U.S. Renewable Energy Marketplace Factors Driving the PPA Market U.S. Renewable Energy Marketplace Factors

Driving the PPA Market

Figure 7. Stacking Value of the Clean Energy Tax Credits for Utility-Scale Projects under the Inflation Reduction Act

Investment Tax Credit (ITC)

The IRA extended both the ITC and PTC for clean energy projects placed in service between 2021-2024 and then transitions to a technologyneutral tax credit from 2025-2035. Because of the emissions profile of wind and solar, the tax credit value remains unchanged after the transition. Clean energy projects can achieve tax credit rates higher than the current market allows by meeting requirements for bonus adders.

These bonus adders are intended to incentivize developers to pay prevailing wages, create jobs through apprenticeships, and develop projects in communities that have been disproportionately impacted by emissions and climate change.

Inflation Reduction Act clarifications help guide developers on pricing, while law creates some controversy with Europe

Clarifications from the Internal Revenue Service (IRS) on the Inflation Reduction Act (IRA) are beginning to help developers price PPAs more confidently. This law extends renewable energy project eligibility for tax credits for 10 years. While the availability of these incentives is expected to have a positive impact on PPA pricing in the medium- to long-term, as the value of the credits would have otherwise declined over time, the new law makes the structure of the credits more nuanced, as illustrated in Figure 6. Project developers will need to comply with certain provisions in order to qualify for tax credits, and they are beginning to receive more guidance on how to model the cost of compliance.

Guidance issued by the IRS in late November has provided developers with more clarity on how to price projects that will begin construction by the end of January 2023, and has also indicated that the cost of compliance for projects built beyond that date will negate some of the value of the credit. Specifically, projects that begin construction by January 29, 2023, will automatically qualify for the historical “full value” of the investment tax credit, or 30%.

After that, projects will only be eligible for a base tax credit value of 6%, plus an additional value of 24%, if they comply with the IRS’ newly issued list of requirements for paying construction and repair workers the prevailing wage and meeting the IRS’ apprenticeship labor hours requirement. With this clarification, developers can begin revising their assumptions on the cost to meet these requirements. However, developers are still waiting on additional clarifications that are expected in 2023, on how to qualify for tax credit bonuses based on using domestic content and/or building a project in a location that qualifies due to economic or environmental factors.

Another recent development related to the IRA is backlash from European countries claiming that some requirements in the IRA unfairly benefit U.S. companies. One example is related to the clean energy tax credits: a 10% bonus incentive is available when U.S. steel, iron, or other domestically manufactured products contribute 20% of an offshore wind project’s materials, or 40% of any other facility’s materials.

Members of the European Union (EU) have expressed concerns that the IRA will hinder European companies, and that it violates international trade law. In response, the U.S. and EU have created a joint task force to address these concerns. Project developers will be attentive to any potential changes that may result from these conversations in 2023.

To learn more about the specifics of the IRA and its provisions, please follow this link to Edison’s blog series.

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