failing to meet these requirements would only get an ITC of six percent. Together with a lower rate, businesses will also have to pay remittances to each underpaid worker, and penalties of up to $10,000 per employee.
Projects that get started in 2022 can qualify for the 30-percent rate without having to meet the new labor requirements.
According to law firm Troutman Pepper, meeting these requirements “is especially important for sponsors obtaining third-party financing [...and] compliance with the prevailing wage and apprenticeship requirements may involve significant changes to historical labor sourcing practices.”
The labor market is already extremely competitive, and the organizational change to evolve a company’s hiring strategy is costly and time-consuming. That said, there is an easier (albeit time-sensitive) way for businesses to secure higher credit rates.
In short, projects that get started in 2022 can qualify for the 30-percent rate without having to meet the new labor requirements.
Wage and apprenticeships requirements apply to projects that start after December 31, 2022, but not before 60 days have elapsed after the government provides guidance on the requirements.
In order to realize this opportunity, companies must move fast. Solution providers already have the assets companies want, but it can be difficult to access the kind of flexible funding businesses need.
Accelerating your clean energy projects in 2022
Companies who start their clean energy projects now enjoy lower energy bills, fewer emissions, and make better use of these new tax credits.
Locking in the 30 percent rate is key, but to do so companies need help realizing their plans, particularly when it comes to funding. Access to a flexible, low-risk, on-bill payment solution will help you realize these projects now.
EnPowered Payments accelerates clean technology projects, helping solution providers sell more and their customers save more. By minimizing risk and maximizing flexibility, on-bill payments allow customers to repay cleantech projects through their future savings.
Payments empowers companies to avoid up-front costs and justify their energy savings and asset costs directly on their electricity bill.
Interested in learning more? Reach out today to see how EnPowered will help you launch more projects before the end of 2022.