Industry groups representing clean energy producers and manufacturers filed initial thoughts to the U.S. Treasury Department on how to structure the roughly $270 billion worth of energy and climate-related tax breaks in the Inflation Reduction Act.
The tax incentives make up the bulk of the law's $369 billion in climate and energy spending over the next decade. But without certainty on a range of areas, including wage requirements and bonus incentives, companies have warned that investment could be stifled.
"Clear, workable and flexible Treasury guidance is the key to incentivizing taxpayers and the clean energy industry to develop projects in a timely way — and at levels that will ensure the [Inflation Reduction Act] lives up to its promise," the American Clean Power Association's interim CEO and chief advocacy officer, J.C. Sandberg, said in a Nov. 4 statement.
The Inflation Reduction Act, or IRA, extended existing production and investment tax credits for wind, solar and other qualifying renewable energy resources by 10 years. It also created new incentives for stand-alone energy storage, existing nuclear plants and hydrogen and other carbon-free resources.
To receive the full value of the credits projects must meet prevailing wage and apprenticeship requirements. Developers can also receive bonus credits if projects are located in low-income areas or "energy communities" affected by a shift away from oil, gas and coal production or electricity generation from fossil fuels.
In early October, the Treasury Department sought comments on several key elements of the IRA's tax provisions. The agency encouraged comments to be filed by Nov. 4 but said it would consider feedback submitted after that date, with final guidance and proposed rules to follow.
Treasury will also issue additional requests for comment on other aspects of the IRA going forward.
The IRA allows projects located in energy communities to qualify for a 10% bonus credit. Those communities can include brownfield sites affected by pollution, U.S. census tracts where coal mines or coal-fired power plants have closed in recent decades, and areas where industries tied to fossil fuels contribute a certain percentage of local tax revenue and the unemployment rate is above the national average.
"With energy communities, mostly the comments were around having some certainty around what would qualify ... so that [developers] can start to have those conversations about financing with their tax equity investor, their lender for that matter, around what the capital stack is going to look like," Eli Hinckley, a partner at Baker Botts LLP focused on energy tax policy, said in an interview.
In its comments to Treasury, the American Clean Power Association, or ACP, said brownfields should include sites designated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, known as CERCLA, as well as additional sites identified by the IRS and U.S. Environmental Protection Agency.
More broadly, ACP asked the IRS to adopt a standard for deciding whether a facility is located in an energy community. The group said onshore projects should qualify if at least 10% of the total project is located in an energy community, which can be based on the project's nameplate capacity, total cost or area by acreage. Offshore projects should be eligible if their interconnection facility, port used for staging and crewing, or node at which power from the project is "commercially settled" is located in an energy community, ACP said.
Furthermore, taxpayers should be able to certify or seek the energy community designation "before construction begins, up until project completion," the group said. To determine the "previous year" for unemployment rates, ACP suggested using the calendar year before the certification process starts, a designation it said should apply through the entire life of the tax credit.
In addition, Treasury should "clearly delineate" the list of jobs used to determine employment-based energy community designations and allow "multiple pathways" to certify that an area qualifies as an energy community based on its fossil fuel-derived tax revenue, the group said.
The Solar Energy Industries Association, or SEIA, asked the government to set "clear and inclusive definitions" for retired coal plants and mines. SEIA also urged flexibility for taxpayers to choose among various census tracts and statistical areas when determining a project's eligibility.
"Census tract shapes change frequently and IRS should allow the taxpayer to elect any census tract vintage between the year a retired coal-fired generating unit or closed coal mine was placed in service and the year the qualifying property is placed in service," the solar power advocate said. "This will help provide clarity and certainty to taxpayers and is consistent with defining the community impacted by these retirements and closures."
SEIA also sought more comprehensive estimates of fossil fuel employment and for assurances that potential errors in government data used to determine an energy community "will not be a basis for recapturing energy community bonus credits."
Prevailing wage, apprenticeship requirements
The groups are also seeking more clarity on the wage and labor requirements. To receive full production and investment tax credits under the IRA, project developers, contractors and subcontractors must pay prevailing wages for the construction, alteration or repair of qualifying facilities. In addition, any project that needs four or more people to do such work must employ one or more qualified apprentices from a registered apprenticeship program to get full credits, although good-faith exemptions exist if qualified apprentices are unavailable.
The mandates apply to any project starting construction 60 days or more after the IRS issues final guidance on the wage and apprenticeship requirements.
SEIA asked the IRS first release draft guidance, with the chance for public comment, before issuing the final guidance that triggers the 60-day clock. It also requested a detailed list of what prevailing wage and apprenticeship information must be kept to show compliance, as well as key definitions and lists of occupations for construction, alteration and repair.
Clean energy producers also want assurances on when construction is considered to start for purposes of the law's wage requirements and other bonus adders. Under pre-IRA law, a safe harbor provision established that construction begins when 5% of associated costs have been incurred or significant physical construction has begun. Those thresholds have also helped determine how long project developers have to complete construction before credit amounts phase down.
Market participants have assumed the IRA provisions would mirror those requirements, but "we don't know they're going to be the same," Hinckley said.
ACP recommended that the safe harbor should last for 10 years after the start of construction for offshore wind projects, facilities being built on federal lands, and projects requiring new long-distance transmission. For all other projects, the group proposed that qualifying projects starting construction before 2022 satisfy safe harbor rules if placed into service by the end of 2027. Projects starting construction after 2022 should be able to satisfy safe harbor rules if placed in service by the end of the fifth calendar year after construction begins.
Domestic content, timing of guidance
The IRA provides another 10% bonus credit for projects if 100% of construction materials, including steel and iron, and 40% of the cost of manufactured products (20% for offshore wind projects) are produced in the U.S. The percentage for manufactured products rises in future years.
Both ACP and SEIA said the iron and steel requirements should only apply to structural or load-bearing materials and not to manufactured products. Industry groups also want confirmation that any iron ore used to make construction materials does not have to be mined in the U.S., said Keith Martin, a tax and project finance lawyer with Norton Rose Fulbright.
Martin said the IRS is expected to issue wage and apprenticeship guidance by the end of 2022, but most other guidance will not be available until the first half of 2023, with final regulations arriving later.
"I wouldn't expect any regulations before late next year," Martin said in an interview.
S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.