What is the Inflation Reduction Act’s direct pay option for public utilities and electric cooperatives, and how should they be preparing to take advantage of energy storage and solar tax credits?

Under the ITC, or investment tax credit as we’ve known it to date, project donors are able to recover a portion of their investment costs as a credit against future tax payments. But in order to do so, the project owner must have a tax liability.

Alternatively, now with the passage of the IRA, or Inflation Reduction Act, there’s the inclusion of a direct pay option for both public and nonprofit entities allowing them to own clean energy projects, including storage, and receive the direct cash payment. Previously, under the ITC as we’ve known it to date, there’s been a gap for many cooperatives and public utilities that wanted to own projects directly but had no means to monetize the ITC.

So the passage of the IRA breaks the reliance on power purchase agreements, or PPAs, and this fear of leaving money on the table by not being able to directly own these assets. As a result, this opens up a whole new model for cooperatives and public utilities to self-develop, own, and operate clean energy assets. And it also leads to cost efficiencies and greater flexibility to control your own destiny.

What are some of the important nuances related to direct pay eligibility and amounts?

There are some important nuances to be aware of as they relate to direct pay eligibility and amounts.

Projects that are under one megawatt AC will be eligible for the full direct pay amount. This could be favorable for utilities seeking to develop virtual power plants, or VPPs, for smaller member-sited or customer-sited resources. Alternatively, starting in 2024, projects that are over one megawatt AC will need to meet certain domestic content thresholds in order to maintain eligibility for that full direct payment. 

The first requirement is that steel and iron will need to be 100% domestic content every year.

The second requires that manufactured products will need to be comprised of at least 40% domestic materials in 2024. That percentage is going to increase five percentage points each year until remaining fixed at 55% for all years beyond 2027. If it doesn’t meet these two requirements, then starting in 2024, it would be eligible for 90% of the direct pay amount, and then in 2025 it would be eligible for 85%. But then for all years thereafter it wouldn’t qualify at all for the direct pay option. And to clarify, these years that I just mentioned correspond to when the project starts its construction. Because it’s going to take time for the US to build up a domestic manufacturing industry, it may be difficult to find hardware products that comply with these domestic content requirements by the year 2024. And so, for that reason, we’re encouraging entities that have interest in this direct pay option to strongly consider starting project construction before 2024 to ensure their eligibility for 100% of the domestic pay amount. Cooperatives and public power utilities are poised to benefit from the IRA’s passage. Here at Stem, we’re ready to help you navigate these exciting new opportunities.

Disclaimer: This content is preliminary and is provided for informational and planning purposes only regarding the Inflation Reduction Act. This does not constitute legal, tax, regulatory, policy, or other advice or guidance. The provisions in legislative bill text require further clarification and guidance by executive branch, regulatory, and other agencies.