The Treasury Department on Nov. 17 released guidelines for the Inflation Reduction Act’s (IRA) investment tax credits (ITC) for clean energy projects, allowing developers to claim the credits for equipment used to connect a solar or wind project to the grid, as well as for standalone energy storage projects.

Under the IRA, both homeowners and commercial clean energy developers can qualify for a 30% ITC through 2032 or possibly 2033.

The department’s notice of proposed rulemaking (NOPR) specifically permits developers to claim the credit for equipment that is a “functionally interdependent” component of a system that generates clean energy, including inverters, converters, and wires and cables up to and including a transformer in a substation.

The 127-page NOPR defines system components as functionally interdependent “if the placing in service of each component is dependent upon the placing in service of each of the other components in order to generate or to store electricity, thermal energy or hydrogen.”

Examples in the proposed rule detail how interconnection equipment in a solar project or offshore wind project could be functionally interdependent and therefore included in the overall project costs for calculation of the ITC once a project has gone online.

The guidelines also provide a broad definition of the kinds of projects ― beyond solar and wind ― that will qualify for the ITC, including geothermal, hydrogen fuel cells, combined heat and power, and bioenergy.

The ITC for standalone storage is another major component of the new guidelines; it covers all technologies and chemistries ― lithium ion, vanadium flow and hydrogen ― as well as thermal energy storage technologies, such as geothermal heat pumps.

Prior to the IRA, the ITC could be claimed only for storage that was directly connected to and charged from a clean energy — solar or wind — project. Electric vehicle batteries and thermal storage used for heating swimming pools are not eligible for the credit.

At the same time, the guidelines include sections noting the proposed definitions of clean generation and storage may need to change as new technologies emerge.

The goal of these and other proposed rules in the guidelines is to provide “companies with clarity and certainty needed to secure financing and advance clean energy projects nationwide,” Deputy Secretary of the Treasury Wally Adeyemo said in a department press release.

The publication of the NOPR in the Federal Register, scheduled for Nov. 22, will begin a 60-day comment period, with a public hearing scheduled for Feb. 20, 2024.

Echoing Adeyemo, solar and renewable energy trade groups stressed the industry’s need for clear and stable tax incentives and, while welcoming the proposed guidelines, cautioned that further details may need to be hammered out for developers to take full advantage of the IRA’s incentives and increase renewable energy generation in the U.S.

“We remain impressed by the administration’s commitment to fully maximizing the economic and environmental benefits of [the IRA], and plan to continue working closely with Treasury in support of fair, timely and practicable final rules across all facets of the clean energy tax package,” said Gregory Wetstone, CEO of the American Council on Renewable Energy.

Abigail Ross Hopper, CEO of the Solar Energy Industries Association, hailed the inclusion of standalone storage in the ITC as a big win for the industry. The proposed guidelines are “good news for America’s clean energy economy. However, given the economic headwinds that many solar and storage companies are facing, we are continuing to fully evaluate the details in this guidance to guard against any potential unintended consequences that might undermine our ability to rapidly deploy clean energy projects of all sizes.”

A Developer’s View

When first passed, the ITC provisions of the IRA were seen as a potential bonanza for the solar industry, reinstating the full 30% ITC for a decade, as opposed to the gradual phaseout passed in the Energy Act of 2020. By August 2022, when President Biden signed the IRA into law, the ITC had been reduced to 26%,

The law also allows nonprofits, schools, and city and local governments ― which previously could not benefit from the ITC ― to receive a direct payment of the credits or transfer of them to third parties. Other provisions offer additional credits of 10% each for projects meeting domestic content requirements or located in low-income or “energy” communities ― areas that have lost jobs and tax revenues due to the closing of fossil fuel plants.

But the tax credits for commercial projects also come with requirements that developers pay prevailing wages and bring in registered apprenticeship programs. Any projects not meeting those requirements would be eligible for only a 6% ITC.

In addition, the prevailing wage and apprenticeship requirements apply to any workers employed for the operation, maintenance or repair of a project for a period of five years from the date it goes online.

The IRA has driven expansion in the clean energy sector, especially in domestic supply chains. Solar and storage companies have announced $100 billion in new investments across the U.S. since the law was passed, according to Hopper.

But while growing, the industry continues to be plagued by supply chain, interconnection and other delays. According to a recent report from the American Clean Power Association, more than 16 GW of clean energy projects have been delayed this year, about two-thirds of them solar.

The complexity and slow rollout of tax credit guidance from the Treasury Department — coupled with inflation and delays — have meant uncertainty for some developers as investors continue to wait on the sidelines.

In an interview with NetZero Insider, Mike Healy, CEO of New Columbia Solar, a residential and commercial installer based in Washington, D.C., said a major drawback of the ITC as structured is that it’s not available to developers or homeowners until a project comes online.

“When you’re developing a solar project, you’re underwriting the economics way before you get to interconnection,” said Healy, who also is president of the board of the Chesapeake Solar and Storage Association (CHESSA), the regional trade group for D.C., Maryland and Virginia.

“Yet, with the IRA, you can only submit at interconnection, and then you get told afterwards [if a project qualifies], so it’s not a great process,” he said, noting that his personal views are not CHESSA’s.

The IRA and ITC will be “transformative,” Healy said, but solar’s long development cycle and uncertainty about tax credits can result in fewer benefits for customers. Nailing down the ITC “as early as possible in the development cycle is the only real way to underwrite it to make sure that all parties involved in the solar process get the benefit,” he said.