The new Inflation Reduction Act (IRA) is the most comprehensive and ambitious program the United States has ever sponsored to promote renewable energy use, specifically solar. The IRA allocates $369 billion of federal money to energy and climate change investments in the coming decade, and presents a distinct opportunity for businesses, non-profit organizations and municipalities to leverage key tax credits and cash payouts for adopting solar.
The following points summarize the most important aspects of the IRA for commercial solar projects. For a more detailed explanation, or for specific questions, please consult with SunPeak’s project development team and your organization’s tax specialist.
Two Paths to Federal Solar Incentives: ITC or PTC
With passage of the IRA, commercial solar projects can receive benefit through either the expanded Investment Tax Credit (ITC) or the Production Tax Credit (PTC). Both credits come with potential adders if certain criteria are met, and both credits can be transferred (sold) to a third-party purchaser.
PATH 1: INVESTMENT TAX CREDIT (ITC)
The Investment Tax Credit (ITC), an existing federal incentive, has been revamped and lifted back to its original benefit. The ITC provides solar customers a front-loaded, dollar-for-dollar tax credit equal to 30% of the total project cost in the year the system is commissioned.
The ITC will remain at 30% until at least 2032. A phase out will begin when greenhouse gases have been reduced by 75% relative to 2022 levels. Any 2022 projects originally planned at the lower 26% rate are now fully eligible for the 30% benefit.
Additionally, the ITC now includes provisions for several other project considerations, including:
- Battery storage, either with or without connection to a solar system.
- All interconnection costs for projects less than 5 MWac.
- A direct pay benefit for state and tribal governments and certain tax-exempt entities (see Direct Pay section below for more information).
Prevailing Wage Standards & Apprenticeship Requirements
Beginning in 2023, solar projects above 1 MWac and any battery storage projects will require payment of locally-prevailing wages to all laborers to qualify for federal tax credits. Additionally, at least one qualified apprentice must be employed for a total of 10-15% of total labor hours. Prevailing wages must also be paid for any system alteration or repair work during the five years after the system is placed in service.
Note: As a union signatory since 2019, SunPeak already meets these requirements as part of our standard construction and Operations & Maintenance (O&M) processes.
ITC Project Adders: Opportunities to Tip the Scale Past 30%
Projects may be eligible for additional tax credit benefit if they meet any of the following criteria:
- Domestic content
If projects can utilize 100% American iron/steel and at least 40% American solar modules, inverters and electrical gear, all projects are eligible for additional 10% ITC.
(Once the Department of Treasury issues additional guidance, which is expected in early 2023, projects under 1 MWac will continue to receive 10% ITC, and projects over 1 MWac will add 2% ITC.)
- Special Project Sites
Projects located in specific areas may also qualify for additional ITC.
- Energy Communities
All projects sited in “energy communities”, otherwise known as brownfields or locations recently associated with fossil fuel mining, storage or energy production, can add 10% ITC.
(Once the Department of Treasury issues additional guidance, projects under 1 MWac will continue to receive 10% ITC, and projects over 1 MWac will add 2% ITC.)
- Low-Income Areas
All projects under 5 MWac sited in a low-income area, as defined by the New Markets Tax Credit, can add 10% ITC. Qualified low-income residential building projects or qualified low-income economic benefit projects can add 20% ITC.
- Energy Communities
PATH 2: PRODUCTION TAX CREDIT (PTC)
Some projects, especially those involving large commercial or utility-scale systems, may opt to take advantage of the Production Tax Credit instead of the Investment Tax Credit. The PTC value is based on the amount of renewable electricity produced by your system and is paid annually for the first 10 years of the system’s life.
- For projects under 1 MWac, the PTC is valued at $0.027/kilowatt hour (kWh), and for projects over 1 MWac that meet the prevailing wage requirement, the PTC is $0.021/kWh. This rate will flex in the future, indexed to inflation.
- Each project must be assessed individually to determine whether the ITC or PTC value provides greater benefit to the customer, taking into consideration system size, eligibility for adders, and the net present value of tax credits.
Available PTC Project Adders
Like the ITC, PTC projects that meet the energy community and/or domestic content provisions explained above are eligible for the following additional PTC value, provided prevailing wage/labor requirements are met:
- Energy communities
Projects located in energy communities can add $0.002/kWh.
- Domestic Content
Projects that meet the domestic content requirement can add $0.002/kWh.
More IRA Benefits for Commercial Solar Projects
New with the Inflation Reduction Act, more entities, including state governments and non-profit organizations, can directly benefit from either the ITC or PTC. A couple of highlights for these customers include:
- Direct Pay
Tax-exempt and governmental entities investing in solar can now elect a cash payment from the IRS in lieu of tax credits. By offering direct monetary compensation, the federal government has streamlined the investment process for more types of organizations, allowing them to reap the full value of available incentives.
- Transferability of Tax Credits
Customers can also opt to transfer (sell) solar project-related tax credits via a market-based system to other entities, if desired.
Other good things to know about Inflation Reduction Act:
- Solar projects remain eligible for accelerated depreciation.
The Modified Accelerated Cost Recovery System (MACRS) is another available tool to offset solar project costs, allowing the solar system owner to write off the asset completely in the first year, despite the system’s useful life of 30+ years. This tax benefit is not transferrable.
- Solar projects may also be eligible for local financial incentives.
Depending on your area, local incentives can be significant and further reduce your project investment. SunPeak will research and help you apply for all locally-available incentives, such as solar renewable energy credits, local grants, utility rebates, and other discounts.
Key TakeawaysWith the IRA becoming law, there has truly never been a better time to invest in a solar system. The IRA legislation allows for-profit and non-profit organizations alike to directly and significantly offset solar project costs, thus reaping the benefits of reduced energy costs and more favorable sustainability metrics for decades. Available incentives are fruitful and worth investigating with a qualified solar provider who can assess your site's solar feasibility and provide detailed system design and financing plans that meet your project goals.
SunPeak designs, builds, and maintains solar systems for commercial and non-profit customers across the United States. You can expect SunPeak’s experienced project developers to help you optimize both the financial and technical aspects of your solar project. If you have questions on the new Inflation Reduction Act or want to get a better idea of project feasibility and costs for your site, please contact us.