The Inflation Reduction Act of 2022 (the "IRA"), signed by President Biden into law on August 16, promises to further invigorate an already booming sector of the economy – the renewables industry and energy transition sector. The IRA features significant tax incentives for a host of renewable energy activities, which may prompt 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 growth to jobs and revenues in these sectors are likely in the months and years ahead.
Below is a high-level non-exhaustive list of the IRA's most significant renewable energy provisions:
- Extension of Production Tax Credits ("PTCs") and Investment Tax Credits ("ITCs") for wind and solar facilities that were sunsetting. Qualifying facilities must be placed into service or commence construction prior to January 1, 2025.
- A 10% credit increase for qualifying renewable energy projects located in an "energy community," which includes, but is not limited to, brownfield sites.
- Environmental justice tax credits for solar and wind projects located in certain low-income communities, low-income residential buildings, low-income economic benefit projects, or on Native American lands.
- New PTCs for clean hydrogen produced at a qualifying facility during the facility's first 10 years of operation.
- New PTCs for zero-emission nuclear power production produced and sold after December 31, 2023.
- New "manufacturing production" PTCs for manufacturers of eligible solar and wind power project components produced and sold after December 31, 2022.
- The sale or transfer of certain tax credits to an unrelated transferee taxpayer.
- "Direct Pay" (a refund from the U.S. Treasury) permitted for certain tax-exempt entities (e.g., governmental entities, Indian Tribes, not-for-profits) as a substitute for tax credits that would attach to renewable projects undertaken by taxable entities.
Many of the above-mentioned tax credits are conditioned on the taxpayer meeting certain prevailing wage and apprenticeship requirements.
Furthermore, the IRA incentivizes the increased development of electricity transmission infrastructure, which is viewed by many as paramount to the proliferation of wind and solar energy, and to improving resilience to extreme weather events. These incentives do not come in the form of tax credits, however. Rather, the IRA includes authorization for the appropriation of billions of dollars in the form of 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 aimed at facilitating the construction of certain onshore and offshore transmission lines. The failure to fashion these incentives as tax credits may be viewed as a shortcoming of the IRA. However, the IRA was heavily debated and declared dead repeatedly prior to its passage, so it is likely certain aspects fail to satisfy certain stakeholders.
Regardless of one's individual interests, the law remains an exciting prospect for continued growth in the renewable energy sector. The IRA is, at once, an energy policy act and a major tax policy law. While we don't touch on the myriad other (non-renewable energy) features of this landmark act, there are many.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.