The “Build It In America Act” proposed by the House Ways and Means Committee may have raised concerns about the future of energy tax credits under the Inflation Reduction Act (IRA). While the proposal is not expected to pass, it should serve as a notice for organizations with clean energy projects in development or consideration. The IRA offers a remarkable array of energy tax credits that should not be overlooked.
Securing your advantage
Taking advantage of the IRA’s generous credits is a strategic move for businesses with qualifying clean energy projects. Initiating these projects now safeguards your access to these credits, regardless of future legislation, and can likely increase the amount of credits you receive.
The IRA has breathed new life into energy credits. Prior to the IRA, solar and other clean energy tax credits that had been in place for many years were starting down a path to sunset. The credit percentage and maximum availability of these credits are now equal to or greater than what they once were. Moreover, the IRA introduces new credits for emerging energy technologies like hydrogen and biogas, making the landscape even more attractive.
The IRA has introduced a range of stipulations that can maximize or reduce credits. Factors such as using American-made or domestic content and locating projects in areas affected by the energy transition can influence the amount of credit a project qualifies for. Alternatively, not utilizing them, depending on the category, can actually reduce the eligible credit amount.
Stacking credits for greater impact
Unlocking the full potential of energy credits might seem intricate, but it presents numerous avenues to strengthen incentives, especially for specific communities and projects. One approach is to integrate diverse clean energy technologies into a single project, capitalizing on the unique credits they each offer.
For instance, consider an organization with a solar project linked to lithium-ion battery storage, connected to a microgrid, and equipped with cutting-edge control technology. Each of these advancements qualifies for different credits, allowing the project to stack multiple credits for a more comprehensive financial advantage.
Another strategy involves leveraging individual credits, such as solar credit. By adding bonus credits to a base credit of 6% of the investment, organizations can multiply their benefits. Incorporating prevailing wage provisions can elevate the credit percentage significantly, even up to 30%, marking a return to the former glory of generous credits.
However, prevailing wage only applies to projects exceeding a megawatt in size. Ensuring compliance with this criterion is essential to reclaiming the levels of credit reminiscent of the past.
Beyond the former glory, further bonus credit opportunities await. Assuming the project qualifies for the 5X multiplier, projects can earn an additional 10% by utilizing domestic content up to 40%, and an extra 10% can be gained if the project is located in an energy community, raising the total return to 50%. Even more competitive bonus credits become available for projects situated on Native American land. Moreover, directing portions of energy project savings to assist low-income individuals can lead to capturing additional bonus credits.
These examples demonstrate the potential of projects to secure anywhere from the former glory of 30% in credits, all the way up to an impressive 70% of total project costs. By following these guidelines, projects can have a substantial impact. Most projects typically fall within the range of 30% to 50% in credits, but with careful consideration and planning, businesses can seize the higher end of this spectrum, securing remarkable financial benefits.
The snowball effect
Historically, a large portion of solar panels that have been used to store energy in the U.S. have been imported from Southeast Asia and China. The IRA’s domestic content bonus credit holds significant importance, as projects can receive a 10% credit if these panels are purchased from a U.S.-based manufacturer. Many companies currently face challenges in sourcing domestically made solar panels. However, the situation is gradually improving due to substantial investments in U.S.-based manufacturing plants.
A concrete example of this trend is seen in Italian solar panel manufacturer Enel Group’s recent announcement that it is investing $1 billion in its first U.S.-based plant, which will manufacture solar panels in Oklahoma. The attractive federal and state incentives helped lure Enel Group to invest in Oklahoma, creating job opportunities where there is space and they are needed, garnering bipartisan support. As the renewable energy industry continues to gain traction and investment from companies like Enel, the chances of reversing these credits appear increasingly challenging from a political perspective.
Seize the opportunity
Regardless of political changes, now is the time to act on qualifying projects. Delaying means losing out on valuable returns on investment, and the credit regime is unlikely to get any better. Additionally, the supply of credits might soon outpace demand, causing their value to decrease. By moving sooner rather than later, businesses can secure better rates and ensure they are ahead of the competition.
Consider the following scenario: A company has the potential to save $100,000 by installing solar in their project. Waiting means losing out on significant returns on that investment with each passing year. Acting promptly ensures that the return on investment starts sooner, accelerating financial benefits.
For most non-utility grade renewable energy projects, a potential credit range of 30-50% is likely, some can get up to as much as 70%. This generous incentive should not be underestimated, making immediate action even more crucial.
Moreover, businesses should contemplate the option of monetizing the tax credits associated with these projects. Currently, a good project can sell a tax credit of up to $0.92 on the dollar. However, as the renewable energy sector grows, the supply of credits might surpass demand, potentially lowering their value.
To stay ahead of potential fluctuations, acting swiftly becomes essential. Waiting could mean missing out on the opportunity to secure higher rates as more efficient guidelines for credit monetization emerge.
Furthermore, the presence of numerous capital-intensive projects competing for tax credit buyers, such as billion-dollar offshore wind projects, carbon capture initiatives, and hydroelectric pumped storage projects, may also impact the credit market. These projects might absorb a significant portion of the tax credit demand, affecting the value of selling a tax credit.
Embrace the IRA energy credits
Today’s renewable energy sector offers unprecedented opportunities. Organizations must delve deeper into the potential impact of the IRA energy credits on their strategic energy plans. If you have a project that qualifies for any of the numerous IRA energy credits, seize the moment and act now. The path to a greener future and financial benefits awaits those who don’t sleep on this remarkable opportunity.
Joel Laubenstein is a principal and the leader of Baker Tilly’s tribal services practice. Joel specializes in compliance, energy, infrastructure and broadband initiatives, outsourced grant writing, and outsourced project development, capital procurement, management, and execution.
