In the last decade, solar project development has skyrocketed, boasting an average annual growth rate of 24%, and the U.S. now has 149 GW of installed solar capacity. In the first quarter of 2023, solar accounted for 54% of new electricity-generating capacity additions in the U.S.
This rapid market growth can be attributed to competitive solar pricing (with a 50% reduction in installation costs over the past ten years), surging demand for clean energy in both the public and private sectors, and favorable federal policies with close to $400 billion in federal funding over the next decade to facilitate the clean energy transition. One such policy, the Inflation Reduction Act (IRA), is the U.S.’ most aggressive climate investment to date.
The IRA is pivotal for driving emerging commercial solar markets, offering inclusive tax incentives and long-term market stability. This blog post will dive into IRA’s key provisions so that your business can plan for and benefit from the IRA’s clean energy tax advantages.
Options to monetize clean energy tax credits with Direct Pay and Transferability
The IRA's elective or direct pay provision allows certain organizations to treat the clean energy tax credits as tax payments and thereby receive direct payments from the Internal Revenue Service (IRS) for any tax liability amount paid in excess. The transferability provision enables organizations ineligible for direct pay to sell their credits to the open market. Transferability allows new investors with minimal tax liability to enter the market and monetize their credits by transferring any clean energy credits (except for Section 45W commercial clean vehicle credit) to a third party in exchange for a one-time, tax-free cash payment.
Without these tax credit monetization options, organizations, especially the smaller organizations without the project finance underwriting capabilities, could not benefit from the tax credits available for transitioning to clean energy. The IRA's direct pay and transferability provisions are expected to double or triple the reach of clean energy tax credits by expanding the pool to a broader diversity of stakeholders who can quickly, easily, and affordably finance renewable energy projects. The Internal Revenue Code (IRC) outlines a dozen clean energy tax credits for eligible entities, such as local governments, Indian tribal governments, and tax-exempt organizations.
Tax credits for businesses with adders
Organizations can deduct a percentage of the cost of solar energy systems from their federal taxes with the two tax credits: investment tax credit (ITC) and production tax credit (PTC). IRA has extended the 30% ITC and 2.75 cents/kWh PTC for projects meeting the prevailing wage requirements if over 1 MW AC. In addition, the solar energy projects can benefit from three “adder” tax credits for the ITC and PTC - domestic content adder, energy community adder, and low-to-moderate income adder for projects below 5MW AC.
Domestic content adder
The IRA incentivizes domestic solar manufacturing, dedicating over 50 GW of solar module manufacturing capacity to secure a reliable supply for future growth. The IRA introduced a 10% tax credit adder to encourage the use of domestic content in renewable projects. To qualify, the taxpayers must build a clean energy project with 100% U.S. content steel and iron and a specified “adjusted percentage” (ranging from 20%-55%) of domestically manufactured components. The domestic content bonus applies to PTC-eligible qualified facilities, ITC-eligible generation or storage energy properties, and technology-neutral ITCs for designated investments in net-zero generation facilities or energy storage technologies.
Energy community adder
The Energy Community Tax Credit provides up to a 10% bonus for projects, facilities, and technologies located in specific energy communities. This provision is vital to the energy transition's success, as decarbonization will disproportionately affect regions historically dependent on fossil fuel' extraction, processing, and/or concentrated use. The IRA defines an energy community based on eligibility criteria under Sections 45, 48, 45Y, or 48E of the Internal Revenue Code, which includes brownfields, statistical areas with high unemployment rates, and coal closure areas.
Low-income community adder
The IRA’ Low-income Communities Bonus Credit Program provides a 10% or 20% solar tax credit to low income communities. There is additional guidance for the program qualification, application procedures, review process, and allocation from the IRS, with more details expected shortly.
The three “adders” stacked up with ITC and PTC can lead to 70% tax credits for clean energy projects, and the monetization of tax credits with direct pay and transferability makes this even more attractive for organizations.
Energy-as-a-Service to take advantage of IRA tax credits
The IRA has ushered in a new era of growth and opportunity for the U.S. commercial solar market. By providing vital tax incentives, transferability options, and tax bonuses for low-income communities, the IRA has expanded equitable access to diverse organizations to accelerate the clean energy revolution across the country.
One risk-free way to reap the rewards of the IRA’s tax incentives is through an onsite Energy-as-a-Service (EaaS contract). To maximize the benefits of the IRA and unlock future growth opportunities, reach out to GreenStruxture's energy consultants today to learn more about whether EaaS is right for your business.