Updates on Inflation Reduction Act
The Inflation Reduction Act of 2022 (IRA-2022) seeks to reduce inflation by implementing measures such as production tax credits (PTC) and investment tax credits (ITC).
7 Feb 2023
Specifically, with respect to solar energy, the act aims to reduce the cost by offering credits to producers and investors in the area. Additionally, the act aims to incentivise the development of ‘energy communities’ and domestic manufacture, both attract additional credits.
A solar farm developer can evaluate the PTCs and ITCs to determine which is better suited for their development. Depending on the project cost per watt and the revenue per watt, either PTCs or ITCs will provide a lower Levelized Cost of Energy (LCOE) which translates to a stronger return or lower energy sale price depending on the market conditions. Our analysis shows that PTCs tend to favour larger solar farms where high capacity ratios and lower construction can be achieved. Of course there may be other reasons for selecting the ITC tax equity rather than an incentive which is not purely based on the lowest LCOE.
For both PTCs and ITCs, credits are offered under the following categories:
- Base Credit
- Base Credit uplift for satisfying wage and apprenticeship criteria.
- Domestic content bonus
- Energy community bonus
The base credit is available to all solar PV installations on or after 1 January 2022, whilst the Base Credit uplift is only available when satisfying wage and apprenticeship criteria. The Domestic content requires that all the steel is sourced from the US whilst the manufactured content needs to meet 40% initially growing to 55% in 2028. The Energy community bonus looks qualifies a project if it is classified as a brownfields site, meets the coal communities definition, or satisfies Jobs & Tax Revenues criteria. The industry is awaiting guidance on these bonus categories, as the definitions have lead to several interpretations leaving some projects in limbo as to whether they qualify for the bonus.
The following table summarises the ITC and PTC levels based on category. Note that additional ITCs are available for smaller installations (below 5MW) which could provide a maximum ITC of 70% in some instances.
The passage of the IRA-2022 was met with widespread acclaim, as it offers a way to reduce inflation and to promote the development of solar energy. The credits offered by the IRA-2022 allow for reduced costs of solar energy, thus making it more accessible and affordable for consumers. Additionally, the additional credits offered for energy communities and US manufactured products are a major benefit to the solar energy industry, as they incentivise the development of energy communities and the manufacturing of US-made products.
The passage of the IRA-2022 has a ripple effect internationally, as other countries begin to implement similar legislation to avoid a brain drain of engineers and investors into the United States. The European Union, for instance, passes legislation in early 2023 that offers similar production tax credits and investment tax credits for solar PV. Additionally, the EU legislation offers additional credits for energy communities and US manufactured products, in an effort to incentivise the development of energy communities and the manufacturing of US-made products.
1. "Inflation Reduction Act of 2022 (IRA-2022)." U.S. Congress, www.congress.gov/bill/117th-congress/house-bill/4444/.
2. "EU Parliament Passes Solar Incentives Legislation." Solar Industry, 9 June 2023, www.solarindustrymag.com/eu-parliament-passes-solar-incentives-legislation/.