Because LandGate provides data solutions for some of the largest players in the energy and capital markets industries, we’re hearing a lot of questions about the impact of the Inflation Reduction Act (IRA) – and we have answers. If you were keeping an eye on the Build Back Better Bill, you’ll find the IRA bill holds many of the same benefits.
Learn more about the economic benefits for renewable developers under the Inflation Reduction Act in our webinar, which aired Oct. 20, 2022. Click here to watch the webinar recording.
Solar Tax Credits Under the IRA
Under the Inflation Reduction Act, solar energy is eligible for the production tax credit (PTC) again, which has been a key tax credit for stimulating the growth of wind resources over the past decade. Solar developers now have the choice of either qualifying for the Alternative Investment Tax Credit (ITC), or receiving a percentage back in tax credits based on the amount of capital spent on tangible equipment or the PTC, which is based on the total energy generated over the first 10 years multiplied by the PTC base rate ($/MWh) and any bonuses received.
The 2022 inflation-adjusted PTC base rate is $26/MWh. If you are eligible for the newly implemented Domestic Content Enhancement Bonus, the Energy Community Enhancement Bonus, and the Low-income Community Enhancement Bonuses offered with the passing of the IRA, the PTC rate could increase to as much as $33.80/MWh (+10% of Base Rate for each bonus: $2.6/MWh). Landowners, solar developers, project owners, tax equity investors and other stakeholders need to analyze the benefits and structures of both the ITC and PTC on project economics. Especially in the early planning stages so they can maximize return on investment throughout the upcoming solar boom now stimulated by the passing of the IRA.
The Investment Tax Credit (ITC) has been set to 30% and extended through 2035 before tapering off to 26% in 2033 and 22% in 2034. Previous to the IRA, the ITC had already begun its first phasedown from 30% in 2021 to 2026% in 2022.
ITC & PTC Breakdown
For the ITC and the PTC, the direct payment amount is determined by multiplying the credit by an applicable percentage. The applicable percentage is 100% if the project satisfies the domestic content requirement (or the requirement is deemed satisfied) or has a maximum net output of less than 1 MW(ac). For all other projects, the applicable percentage is 100% if construction begins before 2024 and 90% if construction begins in 2024.
LandGate’s SolarPowerVal tool allows users to analyze a single project or portfolio of projects and compare the effects of the ITC or PTC on Net Asset Value (NAV) across the differing regional solar markets. LandGate users can use the PowerNAV tool to view, analyze, and compare the performance, strategy, and Net Asset Value of the leading energy operators.
A tax credit is a dollar-for-dollar reduction in the income taxes that a person or company would otherwise pay the federal government. The ITC is based on the amount of investment in solar property. Under current law, the ITC will continue according to the following schedule:
Enhanced Bonus Credits Under the IRA
One of the Build Back Better Bill features that was reintroduced in the IRA was the allowance of enhanced bonus credits for certain projects:
Projects that meet a “domestic content” requirement (generally, based on the percentage of domestically sourced content or manufactured products comprising the project) are eligible for a 10% bonus credit;
Projects that are located in “energy communities” (generally, communities with significant historic employment relating to traditional fossil fuel operations or brownfield sites) are eligible for a bonus credit of up to 10%; and
Projects that are located in certain low-income communities are eligible for a bonus credit of up to 20%.
“Energy Communities” is defined as
Census tracts where a coal mine closed after December 31, 1999 or where a coal-fired electric generating unit has been retired after December 31, 2009 (or which is directly adjoining such census tracts);
Areas that: (i) have or had (since December 31, 2009) 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 (ii) have an unemployment rate at or above the national average unemployment rate for the previous year; and
“Brownfield sites” (generally, real property, the use of which may be complicated by the (potential) presence of a hazardous substance, pollutant or contaminant).
“Low-Income Communities” are defined as
Residential buildings that participate in one of several programs listed in the IRA and as part of a low-income economic benefit project if at least 50% of the financial benefits of the electricity produced are provided to households with income of less than 200% of the poverty line or less than 80% of area median income.
The IRA would provide an enhanced ITC for wind and solar projects that are located in a low-income community and have a nameplate capacity of 5 MW(ac) or less, and for which the Secretary makes an allocation of environmental justice solar capacity limitation.
How Can Solar Developers Use the Inflation Reduction Act to Their Advantage?
So how can you evaluate whether or not your projects are within an energy community? LandGate has tools to help:
Locate coal mines and coal-fired power plants and their associated operating details (whether or not they are retired) either by manually combing public data records, or easily finding this aggregated data with a LandGate subscription using filters
Locate rural areas with a high saturation of oil and gas activity. There are public resources available for this, and mineral rights tax information is public, but there is also an extraordinary amount of data to sort through with very little verification. A LandGate Data subscription allows you to easily locate these areas, using algorithms to capture all aspects of oil and gas production.
These incentives are significant, so it can be beneficial to leave nothing up to chance and use a more precise approach would be to utilize LandGate's Oil & Gas PowerVal to run the economics on all of the oil and gas activity within a given county. This tool automatically populates the tax rate (that changes locally) and associated costs, and you can get a very accurate view of the tax revenues in a given county and compare that to the total tax revenue of that county to make sure it is above 25%. The use of LandGate's tools have provided thousands of bankable reserve reports and verified in the view of the IRS.
More Resources:
https://www.pwc.com/us/en/services/tax/library/ira-energy-related-credits-may-benefit-certain-asset-managers.html
