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IRA Year One: Progress Made & What Lies Ahead
This week marks the one-year anniversary of President Biden signing the Inflation Reduction Act (IRA) into law. The IRA is the largest climate investment in U.S. history, unlocking at least $391B in spending between 2022 and 2031 — and potentially much more. The new and expanded tax credit incentives will subsidize zero-to-low emission energy sources, spur the clean energy economy, and is estimated to cut U.S. carbon emissions in half by 2035.
Since August 2022, $270B+ in capital investment has been announced for domestic clean energy projects and manufacturing facilities, exceeding combined clean energy investments made over the previous eight years. This surge in capital has created 170K+ clean energy jobs in the last year, with 1.5M more to be added over the next decade. By 2030, electricity deployed through the U.S. power grid is expected to be powered by 81% clean energy (for reference, it’s 40% today).
What progress has been made in tax credits?
In the first year of the IRA’s implementation, the Treasury Department has been working closely with the IRS to ensure clean energy tax credits are delivered accurately and seamlessly. Treasury has issued 38 pieces of guidance to date on the clean energy provisions – including transferability – which, for the first time, allows companies to purchase clean energy tax credits directly from project developers to reap tax savings benefits – and reviewed nearly 5,000 comments from stakeholders.
Updates from Treasury since transferability guidance was released in June include:
Procedures and documentation required for tax credit transfers.
Confirmation that tax credits can be applied to quarterly tax estimates, even prior to the execution of an agreement, as long as the buyer intends to purchase a tax credit in that taxable year.
Rules around recapture: Generally, the buyer is responsible, but this excludes upstream sales (e.g., sales of partnership interests in an entity owning the project), which remain the seller’s responsibility, reducing recapture risk for buyers.
Significant details regarding low-income community programs, including specification of data sources, details around suballocations and preferences in program allocation, and technical rules for project aggregation.
Cash consideration rules, defining cash as immediately available funds and requiring payments to be made within a specified time window.
Confirmation that tax credit brokerage is explicitly permitted, as long as the credit is never transferred to the broker.
Meanwhile, Ever.green has built a streamlined platform for companies and project developers to buy and sell tax credits with confidence. We have announced a partnership with Baker Tilly, a leading advisory, tax, and assurance firm, to offer deal structuring and due diligence support to our customers. We are actively adding new projects to the platform, sourced from a trusted network of developers across the country and led by our team with decades of combined clean energy and climate experience.
As early deals come together, we are seeing both interest from buyers in smaller transactions to dip their toes in the water, and much larger deals than expected, with Bank of America closing the first publicly announced tax credit deal this week for $580M. Alongside Investment Tax Credits (ITCs), we saw the first ever Production Tax Credits (PTC) sold on solar.
From hundreds of conversations with interested buyers, we have found that most companies are investing in a period of “discovery” before they transact. Ever.green is helping companies get up-to-speed on the opportunity and learn how to mitigate risks. We have also found that some companies are not familiar with the IRA tax credit opportunity, at all – in fact, recent polls show that 71% of Americans have heard little or nothing about the IRA. To address this gap, Ever.green is building awareness of the financial benefits of tax credits through its platform and broader outreach.
What lies ahead?
Things we’re still waiting on
Further guidance on the domestic content bonus credit and the prevailing wage and apprenticeship multiplier is expected soon. Guidance in particular is needed on the applicability of exemptions under the Buy America Act to the domestic content requirements, as well as the good faith exemption for apprentices.
Also coming soon is the opening of the application portal for the low-income communities bonus credit.
The portals to pre-register for direct pay or tax credit transfers are expected to open this fall. Obtaining a registration number from the applicable portal is a precondition to both receiving direct pay and successfully completing a tax credit transfer.
Clarification around step-up in basis. Many in the industry were hoping for guidance on whether third-party validation could allow projects to obtain a step-up in their value for tax purposes beyond cost basis. Such a step-up is common in tax equity deals, where projects are generally sold into funds, and the lack of a natural equivalent when only a tax credit is sold disadvantages the latter structure. It is unclear as to whether any additional guidance will be forthcoming.
Beyond the logistics of tax credit implementation, there are noneconomic hurdles to get clean energy projects online – the projects need land and permits, and to be connected to the grid in a timely manner. New rules were approved by federal regulators in July to streamline the approval process of getting connected to the grid, known as the interconnection queue, and permitting reform is gaining traction.