Clarification of IRA benefits will ‘unlock billions’ of investment for renewables

At least 40% of components in an onshore wind farm must have been produced in the US if it is to meet the domestic content requirement of tax credits in the Inflation Reduction Act (IRA).

The US Treasury Department and Internal Revenue Service have issued guidance on the IRA (Image credit: Richard Sharrocks/Getty Images)

The rule for ten-year tax credits under the legislation, made law last year, applies to projects that start construction before 2026, according to guidance released on Friday by the Treasury Department and Internal Revenue Service. 

Offshore rules

For the country’s less mature offshore wind sector the percentage produced of wind components produced in the US must be 20% of the cost, if the project starts construction before 2027. 

Wind projects and other clean energy projects can get as much as a 10% bonus under the production tax credit (PTC) and investment tax credit (ITC) if they use domestic content.

Many wind projects have been on hold as the industry, described by the American Clean Power Association (ACP) as being mired in a “policy vacuum”, has awaited guidance. However, ACP said clean energy investments had, overall, been high since the IRA was signed into law in August.

Definition of domestic

According to the guidance, “a manufactured product is produced in the United States if the manufacturing processes for the product take place in the United States and all the components of the product are manufactured in the United States".

Specifically, “manufactured products which are components of a qualified facility upon completion of construction shall be deemed to have been produced in the United States if not less than the adjusted percentage . . . of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States”.

Rising threshold for onshore

For onshore wind farms, the adjusted percentage increases to 55% for qualified facilities that start construction in or after 2026, and rises to 55% for an offshore wind facility that starts build in or after 2027.

Components covered by the guidance are any article, material or supply, whether manufactured or unmanufactured, that is directly incorporated into an applicable project, according to the guidance. 

To qualify as domestic, iron or steel products must be "melted and poured" in the US. Iron and steel subject to the guidance must be structural. A subcomponent such as a bolt or screw is not subject to the domestic content guidance.

“Components include any articles, materials or supplies that are incorporated into the manufactured product,” the guidance continued. 

‘Boost for US manufacturing’

“The domestic content bonus under the Inflation Reduction Act will boost American manufacturing, including in iron and steel, so America’s workers and companies continue to benefit from President Biden’s Investing in America agenda,” said treasury secretary Janet Yellen. “These tax credits are key to driving investment and ensuring all Americans share in the growth of the clean energy economy,” she said.  

The certainty of the guidance was welcomed as a step forward by the industry.

“The IRA’s domestic content incentive represents a monumental opportunity to continue growing our domestic clean energy supply chain,” added JC Sandberg, ACP’s chief advocacy officer. 

“This guidance will help provide clarity around its eligibility requirements, unlocking billions of dollars of investment in American clean energy manufacturing and its workforce,” he said. “While the industry continues assessing the impact of today’s action, this is an important step in helping to secure our energy independence and advance our shared goals of deploying more clean energy, strengthening the domestic manufacturing base, and providing jobs for American workers.” 

Gregory Wetstone, president and CEO of the American Council on Renewable Energy (Acore), said: “Having clear rules of the road is imperative for businesses seeking to invest in America’s clean energy future, and the domestic content guidance…provides helpful clarity. We are encouraged by Treasury’s solutions to meet the manufactured product test…and we look forward to projects moving forward under this guidance immediately.” 

Wetstone added: “Acore will continue to work with the Treasury Department as the proposal is finalised, and we eagerly await the release of the remaining implementation guidance on other important provisions for the renewable sector, including transferability, direct pay, and the clean hydrogen production tax credit.”