ITC increase to 30%

The renewable energy industry is excited about the enactment of the Inflation Reduction Act of 2022 (IRA)–and rightfully so. The IRA, signed into law Aug. 16, has substantial implications for the tax credit community, especially renewable energy. Renewable energy investment tax credit (ITC) and production tax credit (PTC) investors and syndicators weighed in on the most impactful provisions, including: extension of the ITC/PTC, transferability of tax credits, new technologies eligible for the ITC, and bonus credits. “The IRA has a significant impact on [ITCs],” said Ed Rossier, managing director, head of climate finance at Enhanced Capital, a national impact investment firm with 22 years of experience. “It does three exciting things. One, the transferability of credits. Two, the availability of orphaned technologies. And three, bonus credits for triple bottom line, impact-driven investment.” “There is so much more opportunity to use these credits because of the Inflation Reduction Act,” said Matt Meeker, a partner in the Dover, Ohio, office at Novogradac. “The IRA will have a big impact. We just don’t know exactly how to monetize it yet.” “Projects that were not viable before now can be because of the many changes under the IRA,” said Bryen Alperin, managing director of Foss & Company, an ITC syndicator. ITC/PTC Extension Among clean and renewable energy provisions in the bill is essentially an extension of the PTC and ITC for facilities that start construction after Jan. 1, 2022, and before Jan. 1, 2025, under existing technologies–with the PTC at $26 per megawatt-hour as adjusted by inflation annually and the ITC at 30% of eligible costs if they adhere to the labor requirements on prevailing wages and apprenticeship programs. After 2024, the PTC and ITC will transition to a technology-neutral production and investment tax credit for facilities that start construction by the end of 2032. “A 10-year runway is a big runway,” said Jon Peeples, director of business development for environmental finance at U.S. Bank. “This is a big positive for an industry that typically gets shorter extensions.” U.S. Bank–through U.S. Bancorp Community Development Corporation, its tax credit and community investment division–invests across a variety of tax credit incentives, but in the renewable energy sector it currently focuses on ITCs. “People are concerned about the supply chain delays,” said Meeker. “Solar, like most assets, has been affected, but that concern has been alleviated a little with the 30% ITC being extended for the next 10 years.” Transferability Industry participants are excited at the prospect of the ITC being transferable. Starting in 2023, companies with taxable income will be generally allowed to transfer ITCs and PTCs, along with other tax credits, for cash to unrelated parties, and the proceeds from the transfer is not taxable income. “The transferability of credits brings in new investors to the market,” said Rossier. “Renewable energy has a $20 billion tax equity market. There are banks, family offices, corporate investors, and individual investors who understand the tax and accounting implications of partnership tax equity, but there are many more investors who don’t want to face the learning curve of investing in tax equity.” Rossier went on to say that the transferability provision can bring those other investors into the renewable energy market. Peeples agrees. “Investors now have the option to forgo a partnership investment if that is preferred,” said Peeples. “Some investors may prefer the direct purchase of credits versus the various analytical, legal and accounting nuance that comes with a partnership investment.” In addition to bringing new investors into the renewable energy market, the transferability of credits has other benefits as well. “The transferability of credits may help sponsors and projects that can’t access efficient tax equity,” said Eric Heintz, managing director of renewable energy finance at M&T Bank, an ITC investor. However, questions remain before this provision is used. “The industry is waiting on more guidance from the U.S. Department of the Treasury before they move forward with tax credit transferability,” said Heintz. “[In the meantime,] I see other challenges that guidance likely won’t solve. For example, what happens if you can’t monetize depreciation and how can an investor lay claim to additionality with respect to [environmental, social and governance] ESG reporting?” “How do you acquire credits without having an interest in the partnership?” asked Rossier. “It’s new to transfer federal credits. Usually, you can’t purchase federal credits.” The transferability of tax credits may have an effect on tax credit equity pricing. “If projects can sell/transfer credits, I see potential for pricing to increase,” said Meeker. “Selling credits would simplify monetizing the credits when compared to a typical tax credit investment.” source: https://www.novoco.com/periodicals/articles/inflation-reduction-act-shines-bright-light-renewable-energy-guidance-needed