Following the the 2024 US general election, with Donald Trump’s victory, the future of the Inflation Reduction Act (IRA) enters a pivotal phase. Enacted in 2022, the IRA has been a cornerstone of the United States’ renewable energy strategy, offering tax incentives to drive investments in technologies like wind, solar, and battery storage. While the legislation has catalyzed significant progress in clean energy, its trajectory is poised to change under the new administration. Trump’s election signals potential shifts in the policy landscape, raising questions about the IRA’s longevity and effectiveness. This article examines the successes and challenges of the IRA to date and explores how the new administration might reshape its implementation, with significant implications for tax executives and industry stakeholders navigating a shifting renewable energy landscape.
Successes of the IRA
Since its enactment in August 2022, the IRA has significantly impacted the renewable energy landscape in the United States. For tax executives and financial professionals involved in energy projects, the IRA has introduced a range of tax incentives that have spurred investment, innovation, and economic growth in the renewable energy sector. Below, we explore some of its most noteworthy successes.
Democratizing the Tax Credit Transfer Market
One of the IRA’s most significant achievements has been the establishment and rapid growth of the tax credit transfer market. Before the IRA, the ability to monetize tax credits was mostly limited to sophisticated tax equity investors, constraining access to a small pool of well-capitalized entities. The IRA has democratized this process by making tax credits transferable, opening up opportunities for a broader range of investors.
This change has led to a thriving market for tax credit transfers, with over $5 billion in tax credit transactions completed across dozens of deals in 2023. For context, the estimated size of the traditional tax equity market, prior to transferability, was approximately $20 billion in 2023. The transferability of tax credits has provided much-needed liquidity and flexibility, allowing a more diverse set of players to participate in renewable energy projects without the need for complex tax equity partnerships. Pricing in this market has varied, ranging from eighty-three to ninety-seven cents on the dollar, depending on various factors including the quality of indemnities backing the transactions and the availability of tax insurance.
Expansion of Renewable Energy Tax Credits
The IRA has significantly expanded the scope and value of renewable energy tax credits, making them more accessible to a wider array of technologies beyond traditional wind and solar. This expansion has been a key driver of investment in emerging technologies, such as battery storage, clean hydrogen, and carbon capture, which are critical to broader decarbonization efforts.
For tax executives, the IRA has improved the pricing and terms available in the renewable energy tax credit market, provided new options for participating in the market, and allowed diversifying portfolios through investment in newly qualifying technologies.
Energy Community and Domestic Content Adders
Another success of the IRA has been its introduction of additional incentives for projects located in energy communities and those using domestically manufactured components. The ten percent tax credit adder for projects in energy communities—areas historically reliant on fossil fuels—has had a particularly strong impact. This provision has incentivized the development of renewable energy projects in economically disadvantaged regions, driving job creation and economic revitalization in areas affected by the decline of traditional energy industries.
Similarly, the domestic content adder, which rewards projects that use US-manufactured components, has successfully stimulated investment in domestic manufacturing. Although the full impact is still unfolding due to recently issued guidance, the incentive has already spurred significant investments in the production of solar modules, batteries, and other clean energy components within the United States. For tax professionals, this adder has created opportunities to acquire low-risk tax credits while supporting domestic manufacturing and job creation.
Broader Access to Tax Credit Markets
The IRA has also made significant strides in democratizing access to tax equity investments. Previously, tax equity was a niche market dominated by a few large financial institutions and corporations with the tax appetite and sophistication to use these credits. The IRA’s provision allowing for the transferability and direct pay of tax credits has broadened the market, making it more accessible to new investors and leading to billions invested by new first-time renewable energy tax credit investors.
Stability for Long-Term Planning
The IRA has provided much-needed stability for long-term tax planning in renewable energy. The extension of key tax credits and the issuance of clear regulatory guidance by the Treasury have given companies the confidence to invest in large-scale, multiyear projects. This stability has allowed corporations to plan and execute their long-term renewable energy tax credit investment strategies with confidence.
Failures of the Inflation Reduction Act
Although the Inflation Reduction Act has significantly advanced the renewable energy tax credit market, it has also led to challenges and revealed shortcomings that have hindered its effectiveness. These failures have posed notable implications for tax executives, particularly in tax planning, compliance, and investment strategy. Below, we explore some of the key failures of the IRA and their impact on the renewable energy landscape.
Limited Uptake of the Direct Pay Option
The direct pay option, one of the most anticipated features of the IRA, has not seen the widespread adoption that many expected. This provision was designed to allow tax-exempt entities, such as nonprofits, government agencies, and certain renewable energy developers, to receive cash payments equivalent to the value of the tax credits they could not otherwise use. However, uptake has been disappointingly low, primarily due to concerns about the Internal Revenue Service’s ability to process payments efficiently and the potential for reductions, or “haircuts,” in the amounts paid out.
The limited success of the direct pay option has added complexity to tax planning and project financing for tax-exempt entities. Instead of providing a straightforward mechanism for monetizing tax credits, the uncertainties surrounding the processing and reliability of direct pay have forced many entities to explore more complicated and costly financial structures, such as lease arrangements or third-party ownership models. This has prevented the direct pay option from fulfilling its intended role of simplifying access to renewable energy incentives for tax-exempt organizations.
Burdensome Compliance With Labor Requirements
The IRA introduced prevailing wage and apprenticeship requirements as conditions for receiving the full value of certain tax credits, including the production tax credit (PTC) and the investment tax credit (ITC). Although these requirements were intended to promote fair labor practices and support workforce development, they have instead become a significant burden for many renewable energy project developers, with questionable benefits.
Compliance has proven challenging and costly. The prevailing wage rules necessitate meticulous recordkeeping and wage monitoring, which can be particularly onerous given wage rate variations across regions and labor classifications. A minor error in compliance can result in severe penalties, including a reduction in the tax credit amount of up to eighty percent. This risk has led many developers to invest heavily in compliance consulting and auditing services, further increasing project costs.
The apprenticeship requirements have similarly fallen short of their goals. In many regions, particularly those without a strong presence of renewable energy industries, there are simply not enough qualified apprentices available to meet the requirements. As a result, many projects have had to apply for exemptions, reducing the intended impact of these provisions. Moreover, the administrative burden of proving compliance has discouraged some developers from pursuing projects that would otherwise benefit from IRA tax credits.
For tax executives, these compliance challenges introduce significant risks and complexities. Ensuring adherence to the prevailing wage and apprenticeship rules requires a deep understanding of labor laws, diligent oversight, and the implementation of robust compliance systems. The potential penalties for noncompliance add another layer of risk, making it essential for tax professionals to work with knowledgeable advisors to navigate these requirements.
Regulatory Ambiguities and Unresolved Issues
Regulatory vagueness and unanswered questions have hobbled the rollout of the IRA and created uncertainty for investors and project developers. Despite Treasury and IRS guidance, significant gaps remain in the regulatory framework, complicating tax planning and investment decisions.
One major area of concern is the lack of clarity around the eligibility of certain projects and components for the ITC. For example, it remains unclear to what extent solar parking canopies and associated infrastructure qualify for the ITC, leaving tax professionals in a difficult position when advising clients on how to structure their investments.
Another unresolved issue is the treatment of interconnection costs for renewable energy projects. Although the IRA expanded the ITC to cover some of these costs, the criteria for eligibility are poorly defined, leading to inconsistent interpretations and uncertainty in financial modeling.
Furthermore, there is ambiguity regarding the IRS’ audit practices for tax credit transactions. It is unclear whether audits will focus on the buyers or the sellers of tax credits, creating additional risk for all parties involved. Additionally, questions remain about whether transaction costs associated with tax credit transfers are deductible, leaving tax professionals to navigate potential tax liabilities without clear guidance.
These regulatory ambiguities have introduced significant uncertainty into certain tax credit transactions. Tax executives are encouraged to work with expert advisors who can help navigate these ambiguities and appropriately structure risk mitigants such as tax insurance policies.
Inequitable Access to Tax Credit Markets
Although the IRA aimed to democratize access to tax equity investments, significant disparities remain between well-capitalized developers and their smaller counterparts. The introduction of tax credit transferability was intended to level the playing field, but the reality has been more complex.
Smaller developers often face higher transaction costs when accessing the tax credit transfer market, including fixed minimum fees for tax credit insurance, brokerage services, legal advice, and appraisals. These costs can erode the financial benefits of the tax credits, leaving smaller developers with less favorable returns compared to larger, more well-capitalized players who can negotiate better terms and minimize costs.
The Post-Election Future of the IRA
With the results of the 2024 election, the IRA stands at a transformative crossroads. The Trump administration’s policy priorities could bring sweeping changes to how renewable energy tax credits and incentives are implemented—or dismantled. As the extension of the Tax Cuts and Jobs Act (TCJA) tax cuts looms, the IRA is likely to serve as a bargaining tool in negotiations over fiscal policy. Below, we explore the potential outcomes for renewable energy under the new administration.
Selective Reduction of Tax Credits
A partial repeal or restructuring of the IRA could involve a targeted reduction or elimination of specific tax credits, especially those perceived as less critical or more controversial. Credits that support emerging technologies, such as clean hydrogen production and electric vehicles (EVs), might be scaled back if they are seen as less politically viable or if they face strong opposition from traditional energy sectors.
The future Republican-led government could focus on reducing the scope of these credits to align more closely with fiscal austerity goals. Republicans might advocate for maintaining tax credits that align with their energy priorities—like carbon capture and storage (CCS) and biomass—while cutting back on those they view as less essential or too costly. This selective reduction could also be seen as a way to offset the financial impact of extending the TCJA tax cuts, making such cuts more palatable to budget-conscious lawmakers.
Targeted Cuts to Federal Funding
In addition to reducing specific tax credits, a partial repeal of the IRA could involve targeted cuts to federal funding for renewable energy initiatives. Key federal agencies, such as the Department of Energy and the Environmental Protection Agency, could see budget reductions as part of broader efforts to control government spending.
These funding cuts could significantly slow the pace of investment in emerging technologies, particularly those that require substantial initial capital and long-term development. Sectors such as offshore wind, nuclear power, and clean fuels might be particularly affected, since they often rely on federal support to secure necessary permits, attract private financing, and drive innovation. Additionally, agencies tasked with allocating bonus credits for adders such as the low-income adder may be defunded, effectively limiting or eliminating those programs.
Regulatory Changes
Another possible change could be the changes to specific regulations that currently support the deployment of renewable energy technologies. Regulatory rollbacks might include loosening emissions standards on traditional power plants, tightening requirements for renewable energy project eligibility under tax credits, and increasing the stringency of labor and domestic content requirements associated with renewable energy incentives.
Such changes could be justified by a desire to promote US jobs and manufacturing and promote economic growth, particularly in regions that depend heavily on traditional energy industries. However, these changes could also introduce uncertainty for renewable energy developers and investors, complicating long-term planning and making it more difficult to predict the financial outcomes of new projects.
Conclusion
The future of the IRA and renewable energy incentives is at a pivotal moment. The election’s outcome could bring about significant changes, either expanding or reducing key tax credits and regulations that have been crucial in shaping the renewable energy sector. These potential shifts carry substantial implications for tax executives and industry stakeholders, who must be prepared to adapt to a rapidly changing landscape.
Navigating these changes will require foresight, adaptability, and a deep understanding of evolving tax policies. Corporations investing in renewable energy tax credits must stay informed and ready to adjust their strategies, ensuring that they capitalize on new opportunities while effectively managing risks.
By working with knowledgeable advisors, corporations can not only safeguard their interests but also thrive in an ever-evolving tax credit environment. As the landscape continues to shift, staying ahead of the curve with expert guidance will be essential for success.
Bryen Alperin is the managing director of Foss & Company.
