Inflation Reduction Act Breakdown

by Sam Dunaiski | Aug 31, 2022 | Advocacy, Biogas, Electrification, Energy Storage, Geothermal, Hydroelectric, Renewables, Solar, Wind

The world of clean energy received a monumental win earlier this month with the passage of the Inflation Reduction Act. The Inflation Reduction Act (IRA) will be the backbone of the United States’ effort to decarbonize our energy sector, spur clean energy implementation across all demographics, and significantly grow the clean energy economy.

Here is a breakdown of the bill’s elements:

Renewable Energy Generation

Investment Tax Credits

• Residential Solar: 30% Investment Tax Credit (ITC) on project costs until the end of 2032, with a step-down of 26% in 2033 and 22% in 2034. Credits are retroactive for residential installations from 1/1/2022, meaning that homeowners who installed a solar array at any point in 2022 will qualify for the 30% ITC.
• Commercial Solar: 30% ITC on project costs until the end of 2024 (ITC on commercial solar is also retroactive to 1/1/2022). Beginning in 2025, the ITC will be replaced by technology-neutral credits, with the following rules in place:
  • 6% base credit; bonus credits up to 30% of costs if the project meets union labor, prevailing wage, and apprenticeship requirements. These requirements do not apply to projects less than 1 megawatt (MW) in size.
  • 10% bonus credits if the project meets domestic content requirements.
  • 10% bonus credits if the project is sited in an “energy community” – a brownfield site or a community with a recent coal plant closure.
  • 10% bonus credits if the project is sited in a low-income community. This only applies to projects that are 5 MW and less.
  • 20% bonus credits if the project qualifies as directly serving a low-income residential facility or another economic benefit system.
  • Interconnection costs -for projects less than 5 MW- with the utility can be included in the credits.

Production Tax Credits

While the Investment Tax Credit applies to the upfront purchase of parts, materials, and labor, the Production Tax Credit (PTC) functions differently. This credit is a direct payment and applies to the production or output of the generation source. This generation source can be solar, wind, geothermal, biomass, and hydropower, to name a few. These credits are also retroactive from 1/1/2022.

Here is how the PTC breaks down:

• Direct pay value: $0.026 per kilowatt-hour (kWh) starting in 2022; rate rises with inflation.
• Bonus credit of 1.5 cents/kWh if union labor, prevailing wage, and apprenticeship requirements are met.
• 10% bonus credits if domestic content requirements are met.
• 10% bonus credits if the project is sited in an “energy community” – a brownfield site or a community with a recent coal plant closure.
• The PTC is available for nonprofits, state and local governments, rural electric cooperatives, tribal governments, and/or other tax-exempt entities. These organizations previously did not qualify for the ITC.
• PTC will also apply to utility-scale projects.
• Credits are available for ten years after the project is placed into service.
• Direct pay/PTC is not available for residential solar installations.
• PTC is transferable after 2022; however not for individual taxpayers.
• Commercial solar projects can choose either the ITC or the PTC.

Electric Vehicles

New EVs: (Effective 8/16/2022)

• $7,500 tax credit to be divided into two separate credits:
  • $3,750 credit for electric vehicles with batteries produced in North America.
  • $3,750 credit for electric vehicles using a certain percentage of critical battery minerals extracted or processed in the U.S.
  • Vehicles meeting only one requirement will only be eligible for a $3,750 credit.
• Vehicles must cost less than:
  • Vans < $80,000
  • Pickups and SUVs < $80,000
  • Cars < $55,000
• Income requirements:
  • Joint tax return < $300,000
  • Head of household < $225,000
  • Single-payer < $150,000
• Credit will eliminate the limit of 200,000 vehicles per manufacturer.

Commercial Clean Vehicles: (Effective 01/01/23)

• Up to $40,000 tax credit for commercial electric vehicles.

Used EVs: (Effective 01/01/2023)

• $4,000 tax credit or 30% of the vehicle’s sale price.
• The vehicle’s model year must be at least two years older than the current “new” model year.
• Vehicle cost must be less than $25,000.
• Income requirements:
  • Joint tax return <$150,000
  • Head of household <$112,300
  • Single-payer <$75,000
• Used EV tax credits will continue until the end of 2032.

EV-Charging:

• Credits for EV-charging equipment and infrastructure will increase up to $100,000.
• Equipment must be located in a qualified census tract, with similar bonus credits if prevailing wage and apprenticeship requirements are met.
• A direct pay or PTC option is available for charging with transferrable credits.
• Credits will be available until 2032.

Battery Storage

Effective as of 1/1/2023

• 30% ITC for the cost of installation; credits last until 2033. To qualify, batteries must be larger than 3kWh for residential installations and larger than 5kWh for commercial installations.
• Commercial battery credits have similar sliding scales as other ITC items: baseline of 6% with increasing credits for prevailing wage, labor, location, etc.
• Battery storage systems will no longer need to be coupled with solar generation systems to qualify for tax credits.

Energy Efficiency and Electrification

Effective as of 1/1/2023

Federal Tax Credit

• Heat Pumps: 30% of costs, up to $2,000
• Electric Upgrades: 50% of costs, up to $1,200/year

• Incentive levels and eligibility are determined by income
• Heat Pumps: rebates for up to $8,000
• Electric Upgrades: up to $4,000 for breaker boxes/electric service; $2,500 for wiring, and $1,600 for insulation/venting/sealing

Manufacturing and Production

Effective as of 1/1/2023

• $30 billion in PTC to manufacture solar panels, trackers, inverters, wind turbines, batteries, and other critical minerals.
  • Solar PV cells – $0.04/watt
  • Solar-grade polysilicon – $3/kg
  • Solar modules – $0.07/watt
  • Wind components – 10% of the sales price
  • Battery cells – $35/kWh
  • Critical minerals – 10% of the cost of production
• $10 billion in ITC funding for building new facilities to manufacture clean energy products; $4 billion of these funds must be allocated to “energy communities.”
• $500M for manufacturing heat pumps and processing of critical minerals necessary for heat pump production.

Other Items

• Carbon Sequestration Credits (ITC or PTC) for facilities that begin construction before 2033 and provide direct air capture of carbon dioxide. Credits will be issued by a metric ton of carbon capture.
• Clean Hydrogen – credits for production -by unit- of green and blue hydrogen that can be used to offset traditionally carbon-based fuels.
• Sustainable Aviation Fuel – credits for SAF produced by unit (gallon) with increasing credits based on a percentage of greenhouse gas reduction.
• Biodiesel/Alternative Fuels – production credits for fuels produced based on life-cycle emission levels.
• Methane Fees – fees imposed by EPA for facilities that emit more than 25,000 metric tons of CO2 annually.

Additional Provisions

• $500 million for the Defense Production Act, some of which could be used for solar manufacturing.
• Greenhouse Gas Reduction Fund totaling $29 billion overseen by the Environmental Protection Agency.
• Climate Pollution Reduction Grants to state and local governments totaling $5 billion.
• Environmental and Climate Justice Block Grants: $3 billion for disadvantaged communities.
• $2 billion in loan authority for new transmission construction in designated national interest corridors.
• $760 million for the Department of Energy to issue grants to state, local or tribal entities to facilitate siting of high-voltage interstate transmission.
• Additional $1 billion for rural renewable energy electrification loans and expansion of the program to include storage.
• Additional $1 billion for Rural Energy for America Program (REAP), with total grants limited to 50% of the total cost of an eligible project.
• $9.6 billion for loans and financing for rural co-ops to purchase renewable energy, generation, zero-emission systems, and related transmission, limited to 25% of total cost.
• Incentives for build-out of electric vehicle charging networks.
• Extension, expansion, and changes to electric vehicle tax credits, including a new credit for purchasing used EVs.

Conclusion

Much of the implementation and administration of the Inflation Reduction Act is still not understood. This document is meant to summarize the items in the bill that RENEW Wisconsin considers particularly important to the clean energy transition in our state.

For additional information, please utilize the following resources:

• • IRA: Solar Energy and Energy Storage Provisions Summary- SEIA
  • What’s in the Inflation Reduction Act for the solar industry? -PV Magazine
  • What’s in the Inflation Reduction Act for the solar industry? -PV Magazine
  • Complete guide to the 2022 federal solar tax credit- Solar Reviews
  • The Inflation Reduction Act Delivers Affordable Clean Energy for Wisconsin-whitehouse.gov
  • Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022- Senate Democrats
  • The Inflation Reduction Act: Key Provisions Regarding the ITC and PTC- Foley & Lardner LLP
  • The Inflation Reduction Act’s Quiet Revolution on Public Power- The American Prospect
  • Revival of Reconciliation Holds Huge Potential for Geothermal Industry-IGSHPA
  • “The Roof is lifting” – the United States to inject $800 billion into climate, energy sectors as IRA 2022 passes to Biden for signing- Biofuels Digest
  • Message from ABC Board Chair Bernie Sheff, PE- American Biogas Council

Please contact Sam Dunaiski (sam@renewwisconsin.org) with questions.