By Dan Smith, Vice President Markets Team at DSD Renewables

It’s officially been two years since the Inflation Reduction Act (IRA) was signed into law, and it’s clear that this landmark legislation has made a significant impact on the clean energy industry. Not only has it bolstered renewable energy adoption by providing much-needed stability and incentives for solar developers and customers alike, but it’s ensured long-term certainty with a decade-long runway for such incentives. This has been unprecedented for the renewable energy industry as a whole.

This blog will delve into the IRA’s key achievements, explore what it continues to offer, and discuss how enterprise companies can harness these benefits to their advantage.

What is the Inflation Reduction Act (in a nutshell)?

The IRA represents the biggest investment in climate action in US history. It was designed to tackle inflation and climate change by investing in clean energy and extending tax credits that incentivize renewable energy projects, including solar, energy storage, and electric vehicle infrastructure. As a result:

• Investment Tax Credit Extension: The IRA increased and extended the Investment Tax Credit (ITC)–which was initially enacted in 2006–from 26% to a robust 30%, significantly enhancing the financial appeal of solar projects. The ITC is a tax credit that reduces the federal income tax liability by a percentage of the cost of a qualified system that is installed during the tax year.
• Bonus Tax Credits: The IRA created ITC bonuses, or adders, for projects meeting certain characteristics, providing further economic support for projects that 1) benefit low-income communities, 2) use domestically produced content, or 3) are located in energy communities, which are the areas most economically affected by the transition from fossil fuels to clean energy. Described later in this post, these bonuses are a first of their kind for solar projects.
• Standalone Energy Storage ITC Eligibility: For the first time, energy storage systems became eligible for the 30% ITC, paving the way for more integrated energy solutions. Previously, the ITC for storage was only available if coupled with solar.

Two years of impact: Key achievements for renewable energy projects

Since its inception, the IRA has been instrumental in propelling the clean energy industry forward. Key achievements include:

• Enhanced Investment Certainty: The 30% ITC and extended timeline have given solar developers and enterprises a clear path for long-term planning. This certainty has enabled companies to invest confidently in greenfield projects and other multi-year initiatives, knowing they have a secure tax incentive.
• Tax Credit Transferability: This provision has expanded the pool of taxpayers who can benefit from the ITC, potentially reducing the cost of capital and increasing overall investment in clean energy projects. Organizations that don’t have sufficient tax liability (aka the amount of money or debt an individual/entity owes in taxes to the government) to fully utilize the credits themselves, can opt to transfer them to a third party in exchange for immediate, tax-free funds. This mechanism is crucial for driving investment and ensuring a steady flow of funding into the sector.

Without the passing of the IRA, the ITC would have dropped from 26% in 2022, to 22% in 2023, before dropping off completely in 2024, greatly impacting the financial viability of future projects. In many ways, the IRA kicked the renewable energy industry into gear going into the next decade of innovation and climate action.

Source: https://www.seia.org/initiatives/solar-investment-tax-credit-itc

Current opportunities and updates in clean energy

While the ITC provides long-term certainty, several aspects of the IRA are evolving. Staying informed about these developments can help you maximize the benefits available:

• Energy Community Tax Credit Bonus: The Energy Community Tax Credit Bonus applies a bonus of up to 10% for Production Tax Credits (PTC) or 2 percentage points for the Investment Tax Credit (ITC) for projects, facilities, and technologies located in energy communities. If prevailing wage and apprenticeship requirements or certain other requirements are met, 10 percentage points are applied for the ITC. The list of qualifying energy communities updates annually, which means some regions gain and lose eligibility from year to year. Projects in states like Illinois, California, Pennsylvania, Ohio, and Texas have benefited significantly from this provision, which helps revitalize areas affected by the transition away from fossil fuels. An up-to-date detailed map of energy communities can be found here.
• Low-Income Community Projects: The IRA has enabled better economics for projects in low-income areas. The Low-Income Communities Bonus Credit was designed to increase adoption of and access to renewable energy facilities in underserved and environmental justice communities as well as encourage new market participants. The bonus program provides a 10 or 20 percentage point increase to the ITC for qualified solar and wind energy facilities with a maximum net output of less than five megawatts (AC). With capacity capped at 1.8 GW annually, the current framework has created a coveted and competitive market supporting impactful investments in underserved communities.
• Prevailing Wage & Apprenticeship Requirements: To qualify for increased credit or deduction amounts of certain clean energy tax incentives, taxpayers generally need to pay laborers and mechanics employed in construction, alteration or repair no less than applicable prevailing wage rates. They also need to employ apprentices from registered apprenticeship programs for a certain number of hours. By meeting prevailing wage and apprenticeship requirements under the IRA, taxpayers can increase the base amounts of these incentives by 5 times (from a baseline of 6% to 30% for the ITC, and from 2% to 10% for certain bonuses). These requirements ensure fair wages and training for workers in the clean energy sector, and while it adds costs, it also ensures quality and fairness, which is a positive development for the industry.
• Domestic Content: The domestic content bonus credit offers increased production and investment tax credits for energy projects that use 100% U.S.-sourced steel, iron and a certain percentage of U.S.-sourced manufactured products. It raises the PTC by 10%, and the ITC by 2 percentage points up to 10 percentage points, depending on whether the project meets specific conditions such as size, construction start date, or labor requirements. Suppliers are planning to expand operations in the U.S. to meet this requirement and the shift is expected to boost domestic manufacturing, potentially lowering costs over time.

How to take advantage of the IRA on your path to clean energy

The IRA has proven to be a critical driver for the transition to renewable energy through its sheer breadth of incentives and benefits.  If you’re ready to explore how it can propel your sustainability journey, DSD is ready to help navigate all the ways to leverage the IRA and outline the best strategy to achieve your clean energy goals.