Clean energy developers size up US climate law's new labor rules

U.S. clean energy developers are hoping to satisfy new labor standards under the Inflation Reduction Act that will unlock enhanced tax credits for projects starting construction after Jan. 29.

Obtaining the beefed-up credits will be key to unlocking as much carbon-free capacity as possible under the law, sources say. But with the Inflation Reduction Act, or IRA, only about six months old, utilities and other project developers are still assessing their options under the law.

"The ink is still drying on this legislation," said Dennis Pidherny, managing director of U.S. public finance for Fitch Ratings.

Under the IRA, the federal investment tax credit for qualifying clean energy projects was set at a base level of 6%, but it can reach 30% if the law's wage and apprenticeship standards are satisfied. Production tax credits have a base rate of 0.3 cent/kWh, with a bonus rate of 1.5 cents/kWh for qualifying resources fulfilling the standards.

Projects seeking bonus credits must pay a prevailing wage, as determined on a U.S. Labor Department website, and use qualified apprentices for a portion of construction, alteration or repair of the facility. Those percentages are set at 12.5% for projects starting construction in 2023 and 15% for those beginning construction in 2024 or later.

A good-faith exception is available if a qualified apprenticeship program denies a request for workers or fails to respond to the request within five business days.

In November 2022, the U.S. Treasury Department released initial guidance on the IRA's labor rules, which will apply to projects starting construction on or after Jan. 29 that want to claim enhanced incentives.

Although the labor requirements may pose administrative burdens, labor representatives said the enhanced incentives are attainable.

"Every one of our members has either been through or tested through an apprenticeship program that will meet the requirements of the bill," said Matt Spence, a spokesperson for the International Brotherhood of Electric Workers, or IBEW. "We expect that we will be able to do this work."

If project developers rely on the IBEW's union members, the standards are "absolutely doable," Spence said in an interview.

But Pidherny warned that a tight U.S. labor market and higher construction costs due to inflation would challenge the clean energy transition, even if the share of apprenticeship hours required for the IRA bonus credits is small. One recent analysis estimated that the law will create more than 9 million new jobs over the next decade.

"I think there's a shortage of labor on all ends," Pidherny said.

Bonus credits a crucial 'delta' on investment

The stepped-up credits could boost the economics of projects already planned and expand the pipeline of new wind, solar and energy storage facilities.

"That delta [between the base and bonus credits] is whether or not they're going to invest in the most significant amount that they're projecting or they're going to cut back on the project or not move forward with the project at all," said Brian Smith, global incentives leader for accounting firm EY.

Between 2023 and 2030, the U.S. has 209 GW of new solar capacity scheduled to enter service, with another 51 GW planned but lacking specific in-service years, according to data from S&P Global Market Intelligence. Over the same time period, 136.5 GW of combined U.S. onshore and offshore wind energy capacity is set to come online, with 45.4 GW planned but without listed in-service years. And 64.4 GW of combined co-located and standalone storage will start operations in the next seven years, with another 13.1 GW planned but without in-service dates.

Top developers include multinational firms EDF Group, Iberdrola SA, NextEra Energy Inc. and Ørsted A/S, as well as privately owned developers Apex Clean Energy Inc., Hecate Energy and Invenergy LLC. The estimates for additional capacity are likely to grow in the coming years as utilities and other project developers seek to lock in the benefits of the IRA's 10-year tax incentive programs.

Compliance hurdles

Even if project developers satisfy the wage and apprenticeship rules, demonstrating compliance could be challenging.

Many companies "may not have the historical context of working with the government, complying with the Davis Bacon Act or other types of prevailing wage-type scenarios," Smith said. "It's somewhat new, in particular to a lot of the foreign investors coming in."

Furthermore, the Labor Department may not have a prevailing wage listed for a particular job or part of the country, requiring companies to contact the agency for a determination.

"I think there's going to be a lot of wage determinations that are needed," said David Camerucci, senior manager of global location investments, credits and incentives at EY. "I think the expectation is there is more guidance, some more clarity [needed] around exactly how to meet these things."

Smaller companies and contractors may be particularly challenged, according to Camerucci. The need to track both hours and wages for each qualified apprentice and make sure they match the IRA's requirements "could be really burdensome," Camerucci said, adding that Treasury could create a form to help taxpayers demonstrate compliance.

Given potential challenges to satisfying the labor rules, several of EY's energy clients are looking at whether other potential IRA bonus credits would be easier to obtain. Those include incentive enhancements for projects in low-income areas or energy communities that have lost substantial fossil fuel-based employment.

"Do you elect to take one credit over another because ... maybe you deem the prevailing wages would be a little bit too cost-comprehensive?" Smith pondered.

Industry groups have also pressed for more certainty in fulfilling the labor rules.

"While Treasury's initial guidance on those requirements was an important first step to help fill in some of the needed details, we look forward to the administration timely providing greater clarity on how to meet the labor standards," J.C. Sandberg, chief advocacy officer for the American Clean Power Association, said in a statement.

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