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The Inflation Reduction Act Contains a Crucial Upgrade for the Investment Tax Credit

October 14, 2022 Patrick Corr

The signing of the Inflation Reduction Act (IRA) in August 2022 was historic for the renewable energy industry, and we have outlined some of the highlights in our previous blog post. There are many components to the bill that will have a massive impact on the economics of renewable energy projects, but one of the strongest is the boost to the Investment Tax Credit (ITC) for renewable energy projects, which increased from 26% to 30% for the next 10 years. But the ITC wasn’t just extended, it was expanded as well, adding the ability to capture the 30% ITC for interconnection costs for projects under 5 MWac.

According to the National Law Review,

“Historically, the ITC was limited solely to costs (or, in a lease passthrough structure, value) associated with energy-producing equipment. Thus, interconnection costs have traditionally been ineligible for the ITC. However, the IRA expanded the definition of “energy property” eligible for the ITC, to include “amounts paid or incurred by the taxpayer for qualified interconnection property…”

This is somewhat of an unsung hero within the Inflation Reduction Act but could be a real game changer for many solar and wind projects. Interconnection is often a very significant percentage of a project’s overall costs.

Although this will not speed along any of the interconnection cluster studies currently delaying project timelines, it could have a real impact on the economics of projects that are running up against significant utility upgrade costs. It could be the difference between a project being viable or not and will most certainly add to the overall number of projects interconnected, generating clean energy, and helping achieve the Biden Administration goal of 100% clean energy by 2035.