The Inflation Reduction Act and Site Selection

Signed into law by President Biden in August 2022, the Inflation Reduction Act of 2022 (IRA) provides over $320 billion new and enhanced incentives designed to increase clean energy production in the United States, support energy innovation, and encourage investing in disadvantaged communities and projects that redevelop fossil fuel infrastructure and employ displaced workers. The US Treasury Department and the IRS have engaged in the rule making process since enactment to provide clarity and guidance on how to claim new and expanded programs and credits under the IRA. This resource guide is intended to provide an overview of key tax credit provisions (and subsequent updates to the same), relevant issues, and particularly geographic factors that could – and likely should – be taken into consideration during a site selection process.

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IRA Summary

The IRA includes new and expanded tax credits, grants and financing programs spanning a variety of categories. A significant amount of the new and expanded credits focus on incentivizing either the upfront costs of constructing (i.e. investment credits) a facility that directly produces clean energy or a facility that manufactures clean energy components, or alternatively incentivizes the ongoing costs of operating a facility (i.e. production credits) that directly produces clean energy or a facility that manufactures clean energy components.  

The IRA’s federal income tax credits for qualifying energy projects have designated “base rates” with the opportunity to earn “bonus” rate increases by meeting additional qualifying criteria such as project location within a designated energy community, the use of domestically produced products, and paying prevailing wage and offering apprenticeships.

The “base rate” differs per program. More details can be found below, but, as an example, the new investment credits provide a base tax credit rate of 6% of qualified investments. If the project meets the prevailing wage and apprenticeship requirements, the project could receive a credit five times greater than the base, i.e., 30%.    

For taxpayers without sufficient tax liability to realize the full value of these credits, including most project-specific Special Purpose Entities (SPEs), the IRA permits the transfer of most of the credits, providing the ability to monetize the credits by selling them to taxpayers with adequate tax liability to fully utilize the credits. Governmental entities and tax-exempt organizations may also be eligible to receive a direct payment of the credit.  

Below is an overview of production and investment credits created or extended by the IRA followed by an explanation of bonus enhancement and related requirements. Additional details on these programs - as well as information on other fuel, vehicle, carbon management and other credits created by the IRA which would likely be of relevance to private sector companies and investors - can be found on BLS’s website.    

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Bonus Enhancements

Energy Communities Bonus: As defined in the IRA, the Energy Community Tax Credit Bonus applies a bonus of up to 10% for projects and facilities located in energy communities for the following credits:

The IRA defines energy communities as any one of the following:

1. A “brownfield site” (as defined in certain subparagraphs of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA))
2. A “metropolitan statistical area” or “non-metropolitan statistical area” that has (or had at any time after 2009)
     a. 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
     b. has an unemployment rate at or above the national average unemployment rate for the previous year.

1. A census tract (or directly adjoining census tract)
     a. in which a coal mine has closed after 1999; or
     b. in which a coal-fired electric generating unit has been retired after 2009.

There is no current mapping for all qualified brownfield sites; however, the Department of Energy launched a mapping tool that provides geographic eligibility under the other categories (see map below). The Treasury Department and the IRS released a listing of MSAs and non-MSAs qualifying by means of their unemployment rate once unemployment data for 2023 on June 7, 2024. This listing will apply until the next rates for 2024 become available and the 2025 Annual Statistical Area Category and Coal Closure Category Update is released.

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Domestic Requirements Bonus: To qualify for the domestic content bonus credit (10%), taxpayers must demonstrate sufficient use of domestic iron, steel, and manufactured components. The bonus applies to the following credits:  

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Prevailing Wage and Apprentice Bonus: Several tax credits provide enhanced clean energy tax benefits of 5 times the base rate if prevailing wage and apprenticeship requirements are met.  

• “Prevailing Wage” refers to aligning a company’s compensation (basic hourly wage plus fringe benefits) with published industry norms for a given occupation/job in a given location. Prevailing wage is determined by the U.S. Secretary of Labor and, applies to all laborers and mechanics for all hours performing construction, and in some cases alteration or repair, on the site of the work of a qualified facility. Companies must undertake specific record-keeping activities to document compliance with prevailing wage requirements.
• To meet apprenticeship requirements, qualified apprentices must be used for a designated percentage of total labor hours for construction, alteration, or repair work on the qualified facility or energy project (10% for projects started before January 1, 2023, 12.5% for projects started during 2023 and 15% for projects started after December 31, 2023).  

On June 25, 2024, the US Treasury Department and the IRS published final rules for compliance with the prevailing wage and apprentice bonus. Key issues in the final rule are summarized as follows:

• While there are certain similarities with the Davis-Bacon Act, no certified payroll is required for the IRA prevailing wage and apprentice bonus;
• OEMs may be exempt from prevailing wage and apprenticeship requirements subject to the amount of construction activities;
• Prevailing wage is set at the time the construction contract for the project is executed; and
• Projects must engage with unrelated third-party registered apprenticeship programs to meet good faith efforts exception

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IRA Recent Updates

The IRS has notably issued final rules for the prevailing wage and apprenticeship bonus enhancement, and proposed rules for the Clean Hydrogen Production Tax Credit, Advanced Manufacturing Production Credit, Clean Electricity Production Tax Credit and Clean Electricity Investment Tax Credit in addition to publishing various notices offering guidance on related issues to domestic content, links to which are embedded throughout this resource guide.  

While the majority of credits available under the IRA are as of right (meaning projects can claim credits subject to meeting eligibility requirements without additional formal governmental approval), the Advanced Energy Project Credit and Low-Income Communities Bonus are awarded on a competitive basis. The Department of Energy has recently released the results of the first round of applicatons for both highly competitive and over-subscribed programs summarized as follows:  

• Advanced Energy Project Credit: The Advanced Energy Project Credit competitively awards up to $10B in credits for up to 30% of qualifying investment in advanced energy projects.  
  • On March 29, 2024, the Departments of Energy and Treasury announced that $4B of credits had been awarded to over 100 projects as part of Round 1. Award and applicant highlights included:
    • Concept and application submissions total nearly $42B - meaning a 10:1 ratio of tax credit award requests to tax credit allocation availability signifying high demand and competition for the program
    • All awardees met prevailing wage requirements, meaning all awards were 30% of eligible investment
    • Industry award allocation as follows:
      • Clean energy manufacturing & recycling: $2.7B/67% of award
      • Critical materials, recycling, processing & refining: $800M/20% of award
      • Industrial decarbonization: $500M/13% of awarded credits ‍
      • Applicant self-disclosed project lists are available with a full list available post-project certification‍

• With regards to post-project Round 2, online concept papers were due June 21, 2024, for awarding up to the remaining $6B in tax credit allocations with $2.5B being reserved for energy communities.

• Low-Income Communities Bonus Credit: The Department of Energy and Treasury received over 46,000 applications for the low-income communities bonus credit program that allocated 1.8 gigawatts of capacity through its competitive application program across four categories of qualified solar or wind facilities with a maximum output of less than 5 megawatts. Applications received represent a 4:1 ratio of credits requested versus credits available. DOE is currently accepting applications for the 2024 program.

Finally, effective June 7, 2024, the Department of Energy has released new energy community eligibility data based on unemployment and coal closure.  

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CLEAN ENERGY TAX CREDITS: PRODUCTION TAX CREDITS (TRANSFERABLE)

Energy Developers

• Clean Hydrogen Production Tax Credit (45V): Tax credit for the production of clean  hydrogen at a qualified clean hydrogen production facility
  • The base credit is $0.60/kg (adjusted for inflation) multiplied by the applicable percentage (20% to 100% depending on lifecycle greenhouse gas emissions). For hydrogen produced after 12/31/22 (for facilities placed in service before  1/1/33 for their first 10 years in service‍
    • Update: Proposed Rules Issued 12.26.23
  • NO — Energy Community Bonus (10%)
  • NO — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Domestic Manufacturers

• Advanced Manufacturing Production Credit (45X): Production tax credit for manufacturers of components for solar and wind  energy, inverters, battery components, and critical minerals
  • Credit varies by technology
  • Credit for critical minerals is permanent starting in 2023. For other items,  the full credit is available between 2023-2029 and phases down over 2030-2032  
    • Update: Proposed Rules Issued 12.15.23‍
  • NO — Energy Community Bonus (10%)‍
  • Only Domestic Manufacturers are eligible; No additional bonus credit‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Nuclear

• Nuclear Power Production Tax Credit (45U): Tax credit for electricity produced at a qualified nuclear power facility
  • Credit is 0.3 cents/kWh, inflation adjusted.
  • For electricity produced at a qualified nuclear power facility; produced and  sold 1/1/24-12/31/32; down depending on the amount of energy produced and the  gross receipts of the nuclear power facility 
  • NO — Energy Community Bonus (10%)‍‍
  • NO — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)

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Biomass, Geothermal, Hydrokinetic, Landfill  and Waste, Hydropower, Marine, Small Irrigation, Solar, Wind

• Production Tax Credit forElectricity from Renewables: Tax credit for production of electricity from renewables and sold to an unrelated party
  • Credit is 0.3 cents/kWh, inflation adjusted.
  • Construction must start before 1/1/25
  • YES — Energy Community Bonus (10%)‍‍
  • YES — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Zero GHG Electricity Generators

• Clean Electricity Production Tax Credit (45Y): Technology-neutral tax credit for production of clean electricity. Replaces  the production tax credit for electricity generated from renewable sources  (extended in Section 13101 through 2024)
  • Credit amount is 0.3 cents/kW, inflation adjusted
  • Facilities placed in service after 12/31/24. Phase-out starts the later of  (a) 2032 or (b) when U.S. greenhouse gas emissions from electricity are 25%  of 2022 emissions or lower.  
    • Update: Proposed Rules Issued 6.3.24
  • YES — Energy Community Bonus (10%)‍‍
  • YES — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Wind and Solar

• EXT. Energy Investment Tax Credit (48) in  Connection with Low Income Communities: Additional investment tax credit for small-scale solar and wind facilities in  low-income communities; allocated investment credit, capped at 1.8 GW per year (unused capacity carries over to following year); for solar and wind facilities with a maximum net output of less than 5 MW, including associated energy storage technology;
  • Credit is 6% of qualified investment
  • The Low-Income Communities Bonus Credit begins in 2023 and is available through 2032 or the year annual GHG emissions from electricity production in the U.S. are equal to or less than 25% of 2022 levels, whichever is later. The bonus requires an application by the taxpayer, with a cumulative total of 1.8 GW of direct current capacity per year available for allocation
    • Update: 2023 round closed; 2024 round currently accepting applications
  • NO — Energy Community Bonus (10%)‍‍
  • NO — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • NO — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Energy Storage, Zero GHG Electricity Generators

• Clean Electricity Investment Tax Credit(48E): Technology-neutral tax credit for investment in facilities that generate clean electricity. Replaces the investment tax credit for facilities generating electricity from renewable sources (extended in Section 13102 through 2024).
  • Credit is 6% of qualified investment
  • For facilities placed in service after 12/31/24. Phase-out starts the later of (a) 2032 or (b) when U.S. greenhouse gas emissions from electricity are 25% of 2022 emissions or lower.
    • Update: Proposed Rules Issued 6.3.24  
  • YES — Energy Community Bonus (10%)‍‍
  • YES — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)
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Critical Minerals, Industrial Facility,  Manufacturing Facility, Manufacturing Retrofit

• Advanced Energy Project Credit (48C):  Provides a tax credit for investments in advanced energy projects that (1) re-equips, expands, or establishes an industrial or manufacturing facility for the production or recycling of a range of clean energy equipment and vehicles; (2) re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at  least 20 percent; or (3) re-equips, expands, or establishes an industrial facility for the processing, refining, or recycling of critical materials.
  • Credit is 6% of qualified investment
  • Competitive application process beginning on 5/31/23;  DOE will consider greatest  job creation, greatest reduction in greenhouse gas emissions, shortest time  to completion, greatest potential for innovation, geographic diversity,  commercial viability and regional economic development potential when awarding credits  
    • Update:  DOE announced $4B of awards from Round 1 in April 2024;  Round 2 concept papers were due June 21, 2024;  Round 2 will cover the remaining allocation unless otherwise announced by DOE
  • NO Energy Community Bonus(10%), but $4B of $10B available is designated for projects located in energy communities‍‍
  • NO — Domestic Bonus (10%) /Domestic Requirement New Guidance 5.16.24‍
  • YES — Prevailing Wage Enhancement (5x) (Final Rule 6.25.24)