HOW INFLATION REDUCTION ACT SOLAR ITC ADDERS SUPPORT SUSTAINABLE DEVELOPMENT GOALS
Incentives for renewable energy have been a hot topic in the U.S. lately, especially with new provisions geared towards implementing recently developed technologies that aim to fight climate change. The Inflation Reduction Act (IRA), signed into law in August of this year, contained significant adjustments to several climate and sustainability solution incentives. Widely regarded as landmark legislation, it was one of the most extensive environmental policies in decades. It laid the groundwork for incremental change through increases in tax credit incentives for projects like Carbon Capture, Utilization and Sequestration (CCUS), battery storage, and solar Investment Tax Credits (ITCs). Under the IRA, institutional investors may now see higher tax credit returns on their investment and new opportunities through ITC adders.
The U.N.’s Sustainable Development Goals (SDGs) offer a blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. No one action can address all 17 goals at once but using the SDGs as guidelines can help inform corporations of processes that can help tackle some of the most pressing issues of our time.
The adjustments made to policies under the IRA align in many ways with the SDGs including those made to solar ITCs. ITCs are calculated as a percentage of the cost that solar developers spend on solar power production equipment while constructing a project. Before the IRA, ITCs were set to reach 10% by 2024, but under the IRA, they now have a base rate of 30% locked in for the next ten years. The law also includes certain adders that can increase the total amount to 60%. The increased incentives can help move solar projects forward despite the recent high interest and inflation rates. These adders include, but are not limited to:
- 10% for projects located in former “energy communities,” or sites where fossil fuels previously dominated
- 10% for a minimum percentage of domestic solar hardware manufacturing
- 10% for projects placed in low-income areas, which can include:
- Community solar, where power generated from these projects can be sold to low-income families and help reduce electricity costs
- Residential projects that are built on the roofs of individual homes or low-income housing apartments.
How Solar ITCs Help Drive Sustainable Development Goals
SDG #7 – Affordable and Clean Energy: Solar panels installed through ITC projects provide clean energy, and the adder incentivizing community solar helps to lower power costs for individuals involved in these programs.
SDG #8 – Decent Work and Economic Growth: The domestic manufacturing ITC adder promotes job creation in the US, rather than sourcing parts overseas. Domestic manufacturing can increase GDP and can reduce supply chain disruptions resulting from long transportation. The ITC also includes prevailing wage and apprenticeship requirements. To avoid penalty fines, laborers, mechanics, contractors and subcontractors must be paid wages at least at prevailing rates, determined by the Secretary of Labor, during the construction, alteration and repair of the facility and for ten years thereafter. By 2024, 15% of total labor hours for construction must be completed by qualified apprentices, contributing to pathways for more suitable work in technical jobs.
SDG #9 – Industry, Innovation, and Infrastructure: Solar energy created through ITC projects offers a reliable infrastructure for power. Solar energy can be more reliable in a storm or rolling blackouts than traditional energy sources. In the recent hurricane Ian, while 2.6 million Florida residents lost power, a 100% solar powered community of about 2,000 homes retained it throughout the storm.
SDG #10 – Reduced Inequalities: The ITC adder incentivizing selling the power from a new solar project to low-income communities through community solar programs provides widespread and affordable access to clean energy. Previously, solar energy was obtained by those who could afford to install personal solar panels on their properties.
SDG # 11 – Sustainable Cities and Communities: Under a new ITC adder in the IRA, solar project placement is encouraged in areas previously powered through traditional energy sources, such as coal and natural gas. Switching from fossil fuels to renewable energy sources will help regions become more sustainable.
SDG #12 – Responsible Consumption and Production: Solar ITCs provide much needed tax equity financing for projects that allow for the responsible production of energy using renewable power from the sun. Without these tax credits, many of these projects might not otherwise have been developed.
SDG #13 – Climate Action: ITCs help fund solar projects, which are a clean source of energy. They reduce emissions since they are an alternative to burning fossil fuels that release harmful CO2 into the atmosphere. To further reduce the amount of CO2 released into the atmosphere, the 45Q tax credit has been expanded upon under the IRA to incentivize the development of CCUS facilities.
The adjustments and adders made to solar, CCUS and other sustainable tax credit programs in the IRA make the financial incentives to invest even more compelling, but the fact that companies can make investments that align so closely with UN SDGs and their own ESG goals making it an easy choice.
With opportunities for tax credit returns of up to 60% and an extension of these provisions for a decade, solar installations can continue despite higher interest and inflation rates. This is important as immediate climate action is needed to prevent irreversible damage to the planet.
Foss & Company has been committed to furthering proven effective technologies that benefit society through tax credit investing since 1983. Our team of experts help guide our investor partners through the process of finding projects that align with their financial and ESG goals.
Reach out to us to connect with one of our tax credit and subject matter experts and learn how investing in climate action technologies through tax credits can help your company incorporate SDG and ESG principles. You can visit our projects page to see some of our previous work.