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By: Kyle Wehnes, Director at Impact Power Solutions
The Inflation Reduction Act (IRA), signed into law in August of this year, is the most significant climate legislation in United States History. The 730 page bill contains a plethora of benefits for the solar industry including $270 billion in clean energy tax incentives. How will this landmark legislation impact Minnesota's burgeoning commercial solar market? Let's take a look.
Investment Tax Credit (ITC) & Production Tax Credit (PTC)
The Investment Tax Credit can be claimed on federal corporate income taxes for a percentage of the cost of a solar photovoltaic (PV) system that is placed in service during that year. The current 26% tax credit was set to decrease at the end of 2022 and expire at the end of 2023. The IRA increases the ITC to 30% and extends it until at least 2032. In an effort to meet a growing demand for green jobs, commercial projects over 1 MW in size will have to fulfill prevailing wage and apprenticeship metrics to qualify for the full credit. Tax credit adders are also available for using domestic products, building on brownfield sites or building in low-income communities. The credit is retroactive for all projects started after January 1, 2022.
The key takeaway: for projects under 1 MW, the ITC will be a straightforward 30% tax credit. Larger projects will have more hoops to jump through in order to qualify for the entire credit.
The Production Tax Credit is an inflation-adjusted per-kilowatt-hour (kWh) tax credit for electricity generated by qualified clean energy resources that can be claimed for the first 10 years after the energy-producing facility is placed in service. The original PTC expired in 2021, but the IRA is reinstating it and adding solar to the list of qualified energy sources. The PTC will also have new prevailing wage and apprenticeship requirements for larger systems to qualify for the full tax credit, similar to those in the ITC.
Solar developers will have the option to utilize either the ITC or PTC for a project, but not both. The IRA has provisions aimed at increasing access to these tax credits, namely the transferability of tax credits and direct payment for nonprofits.
The IRA now allows the transfer of tax credits, including the ITC and PTC. This means that developers can sell credits directly to anyone with tax liability for cash, providing more financing options for smaller projects and reducing transaction costs.
The IRA has opened up the ITC and PTC to nonprofit organizations, schools, municipalities, co-ops and other similar entities by offering direct payments. Previously, these entities had to find a partner with tax equity in order to capture the tax credit value and afford a solar installation. Now they will have access to direct system ownership and the associated benefits.
Investments in energy storage worldwide reached three billion dollars in 2020, and the market is forecast to continue growing. The IRA expands federal tax incentives for energy storage. Importantly, it makes stand-alone commercial storage projects over 5 kWh in size eligible for the 30% ITC. Previously, storage projects had to be paired with solar to be eligible. This increases viability for a wide variety of storage applications.
The Department of Commerce's anti-dumping investigation brought concerns about domestic solar manufacturing to the forefront in 2022. As more and more developers looked overseas for panels and other equipment, ethical concerns and supply chain issues highlighted the need for increased US production. The IRA establishes manufacturing tax credits for the production of a number of solar components along with a tax credit for eligible investment costs in facilities and equipment. Much like the ITC and PTC, manufacturers must choose between the two credits instead of using both. The solar industry advocacy group SEIA has suggested that the tax credits in the IRA could spur upwards of 40 GW of new solar panel manufacturing capacity in the United States.
As of Q2 of 2022, Minnesota is the nation's 15 largest solar market. A mix of state and utility incentives have made solar attractive to a variety of organizations across the state, from Fortune 500 companies like Target and Ikea, to family owned small businesses and school districts. The IRA complements these incentives and is likely to further stimulate statewide solar development by providing badly needed market certainty.
The extension and reinstatement of the investment and production tax credits will improve the financials for all Minnesota organizations considering solar, especially with the implementation of direct payments for nonprofit entities and tax credits now being transferrable. It is more important than ever to figure out how solar fits into your organization's energy strategy, or risk being left behind.