The Inflation Reduction Act (IRA) was signed into law by President Biden on 16 August 2022. It is a result of negotiations on the proposed Build Back Better Act which had been reduced and comprehensively reworked from its initial proposal. This article discusses the impact of changes in the IRA relating to solar and wind projects. We discuss provisions relating to other clean energy sources in a separate article.
The main provisions likely to affect solar and wind projects are:
- A new tax credit rate structure;
- An extension of wind and solar tax credits;
- The ability to take Production Tax Credit (PTC) for solar deals;
- A New Advanced Manufacturing Production Credit;
- Transfer provisions that allow for the direct sale of renewable tax credits to third parties; and
- “Direct Pay” provisions available to certain entities and with respect to certain tax credits.
A 15% minimum tax is also being introduced for certain companies but is unlikely to impact either solar, wind or P3 projects.
1. Rate Structure
The IRA proposes a set “base” rate for specific renewable energy tax credits, which can be adjusted for inflation. The credit can be increased by a factor of five if prevailing wage and apprenticeship requirements are met.
Wage Requirements
The project owner must ensure that labourers employed by contractors and subcontractors are paid prevailing wages during construction and for any repairs or alterations needed during the applicable tax credit period. Prevailing wages are defined as wages at rates for similar work in the location of the project site, as determined by the US Secretary of Labor https://www.dol.gov/general/topic/wages/govtcontracts Project owners can rectify any failure by paying the difference between the prevailing wage and the wage paid, plus USD 5,000 per worker and an interest charge (though the cost is higher if the failure was intentional).
Apprenticeship Requirements
The IRA requires a percentage of labour hours, defined as the minimum amount of hours of the construction, alteration, or repair work, to be performed by qualified apprentices. The required percentage of labour hours varies depending on the year construction begins.
| Project Construction | % Apprentice Labour Hours |
| Construction begins before 1 January 2023 | 10% |
| Construction begins during 2023 | 12.5% |
| Construction begins on or after 1 January 2024 | 15% |
Limited transition relief from Wage and Apprenticeship Requirements
Projects that begin construction within 60 days of the official guidance detailing these requirements being published are exempt and will automatically qualify for the increased credit rates mentioned above (the “60-Day Grandfather Period”). Projects with a maximum output below one megawatt are also exempt from these requirements.
2. Extension of wind and solar tax credits and ability to take PTC for solar deals
The IRA includes an extension of the PTC and Investment Tax Credit (ITC) for wind and solar projects (including geothermal and hydropower) beginning construction before 1 January 2025. This represents a 3-year extension for PTCs and a 1-year extension for ITCs.
Solar projects may now take the PTC instead of the ITC.
The amended PTCs and ITCs will apply to facilities placed into service after 31 December 2021.
PTC
For projects placed into service from 2022 onwards, the base credit amount for wind projects is 0.3 cents/kWh (increasing to 1.5 cents/kWh provided the Wage and Apprenticeship Requirements are met), adjusted by inflation.
The “inflation adjustment factor” is published by the Internal Revenue Service (IRS). In 2022, the IRS published a notice that stated the inflation adjustment factor was 1.7953. As a result, the PTC for 2022 is 2.6 cents per KWh.
ITC
Alternatively, the ITC offers a base rate of 6% (as a percentage of the taxpayer’s cost of the eligible property) which goes up to 30% if these requirements are met.
Many solar projects will probably claim PTCs rather than ITCs. This is mainly because some ITC is recaptured if a project or portion of a project is sold, otherwise disposed of, or removed from service in its first five years of operation. Claiming the PTC avoids the risk of recapture.
Additional tax credits
In addition, “bonus” tax credits are available, either where domestic content requirements are met or where a project is located in certain “energy communities” or low-income communities.
To be eligible for a domestic content requirement tax credit, projects must incorporate a certain proportion of steel, iron, or manufactured products that were produced in America. Under a “phased-in” approach, the amount of domestic content required will increase over time.
| Project Construction Required | % Domestic Content Required | % Domestic Content for Offshore Wind |
| Construction begins before 1 January 2025 | 40% | 20% |
| Construction begins in 2025 | 45% | 27.5% |
| Construction begins in 2026 | 50% | 35% |
| Construction begins in 2027 | 55% | 45% |
| Construction begins on or after 1 January 2028 | 55% | 55% |
Additionally, other cumulative “bonus amounts” are available:
- Up to 10% is added to the PTC and ITC for projects in certain “energy communities”, which include brownfield sites, areas that meet certain employment percentages relating to coal, oil, or natural gas, and areas in which a coal mine or coal-fired electric generating plant has closed.
- Up to 20% can be added to the ITC for solar and wind projects located in certain low-income communities, low-income residential buildings, or on American Indian land.
Due to the 60-Day Grandfather Period, projects that do not meet the Wage and Apprenticeship Requirements may rush to begin construction. Additionally, because bonus tax credits are only generally available on projects placed into service from 1 January 2023 onwards, those who qualify for these bonus tax credits are incentivised to delay the date the project is placed into service even if it is near completion at some point in 2022.
3. New Advanced Manufacturing Production Credit
A new PTC will be created for the domestic production and sale of qualifying solar and wind components. Components for these purposes are broadly defined, including photovoltaic wafers, blades, nacelles, and towers, and certain “critical minerals” such as aluminium, graphite and vanadium, among many others. The credit rate varies depending on the component and will apply to components produced or sold after 31 December 2022.
| Date component produced or sold | % PTC available |
| Between 2023 and 2029 | 100% |
| In 2030 | 75% |
| In 2031 | 50% |
| In 2032 | 25% |
| After 2032 | 0% |
No phase-out will be applied to the production of components in the “critical minerals” category.
Transfer Provisions
The IRA allows for the transfer of renewable tax credits between taxpayers, provided the tax credits are paid for in cash, and the amount paid is neither taken into income by the seller nor deducted by the buyer. There are limited exceptions to this ability to transfer tax credits, including certain tax-exempt transferors and government entities.
This provision could substantially minimise the importance of the partnership flip structure, based on the principle that tax credits cannot be bought and sold between taxpayers. If tax credits can be sold, it may limit the use of the flip structure to cases where the value of the non-credit attributes such as tax depreciation continue to be demanded by tax equity investors seeking disproportionate allocations of such benefits.
“Direct Pay” provisions
Direct pay (i.e., a refund from the Treasury) is available with respect to the majority of the renewable incentives mentioned above. However, in most cases, direct pay is limited to taxpayer claimants, such as tax-exempt entities, government entities, Indian Tribes, or Alaska Native Corporations. There are some cases where direct pay is available to taxpayers of all profiles.
4. Other Changes
The credit carryback period for renewables tax credits is extended from one to three years.
A number of the changes detailed in the IRA could significantly impact tax equity financing. Operis has experience auditing models relating to tax equity structures and P3 projects to ensure they are optimised and correctly reflect relevant tax legislation changes. Its dedicated Tax & Accounting team can analyse changes within the IRA individually or overall.
If you have any questions regarding the above or would like to speak to someone at Operis about potential issues relating to the impact of provisions within the IRA on tax equity structures or P3 projects, please don’t hesitate to get in touch.
