The biggest investment in climate and energy in American history, the Inflation Reduction Act (IRA) will bring billions in tax breaks and new spending that aims to boost the U.S. clean energy supply chain. Significant federal funding will go to clean energy with the goal of substantially lowering the nations carbon emissions by the end of this decade. The majority of the $369 billion in climate and energy related funding will be through direct tax incentives, but also include grants and loan guarantees.
Who will be eligible for funding?
Corporations, individuals, plus state and local governments are eligible to receive funding in the energy portion of the IRA. Most of the funding will be in the form of tax credits designed to activate private investment in clean energy, transportation and manufacturing. Many of the tax credits are direct pay so an entity can claim the full amount even if its tax liability is less than the credit.
Why is this Act a game changer for the renewables industry?
The IRA is going where other legislation has not gone before – offering stable, long-term policy. Extending credits at their full value for at least 10 years offers investors, manufacturers, developers and utilities enough time to plan and build facilities and projects into the 2030s.
In addition, the IRA has a larger range and flexibility than prior credits. It allows new zero-emissions technology like solar projects or energy storage technology to qualify for investment or production credits. It extends the Investment Tax Credit (ITC) through December 31, 2025, for solar, wind, geothermal, biogas, combined heat and power facilities, and microgrid projects that begin construction before December 31, 2025. It includes interconnection costs in qualified ITC costs and extends the ITC for eligible costs associated with standalone energy storage. Under the previous law, energy storage devices had to be attached to a solar project to claim the ITC. Further revisions in the new law allow developers to claim the ITC for other technologies, such as carbon capture sequestration (CCS), clean hydrogen, nuclear power, and biofuel. The Act also extends the Production Tax Credit (PTC) for wind, biomass, geothermal, solar, landfill gas, and other projects. (The solar PTC originally expired in 2005.)
The IRA also supports workers and domestic manufacturing by tying clean energy credits value to things such as worker training and competitive wages and it enhances the credit for sourcing components domestically.
Other enhancements to the ITC are available for projects placed into service in an energy community or an environmental justice area. An energy community is a brownfield site; an area that has or had a significant employment base related to oil, gas, or coal; or a census tract that housed a coal mine or coal-fired electric plant that closed on or after December 31, 1999.
An environmental justice area is a low-income community or Tribal land. Projects that are part of a qualified low-income residential building or qualified economic benefit project will receive additional percentages.
Lastly, the Act makes tax credits “transferrable.” Developers can sell credits to anyone with tax liability. This provision creates a new marketplace for tax credits. For tax-exempt entities, like municipal utilities, there are cash grants offered.
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