Maximizing Clean Energy Benefits: The Art of Stacking Incentives
Roughly a year has elapsed since the Inflation Reduction Act (IRA) was passed and the momentum it has spurred in reshaping the US clean energy sector has been prolific. Flagship features – tax credits, bonuses, and stacking – have created an attractive and viable space in which actors can leverage these benefits, and in which the renewable energy industry can grow.
Despite their potential, the sheer volume and intricacy of these incentives, coupled with unclear guidance, have generated a sense of uncertainty, leading many companies to await a clearer framework before taking action. The Clean Fight hosted Peter Liu, Managing Partner at Meridian Clean Energy, to explore how businesses can leverage the concept of “stacking”, and various incentives to drive their business goals forward.
What is stacking?
In the context of renewable energy financing, stacking refers to the practice of combining multiple tax credits, incentives, grants, and other funding mechanisms to maximize financial benefits for clean energy projects. The IRA has the capacity to enhance investment tax credits on specific projects by up to 70% of the qualified investment, made possible primarily through stacking. By layering different financial instruments, businesses can achieve a substantial reduction in project costs, making sustainable projects more economically viable.
“If you have a company that's in solar and wind, or maybe even community solar, really get familiar with stacking because it could be pretty powerful”, Peter Liu explains. “That could be 70% of tax credits that could end up being transferable, meaning sold directly without using tax equity.”
Transferability and Direct Pay
The ability to transfer tax credits, coupled with the option for direct payment, creates new opportunities for companies to access financial benefits without the need for complex structures like tax equity.
The IRA modified the Internal Revenue Code (IRC), enabling the monetization of specific energy credits through a direct pay option, treating the credit as a payment against the taxpayer’s tax liability, rendering them "refundable." Additionally, the IRA amended the IRC to introduce a transferability provision, allowing entities to transfer specific credits once. For example, IRA section 6418 enables taxpayers to sell a tax credit for cash to an unrelated taxpayer. Notably, tax-exempt entities cannot sell but can purchase credits. With this new flexibility, companies can more aggressively target tax credits and enhance them with stacking mechanisms, including by stacking bonus credits if applicable.
Stacking for Equity and Inclusion: Bonus Credits
The creation of tax incentives has historically been utilized as a tool to spur investments in strategic priority areas such as low-income housing (LIHTC), production tax credits for renewable energy (PTC), and the energy investment tax credit (ITC). The IRA uses these tax credits in tandem with bonuses that can be stacked to prioritize investment into strategic areas such as manufacturing jobs, energy communities and low income communities. There are currently a number of bonus credit categories and each can provide an additional 10% bonus on top of the PTC or ITC credit. Below are three examples given by Peter Liu:
Energy Community: renewable energy facilities built in an energy community are eligible for a 10% bonus on top of existing PTC or ITC credits. Energy communities are described as brownfield sites within communities that have primary industries in coal, oil, or natural gas, which subsequently have high-rates of unemployment due to the transition to renewable energy.
Low Income Communities: Projects are eligible for a 10% or 20% bonus if a project is located in a low income community. Specifically, this is useful for wind and solar projects located in any of the following categories: low income community, Indian Land, Qualified Low-Income Residential Building Project; or Qualified Low-Income Economic Benefit Project
Domestic Content: Projects that utilize construction materials made in the U.S. are eligible for a 10% bonus, which is reduced to 2% if they fail to meet the wage and apprenticeship requirements.
Potential Roadblocks for Stacking Incentives
For the many benefits that stacking offers, the downsides should not be overlooked. Some of these include:
Regulatory and Policy Risks
While the IRA is entrenched in federal policy and unlikely to be dismantled, changes in government policies, programs, and the value of these credits and other incentives may change depending on the political climate. Uncertainty about these risks may affect the ability of companies and renewable energy players to continue to benefit
Fluctuating Markets
Fluctuations in market conditions for both the price of energy and finance credits may disrupt the economic viability of renewable energy projects. Shifts in price and demand for energy may affect revenue streams whereas disruptions in credit markets may reduce a project’s ability to secure financing, therefore affecting its implementation. Furthermore, market demand is greatly influenced by public perception, local government, and geographically specific policies tied to land use and development patterns.
Operational and Administrative Risks
The rapid evolution of technology in the renewable energy sector introduces risks related to the adoption of new and unproven technologies. Changes in technology standards or the emergence of more efficient alternatives can impact the long-term viability of projects. Managing the intricacies of stacking tax credits can be administratively complex. Compliance with multiple programs and ensuring eligibility for various incentives may require substantial resources and expertise.
The IRA has spurred transformative growth in the U.S. clean energy sector and has proven to be comprised of more than standalone incentives through its provision of tax credits, bonuses, and strategic stacking opportunities. While these incentives can be transformative for clean energy stakeholders, regulatory uncertainties, recapture risks, market fluctuations, and operational challenges may require cautious navigation. Despite these hurdles, stacking as a tool for capitalizing on the IRA’s once-in-a-generation benefits, remains a powerful instrument for the growth of the U.S. renewable energy sector. Proactively having a risk management strategy in place will further enable stakeholders to achieve and sustain success in this dynamic landscape.