Complex, but packing a big punch, tax incentives for clean electricity represent a significant portion of the investments within President Biden’s landmark climate bill. Initial estimates stated that the IRA will deliver at least $370 billion in climate action, $257 billion of which comes from tax credits. Revised projections found that these investments could be three times greater than initially thought, or more—because the credits are uncapped, the only limit on their uptake is the public’s desire to take advantage of them.

Many of the credits go to consumers—a homeowner installing a new heat pump, for example, can take up to $2,000 of the appliance’s cost off their tax bill at the end of the year. But the credits that have the greatest impact to drive forward the clean energy transition will operate largely out of sight from consumers. The clean electricity production tax credit (PTC) and investment tax credit (ITC) fit that profile: lesser-known, but among the IRA’s highest-impact investments to spur a fair and equitable clean energy economy.

First, what are the ITC and PTC?

As the name suggests, the clean electricity production tax credit subsidizes the production of clean electricity. Similarly, the clean electricity investment tax credit supports new investment in clean electricity installations. A given project can only receive the PTC or ITC, but not both. The credits’ shared purpose—boosting the installation and operation of new clean power sources—is clear. But the devil is in the details.

With the ITC, project developers can receive a base credit worth 30 percent of the project’s value, provided they meet certain labor standards (more on that in a second). In a market where wind and solar are already the world’s cheapest energy sources and getting cheaper, this substantial subsidy will make new generation all the more appealing to project developers. And the updated credit supports more than wind and solar power: For the first time, the ITC is now available for energy storage technologies, which are critical for achieving a stable clean grid.

The PTC, on the other hand, awards credits to clean energy sources on a per-kilowatt-hour basis. For every kWh of clean energy generated, the producer gets a base credit of 2.6¢/kWh (again, provided they meet certain labor standards). Historically that’s been roughly equivalent in value to the 30 percent ITC. Subsidizing production per-unit creates a strong incentive to generate as much clean power as possible, with operating costs defrayed along the way.

This is roughly how the ITC and PTC have always operated, but for the first time the IRA extends these credits for a full ten-years, and beyond, at their full value. The IRA also makes some important upgrades. Those changes will redefine the credits’ impact on the clean energy economy.

How does the IRA upgrade the ITC and PTC?

1. Ambitious labor standards

New labor stipulations are among the IRA’s most significant changes to the ITC and PTC. Originally, projects were eligible for the base credits of 30 percent and 2.75¢/kWh with no strings attached. Now, developers and operators have to pay prevailing wages and hire apprentices to qualify for the full credit value. If they don’t, they receive much, much smaller credit shares—a modest 6 percent and 0.5¢/kWh, respectively. (Smaller projects aren’t subject to this standard to receive the base credit.) Tying the full credit value to labor practices, as pioneered by Washington’s Clean Energy Transformation Act signed by Governor Jay Inslee in 2019, is a major incentive to create good jobs in the clean energy economy.
The prevailing wage provision requires that all wages for construction, alteration, and repair for the first five years of an ITC project and the first 10 years of a PTC project must be paid at the prevailing wage. Prevailing wages, calculated on a state and regional basis, are the average wage paid to workers in a given occupation in a geographic area. This requirement ensures that clean energy workers are paid a fair, liveable wage.

The apprenticeship requirement further calls for a certain percentage of construction labor hours for each clean power project to be performed by an apprentice. The percentage increases over time: It’s currently held at 12.5 percent for projects beginning construction this year, and will reach 15 percent for projects beginning construction after 2023. Apprenticeships are a critical pathway into good union jobs, and this stipulation will help build a durable workforce with a new generation of well-trained clean energy workers.

2. Direct pay and transferability

Direct pay and transferability change the game for certain clean energy projects. These provisions recognize that tax credits are ultimately a blunt instrument, in part because they depend on the benefiting organization actually having tax liability—you can’t count a subsidy credit against your taxes if you don’t pay any taxes!

Direct pay solves that problem, by converting the tax credit to direct cash payments. By making the credits available without requiring tax liability, direct pay offers credit access to a much broader set of entities, including tax-exempt entities, states and their political subdivisions, and Tribal governments. New access to tax credits will be especially important for public utilities, including municipal utilities and rural cooperatives, which generate 15 percent of all power in the U.S. and serve one in seven Americans. We can expect a massive upswell in new nonprofit- and publicly-owned clean energy generation, as a result of the direct pay upgrade.

Transferability addresses another problem with tax credit accessibility. In the past, a company eligible for a credit larger than what they’d otherwise pay in taxes could find a complicated workaround: Contracting with a financial institution to apply the credit against that company’s much larger tax liability, in exchange for a steep cut of the credit. Those arrangements were purely extractive, boosting profits for banks while reducing the credit benefit for project developers. Transferability makes it much simpler and cheaper to shift credits between companies, so less of the credit is wasted—and more federal investments go toward their intended purpose of encouraging renewable energy.

 3, Tying credits to clean energy targets
The IRA newly connects the two credits to real-world climate targets, ensuring incentives don’t run out until we’re on track to decarbonize the power sector. The ITC/PTC provisions are an extension and expansion of existing tax credits until January 1, 2025. After that, the old credits expire, and functionally similar programs (with some tweaks, including a transition to covering all zero-carbon power sources) kick in. The new credits are partly linked to greenhouse gas (GHG) pollution reduction targets. They begin to phase out in 2032 only if GHG pollution from electricity is below 25 percent of 2022 emissions. If the power sector hasn’t hit the decarbonization target of less than 25 percent of 2022 emissions by 2032, the credits won’t phase out until the target is met. It’s a neat way of connecting the credits to important, real-world climate targets.

But the IRA’s changes to the ITC and PTC don’t stop at these three upgrades. There’s one more crucially important update in the IRA’s credit extension: bonus credits. Above, we outlined the base tax rate, which is the guaranteed minimum credit for producers and suppliers. Bonus credits go one step further, providing robust incentives—and much larger credit values—to boost the broader economic benefits of clean energy deployment.

Let’s break it down: How do bonus credits work?

If a tax credit could have a “secret sauce,” bonus credits, also known as adders, would be it. They’re huge incentives for clean power developers and operators to strengthen domestic supply chains, build the clean energy workforce, support equitable clean energy investment, and more. 

The bonus credits are at the heart of the Biden administration’s climate policy agenda, going beyond driving widespread uptake of clean energy and electrification. These incentives will help remake the fabric of the American economy, which has historically prioritized profits over people and has spent decades offshoring, disinvesting, and racing to the bottom on job quality. By creating additional incentives across several benchmarks, PTC and ITC can have a lasting impact on clean power in the U.S.

Three key bonus credits within ITC and PTC

1. Domestic content 

Both the ITC and PTC credits feature an adder for projects built with domestically produced materials. The domestic content requirement encourages projects to source all of their iron and steel and 40 percent of the value of other materials from U.S. manufacturers—with an increasing proportion of other materials required over time, ultimately reaching 55 percent for projects built after 2026.

The incentive is calculated differently for the two credits. Per the Department of Energy, projects “that meet domestic content minimums are eligible for a 10 percentage point increase in value of the ITC (e.g., an additional 10 percent for a 30 percent ITC = 40 percent) or 10 percent increase in value of the PTC (e.g., an additional 0.3 ¢/kWh for a 2.75 ¢/kWh).” Either way, the incentive is clear: build more infrastructure with U.S.-made components and get a bigger subsidy for your clean power project. This adder can play a major role in building out domestic supply chains that will feed into new clean power generation for years to come.

2. Energy communities 

The credits include another adder for projects sited in “energy communities.” Energy communities are specifically defined in the IRA statute, generally including communities that have suffered hardship from the decline of the fossil fuel industry. (The US Department of Energy has helpfully released a mapping tool to help identify energy communities as defined by the IRA.)

This adder features the same 10 percent bonus as the domestic content requirement for both credits, with a catch: Larger projects that fail to meet the labor adder benchmarks only receive a 2-percentage-point increase in the value of the ITC. That caveat makes intuitive sense—the point of the energy community bonus is to revitalize communities left behind by the transition away from fossil fuels, and high-road labor standards will go a long way toward uplifting working families in those places.

3. Low-income communities

This bonus credit only applies to the ITC, which receives an additional 10-percentage-point increase for wind and solar projects under 5MW located in a low-income community or on Tribal land. For projects classified as a “qualified low-income residential building project” or “qualified low-income economic benefit project,” that bumps up to a 20-percentage-point increase.

Much like the energy communities provision, this adder is a major incentive for developers to invest in communities that would benefit the most from new infrastructure and good jobs. The 5MW ceiling also indicates an interest in applying the ITC toward smaller-scale community solar or rooftop projects focused on providing targeted economic benefits to low-income communities and residents.

The maximum incentives for projects that hit every benchmark speak for themselves. A new smaller project that meets labor and domestic requirements, and is built in a low-income energy community, qualifies for an ITC at a whopping 70 percent of the project cost. Larger projects, which don’t qualify for the low-income community adders, are still eligible for a full 50 percent credit. If opting for the PTC instead, a large clean power source meeting the labor and domestic requirements in an energy community will receive a PTC of 3.2 ¢/kWh. In a market where as of 2021 the national average cost of solar power was 3.6 ¢/kWh and wind power was 3.8 ¢/kWh, such incentives would be a seismic shift.

The U.S. Energy Information Administration (EIA) modeled the impact of the PTC and ITC on domestic clean energy generation. They project that without the IRA and the ITC/PTC extension, the U.S. would have around 726 gigawatts of solar power capacity by 2050. Factoring in the PTC and ITC, with high credit uptake, we’d reach nearly 1,000 GW of solar power by 2050. That’d be a 38 percent percent increase in capacity over business as usual for solar generation on the strength of these two credits alone.

EIA’s study of the “high uptake case” highlights a critical variable in all of these discussions: how many businesses will take advantage of the credits and with how many bonuses. The IRA’s cost estimate comes with the major caveat that, for the credits, these numbers are only projections. There is, theoretically, no limit on the value of uncapped credits that businesses can take. The IRA doesn’t impose a cap on the PTC and ITC, so the sky’s the limit.

Initial projections indicated that the two credits alone will comprise more than $125 billion of investments. Multiple recent reports blow that figure out of the water. According to Goldman Sachs modeling, the IRA could drive three times the climate investments initially projected, with an additional $82 billion in clean energy credits. The Congressional Joint Committee on Taxation, which issued the authoritative initial IRA cost estimates, produced even higher revised credit projections—their April 2023 figures indicate the IRA’s clean energy tax credits will drive nearly $570 billion of new federal investments. According to the Wall Street Journal’s coverage, “companies are rushing to cash in on tax credits that aren’t capped.” These results demonstrate the private sector’s voracious appetite for the PTC and ITC subsidies, and indicate that the credits could have a far greater impact than first predicted.

The Bottom Line

The IRA is overflowing with ambitious climate investments that stand to reshape the American economy: ITC and PTC stand out among them, driving domestic investment in frontline communities.

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