State of the IRA – Pre-Election Review

In 2022, the IRA expanded and enhanced the clean energy tax credit landscape by revamping existing tax credits, increasing tax credit amounts, adding new credit-eligible technologies and activities, requiring compliance with certain workforce rules, and creating two new credit monetization methods — transferability (i.e., selling the credits) and direct pay (i.e., refundable credits). However, the upcoming election has placed a focus on the future of the IRA and how a new administration might — or might not — change its trajectory.¹ Because of the enormous impact the IRA has had over the last two years, it seems safe to surmise that a full scale overturn or repeal of the IRA’s clean energy provisions is unlikely.

First, the majority of the IRA incentives for clean energy are in the form of tax credits and would require an act of Congress to undo (i.e., a new administration could not unilaterally remove the tax credits included in the IRA).² Second, the IRA has had a sweeping impact.³ On this topic, a group of 18 House Republicans were compelled to send a letter to Speaker Johnson in early August emphasizing the catastrophic impact a repeal would have:

Today, many U.S. companies are already using sector-wide energy tax credits – many of which have enjoyed bipartisan support historically – to make major investments in new U.S. energy infrastructure. We hear from industry and our constituents who fear the energy tax regime will once again be turned on its head due to Republican repeal efforts. Prematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground, would undermine private investments and stop development that is already ongoing. A full repeal would create a worst-case scenario where we would have spent billions of taxpayer dollars and received next to nothing in return.

Energy tax credits have spurred innovation, incentivized investment, and created good jobs in many parts of the country – including many districts represented by members of our conference. We must reverse the policies which harm American families while protecting and refining those that are making our country more energy independent and Americans more energy secure. As Republicans, we support an all-of-the-above approach to energy development and tax credits that incentivize domestic production, innovation, and delivery from all sources.⁴

This piece, while barely scratching the surface of the ways in which the tax benefits enacted through the IRA have impacted the market, briefly explains the broad reach the legislation has had in just two years. We expect that not only is the IRA poised to remain a significant driver of spending, development, and investment in the domestic economy this year, but it is sure to keep tax lawyers, consultants, and accountants busy for the foreseeable future. All of this — and more! — will be topics of discussion at our “Energy Transition and the IRA Conference.”

The Direct Impacts – More Tax Credits and Transferability

First and foremost, tried and true development and investing is alive and well under the IRA. With an expanded scope of tax credits (see stand-alone storage, hydrogen, clean fuels, etc.) and extension and increase in existing credits (see technology neutral credits, domestic content and energy community bonuses, carbon capture credits), the tax code continues to provide an essential source of financing for developers and sponsors of green projects. For some, the IRA tax benefits could provide up to 70% of a project’s cost. While benefits at this level remain extremely rare, it is not uncommon to see the IRA tax benefits equal to 50% of a project’s costs.

For developers with high quality projects (perhaps with long-term contracted offtakes) but insufficient tax capacity (a very common scenario), partnering with a tax equity investor (i.e., a taxpayer with a relatively predictable tax bill that is interested in being an equity owner in the project) continues to remain the most attractive option. With tax equity, there is no discount imposed on the credit, the tax equity investor can monetize depreciation, and, if it is an investment tax credit project, it may sell the project into a partnership with the tax equity investor at a fair market valuation that allows the tax credit to be based on the fair market value purchase price of the project. Before the IRA, projects that could not attract tax equity investors frequently could not monetize the tax credits available to help offset project development costs. Tax credit transfers now fill that gap, as they allow projects without tax equity investors to sell the tax credits and more efficiently monetize the available benefits.⁵

On the flip side of the transaction, taxpayers that historically would not have invested in clean energy projects as an equity owner may participate as tax credit buyers in a transferability transaction. As a result, many taxpayers that have a tax bill can now purchase tax credits in a transaction that is far less complicated than a tax equity investment and one that provides almost immediate tax savings.⁶ This simpler method of entering the energy transition tax credit market has resulted in an enormous volume of transactions, including with many new entrants doing their first tax credit transactions.  In 2023, there was around $9 billion in tax credit transfer transactions and 2024 is on pace for over $20 billion.⁷

Much has been written about tax credit transferability, but the main point here is simply that it opens up financing options for many projects and taxpayers that would not normally have invested in a green project can do so by signing up to buy an IRA tax credit.

Businesses that have not been swept up by the transfer market still may have directly benefited from the IRA by “going green.” The IRA enhanced and made more accessible benefits for businesses purchasing and installing energy-efficient building property (i.e., a deduction for building improvement technologies, including lighting, furnaces, air conditioners, insulation, windows, doors, siding, roofs, etc.). In addition to the electric vehicle benefits available to individuals, the IRA also allows businesses to obtain tax benefits for electric vehicles and mobile machinery used in their trade or business that meet certain requirements and, depending on the business’s location, also provides tax credits for the related charging stations.

Other Beneficiaries and Industries

Outside of the basic strategies of credit qualification and the transfer market, there are many other avenues for businesses to take part in the energy transition market following the IRA.

For example, the overall increase in development created additional demand for construction and bridge lenders. Although the IRA tax benefits can be large in relation to capital costs, it is hard (in most cases, impossible) to convince an investor to invest on the basis of future credits, so development and construction financing continue to be a key piece in the industry. Lenders have been rapidly getting up to speed on the expanded tax benefits and figuring out how to underwrite their value in a variety of new and different circumstances (bonus credits, planned credit transfers, direct pay elections, etc.). Short story: lenders in the clean energy space have been very busy.

Developers also often want to, or need to for financing purposes, sign up long-term offtakes. Historically, corporations with a high energy demand — see Amazon, Google, Verizon — have used hub-settled virtual PPAs to hedge their future energy costs while being able to claim participation in the green energy market. With more clean energy projects coming online and more energy needed by these players (hello data centers and AI), the activity in this area has also increased in step.⁸

The tax credit insurance market has also truly taken off with the IRA. While the market has covered certain specific risks in the clean energy space for some time (e.g., tax basis in investment tax credit deals), insurance brokers have been hard at work developing new insurance products to cover just about any tax credit issue that may arise from the generation and monetization of IRA tax credits. Coverage ranges from compliance with prevailing wage and apprenticeship requirements (“PWA”) to proper registration and tax reporting (and everything in between). While market terms have developed rapidly (as a result of deal flow that is like drinking from a firehose), these policies are still hotly negotiated, particularly where multiple parties to a transaction (for example, a sponsor, a tax equity partnership, a tax equity investor, and a credit buyer) are all expecting to be first in line in the event of a payout and each is unwilling to let any other party negatively impact its coverage. This is an area where a knowledgeable insurance broker — especially one with a background in tax law — has been worth their weight in gold (or, green). It’s safe to say that insurers, and insurance brokers, in the space have been swamped.

Developing and Growing Industries

Besides the role for investors and developers, one of the most remarkable developments over the past 24 months has been the creation of new business lines around the IRA.

First and foremost, the ability to buy and sell credits opened up a market for tax credit brokers. The business models for these brokers vary widely — from online platforms that match credit sellers and buyers for a range of credit volumes (we’ve heard as low as $10,000) and credit types (production tax credits, investment tax credits, advanced manufacturing tax credits) to more bespoke brokers that specialize in finding large tax credit buyers to eat up billions of dollars of tax credits generated by a single credit seller. The broker business is directly tied to the introduction of transferability in the IRA and continues to pick up steam.

We’ve also seen a variety of new work streams for various consulting and advisory firms. Notably, the PWA requirements woven throughout the IRA tax credits have created a need for knowledgeable and organized consulting firms that can obtain, compile, and maintain the significant amount of records that taxpayers must procure to qualify for the full credit rate. Accounting and payroll firms have expanded their businesses as they are a natural solution for this type of work, but other qualified companies — especially those with experience with Davis-Bacon labor standards in the government contracting space — have also played a significant role. Software developers are likely next in line for this stream of business, as the compliance demands of the PWA requirements create an environment ripe for a tailored software solution.

Accounting firms have also been tapped to assist taxpayers in calculating the amount of their “direct cost” in order to substantiate that the taxpayer is entitled to a domestic content bonus for using a minimum amount of domestically sourced products.⁹ Similarly, independent engineering firms have been used to perform factory visits and confirm product specifications to assist with this domestic content qualification.

The additional complexity of the IRA — PWA, bonus credits, domestic manufacturing, etc. — means taxpayers need more help appropriately structuring their projects, and they need that help earlier and more often.¹⁰ And then, there is the task of ongoing compliance, reporting, and (if the Internal Revenue Service comes calling) tax controversy work. Clean energy lawyers are fully employed.

Predictions

So, what might a new administration actually do?

Again, we are not psychics and will leave the handicapping to the professionals. But, it is possible a Republican administration would peel back some of unallocated IRA grant funds (i.e., not tax credits), but it is unlikely that it would peel back all of these funds given their various benefits afforded to jurisdictions across the country.¹¹

In addition, it bears repeating that repealing or modifying the tax credits would require new legislation and the votes to pass it. While truly hypothetical at this point, one could try to undercut parts of the IRA by going after the tax credits in a direct manner (e.g., by changing credit statutes to shorten the window in which credits are available, making credits more difficult to obtain through notices or new or revised regulatory guidance, or narrowing the taxpayers to whom the credits are available),¹² or indirectly by reducing the tax capacity (e.g., by lowering the corporate tax rate, or repealing or modifying the corporate alternative minimum tax). These paths would still require congressional actions or (at minimum) timely guidance from Treasury.

On the flip side, one could accelerate the impact of the IRA on the clean energy transition by streamlining project permitting and providing incentives to build out much-needed transmission. Additionally, Treasury has yet to issue proposed or final regulations for many provisions (for example, the clean fuel production credit (45Z)), and a new administration could put its stamp on the legislation and help determine which projects move forward by issuing this regulatory guidance.¹³

However, the true impact of any of these hypothetical changes is far from clear and beyond our purview.

We remain bullish on the positive benefits the IRA will bring over the next decade-plus. Sign up here to receive future Vinson & Elkins alerts and look out for a recap of our timely event in New York.

¹ See The New York Times, “Republican Attacks on Biden’s Climate Law Raise Concerns Ahead of Election” (Feb. 19, 2024).

² It could however pare back on direct spending funds that have not been allocated.  For a discussion on this topic, see The Economist, “On energy and climate, Trump and Harris are different by degrees” (Oct. 10, 2024) and Politico, “Trump vows to pull back climate law’s unspent dollars” (Sept. 5, 2024).

³ For example, see Reuters, “Comment: Two years in, the Inflation Reduction Act is uniting America and driving clean energy growth” (Aug. 16, 2024).

⁴ The full letter is available at: https://garbarino.house.gov/sites/evo-subsites/garbarino.house.gov/files/evo-media-document/FINAL%20Credits%20Letter%202024.08.06.pdf. 

⁵ In our experience to date, tax credit transfers regularly price above 90 cents on the dollar.

⁶ Notably, however, this option is limited for individuals and closely held corporations unless they have large slugs of passive income — as such, we have yet to see a lot of activity in the market from these types of taxpayers.

⁷ Anecdotally, these estimates seem on the low end.

⁸ For a discussion of the booming clean energy needs of technology companies, see The New York Times, “Hungry for Energy, Amazon, Google, and Microsoft Turn to Nuclear Power” (Oct. 16, 2024).

⁹ The enactment of a “domestic content safe harbor” may have slowed this industry, but it will certainly still play a role.

¹⁰ This article doesn’t touch on the impacts on domestic manufacturing and the increased onshoring of factories driven by IRA tax benefits. But American Clean Power has gathered data on the investment in clean energy after the passage of the IRA; this information is available at https://cleanpower.org/investing-in-america/. Nor does this article attempt to opine on the extent the PWA requirements may have positively or negatively impacted the American workforce or whether it has been a meaningful impediment to development. 

¹¹ For example, Ohio is one of the states that has received the benefit of these funds.  See The New York Times, “Ohio Reaps Benefits From a Climate Law JD Vance Repeatedly Attacks” (Oct. 1, 2024).

¹² One idea that has garnered bipartisan support is prohibiting “foreign entities of concern” from benefiting from the advanced manufacturing production credit (45X). For more discussion on this topic, see E&E News, “Bill would block China from 45X manufacturing credit” (Aug. 1, 2024).

¹³ Where feasible, the Biden administration is likely to issue final regulations before year end. However, any final regulations issued now likely fall within the scope of the Congressional Review Act (the CRA). Under the CRA, if rules are issued during the period starting 60 working days before the end of a session of Congress through the beginning of the subsequent session of Congress, they fall within a “lookback” period and are potentially subject to a member of the new Congress introducing a resolution of disapproval (an RD). If an RD is signed into law, it would overturn the rule in question and bar the applicable agency (e.g., Treasury) from issuing a “substantially similar” rule.  For more information on this topic, see Congressional Research Service, “The Congressional Review Act: The Lookback Mechanism and Presidential Transitions” (July 9, 2024) (available at https://crsreports.congress.gov/product/pdf/IF/IF12708).