The Inflation Reduction Act of 2022 (the “IRA”), signed into law by President Biden on August 16, promises to further energize an already booming sector of the economy – the renewable energy industry and the energy transition sector. The IRA offers significant tax incentives for a host of renewable energy activities, which can incentivize developers to accelerate the pace of their business models. While leaders in these industries are still digesting the full impact of the IRA on their businesses, massive job and income growth in these sectors is likely in the months and years to come.
Below is a non-exhaustive high-level list of the most important renewable energy provisions of the IRA:
- Extension of production tax credits (“PTC”) and investment tax credits (“ITC”) for wind and solar installations that were coming to an end. Eligible facilities must be commissioned or begin construction by January 1, 2025.
- A 10% credit increase for qualifying renewable energy projects located in an “energy community,” which includes, but is not limited to, brownfields.
- Environmental justice tax credits for solar and wind projects located in certain low-income communities, low-income residential buildings, low-income economic impact projects, or on Native American lands.
- New PTCs for clean hydrogen produced at a qualifying facility within the first 10 years of facility operation.
- New PTCs for zero-emission nuclear power generation produced and sold after December 31, 2023.
- New “manufacturing production” PTCs for manufacturers of eligible solar and wind project components produced and sold after December 31, 2022.
- The sale or transfer of certain tax credits to an unrelated transferee taxpayer.
- “Direct payment” (a reimbursement from the US Treasury) permitted for certain tax-exempt entities (e.g. government entities, Indian tribes, non-profit organizations) in lieu of tax credits that would be attached to projects renewable energy undertaken by taxable entities.
Many of the tax credits mentioned above are contingent upon the taxpayer meeting certain prevailing wage and apprenticeship requirements.
In addition, the ERI encourages the increased development of electricity transmission infrastructure, which is seen by many as key to the proliferation of wind and solar power, and to improving resilience to extreme weather events. These incentives do not, however, take the form of tax credits. Instead, the IRA includes authorization for the appropriation of billions of dollars in grants and loans that would be available for transmission upgrades in certain locations yet to be designated by the U.S. Department of energy. Additional funding would be available for grants to facilitate the construction of certain onshore and offshore transmission lines. The inability to turn these incentives into tax credits can be seen as a shortcoming of the IRA. However, the IRA was heavily debated and declared dead several times before it was passed, so some aspects are likely to not satisfy some stakeholders.
Regardless of its individual interests, the law remains an exciting prospect for continued growth in the renewable energy sector. The IRA is both an energy policy law and a major tax policy law. While we won’t touch on the myriad other features (non-renewable energy) of this landmark act, there are plenty.