Inflation Reduction Act: Tax Credits Available for Utility-Scale Solar and Energy Storage Projects

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA includes a myriad of tax credits, grants and loan programs aimed at accelerating the transition to clean energy. Among the many clean energy provisions contained in the IRA, the IRA extends certain tax credits, expands the eligibility for certain tax credits, creates new tax credits, and  provides a mechanism for tax exempt entities, like municipally-owned utilities and electric cooperatives, to monetize the benefit of tax credits. Below is a general summary of the tax credits of the IRA available for utility-scale solar and energy storage projects.

Investment Tax Credit (ITC)

• The IRA extends the current framework of the ITC for solar projects that begin construction prior to January 1, 2025, but creates a new base credit and increased credit structure. The ITC transitions to a technology-neutral credit in 2025 (discussed in further detail below).
• The base ITC credit is 6%, with an increased credit of 24% (30% total) if:
  • the new prevailing wage and apprenticeship requirements of the IRA are met;
  • the capacity of the solar project is less than 1 megawatt alternating current; or

• • the solar project starts construction less than 60 days from the date the Treasury Department issues guidance on how to meet the new prevailing wage and apprenticeship requirements of the IRA.
• Solar projects that are placed in service after December 31, 2022 and that meet the prevailing wage and apprenticeship requirements are eligible for two separate 10% credit bonuses (above the 30%):
  • A 10% credit bonus ITC if certain domestic content requirements (specified in the IRA) are met; and/or

• • A 10% credit bonus ITC if the solar project is located in an energy community (as defined in the IRA).

• • Both 10% bonuses can be taken if the solar project qualifies for both.
• Beginning January 1, 2023, solar projects with a capacity of less than 5 megawatts alternating current and located in certain “low-income communities” (as defined in the IRA) are eligible for an additional 10% credit bonus ITC.
• The IRA adds standalone energy storage projects as qualifying facilities eligible for the ITC. Prior to the IRA, the ITC only applied to energy storage projects that were paired with a solar facility. Batteries connected to a solar facility will continue to qualify for the ITC, even if they are no longer being charged by solar power. The standalone storage ITC is available for projects placed in service after December 31, 2022 with a minimum nameplate capacity of not less than 5 kilowatt hours. 
• The IRA makes the direct pay and transfer option (discussed in further detail below) available for solar and energy storage projects that qualify for the ITC.

Production Tax Credit (PTC)

• The IRA reinstates the PTC for energy produced from solar projects (the PTC for solar energy production was last available for solar facilities placed in service prior to 2006).
• The IRA extends the current framework of the PTC for solar projects that begin construction prior to January 1, 2025, but like with the ITC, creates a new base credit and increased credit structure. The PTC also transitions to a technology-neutral credit in 2025 (discussed in further detail below).
• The base PTC credit is 20% (0.3 cents per kilowatt hour), with an increased credit of five times or 100% of the base credit (1.5 cents per kilowatt hour) if:
  • the new prevailing wage and apprenticeship requirements of the IRA are met;
  • the capacity of the solar project is less than 1 megawatt alternating current; or
  • the solar project starts construction less than 60 days from the date the Treasury Department issues guidance on how to meet the new prevailing wage and apprenticeship requirements of the IRA.
• • the PTC is adjusted for inflation every year, so the current rate at five times the base credit rate would be 2.6 cents per kilowatt hour.
• Like the ITC structure discussed above, solar projects that are placed in service after December 31, 2022 and that meet the prevailing wage and apprenticeship requirements are eligible for two 10% credit bonus PTC if certain domestic content requirements (specified in the IRA) are met and/or the solar project is located in an energy community (as defined in the IRA).
• The IRA makes the direct pay and transfer option (discussed in further detail below) available for solar projects that qualify for the PTC.
• The prevailing wage and apprenticeship requirements of the PTC are virtually the same as those of the ITC, except that the prevailing wage requirement applies for a 10-year period after the solar project has been placed in service for the PTC, rather than 5-years for the ITC.

Technology Neutral Credits

• Beginning January 1, 2025, the traditional ITC and PTC will be replaced by new technology-neutral credits. Specifically, the IRA adds Section 45Y (Clean Energy Production Tax Credit) and Section 48E (Clean Electricity Investment Credit) to the Internal Revenue Code.  Projects that commence construction prior to January 1, 2025 can opt to receive the ITC and the PTC (discussed above).
• Eligibility for the Clean Energy Production Tax Credit and the Clean Electricity Investment Credit will generally require that the facility's greenhouse gas emissions be no greater than zero.
• Although the Clean Energy Production Tax Credit and the Clean Electricity Investment Credit eventually replace the PTC and ITC, respectively, the new credits’ eligibility requirements and amounts (including bonus credit amounts) generally mirror those of the PTC and the ITC for solar projects, and the Clean Electricity Investment Credit’s eligibility requirements and amounts (including bonus credit amounts) generally mirror those of the ITC for energy storage projects.
• The IRA makes the direct pay and transfer option (discussed in further detail below), with certain limitations, available for the Clean Energy Production Tax Credit and the Clean Electricity Investment Credit.

Direct Pay

• The direct pay option created by the IRA is available to certain entities, including tax-exempt entities, states and political subdivisions (including municipally-owned utilities), and electric cooperatives, and allows such eligible entities to take direct pay equal to the amount of the ITC, PTC, the Clean Energy Production Tax Credit, or the Clean Electricity Investment Credit, in lieu of a tax credit, with certain limitations.
• Direct pay of the PTC may only be received for projects originally placed in service after December 31, 2022.
• For entities that qualify for direct pay, a project loses its ability to receive 100% direct pay over time if certain domestic content requirements are not met.

Transfer Option

• The IRA allows taxpayers to transfer all (or any portion of) the ITC, PTC, Clean Energy Production Tax Credit, or the Clean Electricity Investment Credit, to another taxpayer.  Once made, the election is irrevocable. The transferred credit must be exchanged for cash and is neither included in the transferor’s income, nor deductible by the transferee.

If you have any questions about the information in this alert, please contact Rodrigo Figueroa (210-554-5581 or rfigueroa@dykema.com) or your Dykema relationship attorney.