By Tom Williard, Vice President, NV5 Clean Energy Group
With the Republican Party winning the Presidency and control of Congress, many of our clean energy clients have two questions on their minds: What’s going to happen to the investment tax credit (ITC) and other energy tax benefits, and will this affect my solar, resiliency, EV, wind, or energy efficiency project?
Loss or reduction of energy project federal tax credits could result in a 30% to 50% effective increase in project costs, significantly altering project financing and financial outcomes. This uncertainty is already driving changes in the renewable energy market.
NV5 is working with clients to proactively address federal tax benefit uncertainty by implementing client and project-specific mitigation measures.
IRA Background
The Inflation Reduction Act (IRA) was signed into law by President Biden in August 2022, creating and extending significant tax credits to renewable energy projects and technologies such as wind and solar power, battery energy storage, microgrids, and electric vehicles. The intent of the energy provisions in the IRA are multifold: to reduce emissions that contribute to global warming; to incentivize onshoring of clean energy manufacturing to create jobs and ensure that America is a global leader in clean technology and production; and to promote American energy independence.
Since its passage, provisions in the IRA have contributed to a massive investment of $493 billion[i] in renewable energy and transportation. For our clients, the extension of a full 30% Investment Tax Credit (ITC) through 2032 with bonus incentives, together with Elective Payment provisions that allow non-profits, government entities, and Indian tribal governments to receive direct benefits from these tax incentives, has helped offset reductions in net energy metering credits to revitalize the commercial renewable energy market. In addition, large-scale manufacturing projects are being built and planned, with approximately 75% of that investment flowing into Republican congressional districts[ii] with thousands of jobs and billions of dollars of private investment at stake. Because the provisions of the IRA are federal law, any changes to IRA provisions would require the US Congress to pass legislation implementing changes and the President to sign those changes into law.
Industry Expectations
Given Republican statements and recent legislation[iii] concerning the IRA, together with the need to backfill the extension of the 2017 Tax Cuts and Jobs Act (TCJA) tax cuts, industry observers anticipate that the Trump administration and Congress will make some changes to IRA tax credit provisions.
Republicans have slim majorities in both the Senate (53-47) and especially the House (220-215), where they will likely lose at least three members to Trump administration posts and resignation early on. They can’t afford to lose more than one or two votes in the House to pass legislation. Likewise in the Senate, most legislation would require a 60-vote supermajority to avoid Democratic filibusters. The only viable congressional path to pass legislation that changes IRA tax provisions is through the budget reconciliation process, which requires a simple majority in both chambers to pass.
With several Republican House members on record supporting at least some of the IRA tax provisions, the current consensus is that Republicans will target EV and wind tax credits, but provisions of the ITC will likely remain in place and perhaps be phased out earlier. Slim majorities mean that wholesale repeal of the IRA is essentially impossible.
Republican House and Senate leaders are currently discussing passing a reconciliation bill early in 2025 that would include changes to IRA energy provisions. Given slim majorities, the constraints of the reconciliation process, and other important Republican legislative priorities, it will be a challenge to push through a reconciliation bill quickly.
What You Can Do
Uncertainty is challenging to manage. The key is being well-informed, flexible, and proactive. If you are currently developing or planning to develop a renewable energy project that takes advantage of IRA tax benefits, there are a few steps you can take to reduce risk amid uncertainty.
- Accelerate plans to start and finish construction. Most observers believe that IRA ITC and PTC tax benefits will be preserved based on the date that construction started (by IRS definition). IRA tax benefits are realized in the tax year in which the eligible asset is placed in service. If it is possible to place an IRA-eligible asset in service in an earlier tax year, you should.
- Analyze and plan for loss of tax credits. If tax benefits are not certain, evaluate the viability of your project in the absence of them. Are there other sources of funding, grants, or incentives that can backfill the loss of tax benefits?
- Use contract provisions to limit your risk. If tax benefits are lost during the development phase rendering the project inviable, ensure that there are contract provisions that allow for cancellation of contracts with limited cost and liability.
- If you are a government agency or non-profit using Elective Payment, consider using a calendar tax year rather than a fiscal tax year (if different) to accelerate tax filings.
- Contact your local government representatives. Let them know that these tax benefits are essential to the success of your project, the impact the project will have on your business, jobs, and the environment, and ask them what they are doing to protect these important incentives.
- Stay informed. Proposed changes to energy tax benefits will be known before they take effect.
Tom Williard is vice president of the NV5 Clean Energy Group and specializes in building technical and financial models to predict potential energy asset production and financial performance. He has provided expert renewable energy consulting to public agencies and private companies for more than 20 years.
[i] https://rhg.com/research/clean-investment-monitor-tallying-the-two-year-impact-of-the-inflation-reduction-act/
[ii] https://www.washingtonpost.com/climate-environment/interactive/2024/climate-bill-biden-clean-energy/
[iii] https://www.congress.gov/bill/118th-congress/house-bill/2811
NV5 is not a financial or legal advisor, or an accounting firm, and does not provide those services. Client will rely on appropriate financial, legal and accounting resources to confirm NV5 recommendations concerning the Inflation Reduction Act, Investment Tax Credits, Production Tax Credits, IRS 179D credits, and any other financial or legal information.