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Breaking Down the Clean Energy Incentives in the Inflation Reduction Act

Last month President Joe Biden signed a bill that secured the largest investment in the United States’ history to combat climate change and invest in clean technologies. An analysis of the bill from Senate Democrats predicts that the bill will help the United States lower greenhouse gas emissions by about 40 percent by 2030. 

The Inflation Reduction Act is 730 pages of not-so-easy to read legislation with topics covering healthcare, energy, electric vehicles, corporate taxes and more. Keeping in mind that reading through federal legislation is time consuming and may not be easy to understand, this blog will break down the key points relating to clean energy from the Inflation Reduction Act from the information that’s available at this time. 

Changes to the investment tax credit 

The tax credit that’s received for installing clean energy technologies has now increased from 26 percent back up to 30 percent and will be in effect until 2032. The tax credit will be available for both residential and commercial projects installed this year and moving forward. The investment tax credit will decrease to 26 percent in 2033 and 22 percent in 2034. 

The biggest change relating to the tax credit is that it includes a direct pay provision for a nonprofit or a state, local or tribal government. Previously, those entities were not able to use the tax credit available so often entered into power purchase agreements or leases to utilize the tax credit. We are excited for our nonprofit Solar Moonshot Program participants, which will now be able to utilize direct pay and own their systems outright from the day their rooftop solar power systems are energized. Unfortunately, residential customers are not eligible for the direct pay provision, however, residential customers who do not have the tax appetite to make use of the tax credit, are now about to transfer or sell the credits. 

There are also a number of adders that may increase the percentage of the tax credit. An additional 10 percent is available if the system is installed in an area with significant fossil fuel extraction or a brownfield. Another additional 10 percent is available for using domestic materials, which requires all steel and iron to be sourced from the United States and 40-55 percent of the value of manufactured products to be from the United States.  Finally, an additional 10 percent adder is available for solar projects that sell their electricity via community solar to low income households. The adders are also stackable meaning if a project has the 30 percent tax credit, a 10 percent adder for domestic materials, a 10 percent adder for being located in a fossil fuel community and another 10 percent for being a community solar project, the tax credits could potentially reach up to 60 percent of the total system cost. 

Prevailing wage and apprenticeship requirements 

New employment requirements exist for large clean energy projects 1MW or more. In order to be eligible for the standard 30 percent tax credit, workers installing solar projects must be paid prevailing wages and be part of an electrical apprenticeship program. Violations will not only result in projects unable to claim up to 24 percent of the 30 percent tax credit but also heavy fines of $5,000 for each worker who is underpaid. Furthermore, if the inability to meet the wage requirements is found to be intentional, the fine will double to $10,000 per worker.  

Additional incentives and information

There are many other investments in the bill including tax credits for electric vehicles, electrical panels and more. There are also details that are not determined yet, for instance about the time it will take for direct pay to be paid out, which we’ll update you on as the information becomes available. Sign up for our newsletter to be notified when part two of this blog, which will dive into transportation investments, is available. We’ll be sharing more on social media as well: @DynamicActions on Twitter, @HammondClimateSolutions on Facebook, LinkedIn and Instagram.

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