The Inflation Reduction Act (IRA) and Solar: A 9-Month Update
It’s been nine months since President Biden signed the groundbreaking IRA into law. When the law took effect on August 16th, 2022, the solar industry was excited but unclear about exactly how these new rules and incentives would play out in the marketplace.
Specifically, the IRA introduced multiple Investment Tax Credit (ITC) adders that would provide additional incentives to solar projects that meet various metrics. As a reminder, solar projects receive a tax credit for 30% of a project’s costs, but there are “adders” that can boost the tax credit amount to 40% or even 60%.
While we await further guidance from the government on the granular details of the ITC adders, we know a lot more now than we did last year when this monumental act surfaced.
Let’s dive into what we’ve learned about the ITC adders in 2023.
Low-Income Communities Bonus Credit
The Department of Treasury provided further details on the “Low-Income Communities Bonus Credit Program” in February 2023. For most properties, the key thing to note is that “projects sited in low-income communities” are eligible to receive a 40% tax credit for their solar project.
Unfortunately, this adder is not guaranteed, as total capacity is limited for the Program each year. The Treasury Department claims that “a lottery or other processes” will be implemented if applications exceed the allocated capacities.
There are still unanswered questions regarding the overall process of locking in one of these ITC adders on a given project. However, the IRS has indicated that upcoming guidance will provide additional color on the application process and scoring criteria.
In April 2023, the IRS provided more guidance on the ITC adder for projects sited in “Energy Communities.” This adder is set up to support communities with high fossil fuel employment, such as areas in the vicinity of a closed coal mine. The guidance states that projects in these areas will receive a 10% ITC adder. There are currently no capacity limits for this adder, so we’re more confident that projects in these zones will get at least a 40% ITC.
An additional 10% ITC adder is applied to projects utilizing equipment that is manufactured in the US (“Domestic Content”). The IRS defines domestic content as steel, iron, or manufactured products (modules, inverters, etc.) that are made in the US. The IRS just released guidance last week with details on the eligibility criteria for domestic content. The goal of this adder is to incentivize US-based manufacturing facilities of PV equipment, and we’re already seeing results, with multiple module manufacturing facilities in the works this year.
Projects can technically utilize all of the previously mentioned adders to gain a 60% ITC credit. Although this is unlikely, a tax credit that covers 40-50% can make a huge difference in the economics of a project. When combined with lucrative state incentives and ever-rising energy rates, a solar project can deliver strong financial returns to property owners across the country.
In summary, the IRS still has some more ground rules to lay down, but the solar industry has become savvier with the ins and outs of the IRA incentives compared to last year.