By Tim Powers, Research and Policy Associate
With the passage of The Inflation Reduction Act of 2022 (IRA) into law, the U.S. is now projected to reduce its carbon emissions 42% by 2030, increase solar deployment fivefold, and create millions of American jobs. It will also make it easier for utilities, businesses, and nonprofits to enjoy the benefits of renewable energy and energy storage.
The bill’s not-so-secret weapon is tax credits. The Investment Tax Credit (ITC) and Production Tax Credit (PTC), which have been in place for years, have been instrumental in spurring solar deployment in the US. But they’ve fallen short in a few key ways. The IRA makes some changes to these tax credits that will give a big boost to renewable energy and energy storage.
Utilities, businesses, and nonprofit entities stand to benefit from these changes. They will now have easier, more affordable access to clean technologies that can lower their electricity costs and help them meet their ESG and emission-reduction goals.
Benefits for utilities and businesses
Under the old provisions of the ITC, the credit would have dropped to 10% by 2024 for commercial- and utility-scale projects.
However, passage of the IRA brings the ITC back to its original 30% for 10 years, with carryovers allowed to future years for tax credits not used in the first year. That translates to solar projects penciling out for more businesses and utilities. It also means greater policy certainty; businesses and utilities will be able to plan farther ahead for solar projects without worrying that incentives will change in the near future. It also means lower costs for utilities and their customers. The new rate will apply retroactively to any project placed in service in 2022, not just after the bill’s signing. (As always, check with your tax advisor about qualification details.)
The IRA also includes adders that can increase the 30% credit. For example, a system installed on a brownfield will receive a 10% adder. With our extensive experience in brownfield solar, Inovateus can help municipalities, utilities, and businesses with these types of projects.
In addition, the IRA allows solar projects to use the PTC, which was previously reserved for wind projects and was phased out at the end of 2021. Whereas ITC credits provide a one-time payment of a percentage of a project’s cost, PTC credits are paid based on the power that a project produces over 10 years. Because the cost of solar projects is coming down while the value of energy they produce goes up, it may make sense for utilities and businesses to opt for the PTC, which could provide a more lucrative value stream than the ITC.
Energy storage projects will also benefit from the IRA. Previously, to be eligible for tax credits, a storage project must be charged by renewable energy more than 75% of the time. The IRA will extend the tax credit to standalone energy storage, removing a major barrier to energy storage deployment for both businesses and utilities. Utilities will benefit from the many grid-balancing benefits that standalone storage provides, as well as resilience benefits for the communities they serve. Businesses concerned about resilience will now have more affordable, clean energy options. Microgrid controllers will also be covered by the tax credits, adding to the potential resilience benefits; total costs for microgrids could come down as much as 50%.
Benefits for nonprofit entities
As exciting as these potential incentive changes are, there’s much more to celebrate in the IRA. The bill includes provisions that will make solar and energy storage more accessible for nonprofit entities, such as municipalities, school districts, universities, churches, and tribal governments.
Nonprofits lack the tax liability to take advantage of tax credits. To go solar, they may need to secure financing from a third party that has a large enough tax appetite to benefit from the ITC. The nonprofit generally pays for the solar energy through a lease or power purchase agreement (PPA).
The IRA adds an option for direct pay, available only to tax-exempt entities. Direct pay is what it sounds like: a direct payment is made for the credit amount, versus having that amount deducted from an entity’s tax liability. This is a big win for nonprofits that allows them to use the ITC for the first time.
For some nonprofit entities, this may mean they can purchase their own solar system, whether through grants or other financing options. Doing typically offers more savings than a conventional solar PPA. However, purchasing a system has higher upfront costs, even with the new direct pay option.
Those who still wish to go the PPA route may be able to enter into more favorable PPAs that provide greater savings with IRA passage. PPAs also have the advantage of included operations and maintenance, so O&M costs will need to be factored in when comparing solar project financing options.
Paving the way for much more solar and storage
The IRA is the single biggest federal climate legislation to date. It will have far-reaching impacts on utilities, businesses, and nonprofits that want to go solar or add energy storage for resiliency applications.
Inovateus Solar has developed solar projects for utilities, municipalities, businesses, schools, and universities. If these historic incentives are inspiring your business or organization to move forward with developing a solar project, consult with Inovateus about how to achieve your sustainability and clean energy goals with solar and energy storage solutions.
Because most of the IRA benefits are in the form of tax incentives, it’s important to consult your tax advisor. This blog post should not be construed as tax advice.
