The IRA’s transformative tax incentives for solar energy projects and manufacturing operations

The Inflation Reduction Act (IRA), as passed by the House and Senate, is a major political achievement for the Biden Administration, Senate Majority Leader Chuck Schumer (D-NY), and Democrats of the 117th Congress. This is true despite the fact that it is a significantly smaller package than the initial ambitions of the Biden Administration and Congressional Democrats, particularly when compared with the ambitious Build Back Better (BBB) bill passed by the US House of Representatives in 2021 but lacking the support of two swing Senators, Joe Manchin (D WV) and Kyrsten Sinema (D-AZ).

One sector that made out as well in the IRA – and better than originally expected in certain key respects – as compared to BBB, is the US solar sector. 

Quick takeaways:

  • New (restored) solar PTC could be more valuable than the ITC for larger scale, more efficient solar power generation projects
  • Transferability for tax credits will be particularly significant for smaller project developers, and will enhance the value of credits for larger developers, but tax equity will still be used in some cases to monetize accelerated depreciation
  • The new 45X credit for manufacturing solar cells, wafers, modules etc. is a game-changer that will spur US solar manufacturing to a degree that may not yet be fully appreciated

Here are the highlights of tax provisions in the IRA agreement benefitting companies investing in solar projects and manufacturing operations to support the solar supply chain:

Solar Electricity Generation – Investment and Production Credits

Section 13102. Extension and Modification of Section 48 Energy Credit.

  • Extends the section 48 energy investment tax credit (ITC) for solar electricity production facilities beginning construction before January 1, 2025.
  • The ITC is 30 percent of the basis of energy property facilities placed into service after December 31, 2021, as long as the taxpayer satisfies (and 6% if they don’t) –
    • a prevailing wage requirements for the duration of the construction of the project and for 5 years after the project is placed into service and
    • apprenticeship requirements during the construction of the project.
  • The section 48 ITC is also expanded to include energy storage property, among other property types.
  • The section 48 credit for solar (and other) property is also increased for projects placed in service after 12/31/22 that meet additional criteria as follows (assuming prevailing wage/apprenticeship requirements met):
    • Domestic content requirements – 10 percentage points
    • Placed in service within an energy community – 10 percentage points
      • Energy communities include:
        • A brownfield site
        • Area with significant fossil fuel employment
        • Census tracts and those adjacent where, since 2020, a coal mine has closed, or, since 2010, a coal-fired electricity generation plant has been retired
    • For smaller scale (less than 5 MW capacity) projects, placed in service in low-income communities (as allocated by the Secretary per an annual capacity limitation):
      • Additional 10 percent credit if located in a low-income community (as defined within the New Markets Tax Credit program under section 45D) or on Indian land.
      • Additional 20 percent credit if the project is a qualifying low-income residential building project or a low-income economic benefit project.

Section 13101. Modification of Section 45 Production Credit to restore PTC option for solar

  • Restores the option of claiming 10 years of PTC for solar electricity generation facilities  beginning construction before January 1, 2025
  • PTC – (2.6 cents in 2022, indexed for inflation) can be chosen as an alternative to, and in lieu of section 48 ITC
  • Prevailing wage and apprenticeship requirements (as under section 48) also apply
  • Credit plus-ups for domestic content, energy communities, and low-income communities (as under section 48) also apply

Sections 13701 and 13702. Extensions of PTC and ITC for solar under new ‘tech neutral’ sections 45Y and 48D, for solar electricity generation projects placed in service after December 31, 2024.

  • PTC and ITC for solar after 2024 are effectively the same as those under sections 45 and 48.
  • The provision creates an emissions-based incentive that is neutral and flexible between clean electricity technologies.
  • Prevailing wage and apprenticeship provisions apply in the same manner as for the section 45 PTC and section 48 ITC.
  • The 45Y and 48D credits are set to phase out the latter of 2032 or when emission targets are achieved: when the electric power sector emits 75 percent less carbon than 2022 levels, the incentives will be phased out over 3 years. Facilities will be able to claim a credit at 100 percent value in the first year, then 75 percent, then 50 percent, and then 0 percent.

Solar Energy– Manufacturing Incentives

Section 13501. Extension of the section 48C advanced energy project investment tax credit.

  • Revives the Section 48C qualified advanced energy property credit, providing $10 billion in additional tax credits to qualifying clean energy property manufacturing projects, starting in 2023
  • To be eligible for the credit, a taxpayer must apply for and be awarded a tax credit allocation by the Department of the Treasury
  • $4 billion is set aside for qualifying projects in census tracts in which a coal mine or coal power plant has closed and in which no project received a 48C credit allocation in prior years.
  • To receive a rate of 30 percent, taxpayers must satisfy prevailing wage requirements for the establishment, expansion, or re-equipping of a manufacturing facility and for 5 years after the project is placed into service, and satisfy apprenticeship requirements during the construction of the project.
  • Eligible projects include an expanded list of clean energy manufacturing projects, including, e.g., manufacturing of solar cells, modules or panels.
  • A taxpayer cannot claim both section 48C and section 45X credits for manufacturing property and the property produced by such property.

Section 13502. Advanced Manufacturing Production Credit – 45X

  • Creates a new section 45X production credit for each eligible component that is produced and sold to an unrelated party.
  • Eligible components include solar polysilicon, wafers, cells, modules, backsheets, longitudinal purlins, and structural fasteners.
  • Credits are provided for eligible components produced and sold before January 1, 2030, phased-out with a reduction of 25% per year between 2030 and 2032. This phaseout does not apply to the credits for critical minerals.
  • Credit amounts for solar property manufactured in the US include, for:
    • thin film photovoltaic or crystalline photovoltaic cells, 4 cents multiplied by the capacity of such cell (per direct current watt)
    • photovoltaic wafers, $12 per square meter
    • solar grade polysilicon, $3 per kilogram
    • polymeric backsheets, 40 cents per square meter
    • solar modules, 7 cents multiplied by the capacity of such module (per direct current watt)

Section 13703. Cost recovery for qualified facilities and property

  • This provision provides that any facility described in the clean electricity production credit and any qualified property or grid improvement property described in the clean electricity investment credit (including solar property) shall be treated as 5-year property under GDS for purposes of IRC Section 168.
  • This provision applies to facilities and property placed in service after December 31, 2024.

Credit Monetization

Section 13801. Elective Payment for Energy Property and Electricity Produced from Certain Renewable Resources, etc. and Transferability of Applicable Credits Elective Payment

  • Tax exempt, government and tribal entities can elect to receive “direct pay” for tax credits under:  Sections 48, 45, 45Q, 30C, 48C, 45U, 45V, 45X, 45Y, and 45Z.
  • Taxable entities can elect to receive “direct pay” for tax credits under:  Sections 45Q, 45V, and 45X.
  • Applies for facilities placed in service after December 31, 2022, for which a credit is allowed under these sections.
  • Transferability.  Taxable entities may transfer any applicable credit to another taxpayer.
    • The transfer may be for all or a portion of a credit, but any credit (or portion thereof) may only be transferred once.
    • Credits eligible to be transferred include: Section 30C alternative fuel refueling property credit; Section 45 renewable electricity production credit; Section 45Q credit for carbon oxide sequestration; Section 45U zero-emission nuclear power credit; Section 45V clean hydrogen production credit; Section 45X advanced manufacturing production credit; Section 45Y clean electricity production credit; Section 48 energy investment tax credit; Section 48C advanced energy project credit; and Section 48D clean electricity investment credit.
    • Any amount paid in consideration of a transfer must be paid in cash.
    • Payments for tax credits are not deductible, nor included in income.
    • For credits under section 45, 45Q, 45V, and 45Y, the transfer must be made separately for each year of the credit’s relevant credit period.
    • Carryback Period - the credit carryback period is extended from one to three years for any credit eligible to be transferred.

Clean Energy Incentives for Individuals

Section 13302. Residential clean energy property

  • Extends the credit for the cost of qualified residential clean energy property expenditures, including solar electric, solar water heating, fuel cell, and small wind energy, and geothermal heat pumps.
  • Extends the full 30 percent credit for eligible expenditures through the end of 2032, then phases down to 26 percent in 2033 and 22 percent in 2034.
  • The credit expires after the end of 2034.

Following bill’s passage by the House of Representatives, the President can be expected to sign the bill quickly into law. Several provisions are likely to be closely scrutinized by the Internal Revenue Service as it develops guidance on these provisions. Our Hogan Lovells team is already assessing how best to assert client interests in that process. Please let us know how we can best assist you as the IRA becomes law and is implemented.

 

 

Authored by Jamie Wickett, Scott Friedman, Jonathan Stoel, and Mary Anne Sullivan.

 

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