By Duncan Cooper
Duncan Cooper is the Procurement Market Strategy Director at Enel North America. He helps guide the company’s North American procurement strategy by providing analysis of market conditions and evaluating the effects of new policies and regulations. He has over 13 years’ experience in the renewable energy industry.
The U.S. Department of the Treasury has recently released a notice of intent (NOI) to propose regulations for the Inflation Reduction Act’s domestic content bonus tax credit, which is expected to have significant implications for the energy industry. The bonus tax credit aims to incentivize U.S. manufacturing and strengthen America's clean energy supply chains by rewarding project developers who use a specified amount of domestic content in their clean energy projects.
In this blog post, we will delve into the essential aspects of this bonus tax credit and examine its impact on renewable energy developers and clean technology manufacturers.
What is the domestic content bonus tax credit?
The domestic content bonus tax credit was created by the Inflation Reduction Act, which directs nearly $400 billion in federal incentives to the development of new clean energy and energy technology projects such as solar photovoltaic (PV), wind, geothermal and battery storage.
Most of the funding in the Inflation Reduction Act is offered through two types of tax credits: the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). The ITC reduces upfront investment costs for a project like a solar PV system or a battery storage project that is installed during the tax year. In contrast, the PTC generates tax credits per kilowatt-hour of energy produced for the first 10 years of the project’s operation.
Beyond these incentives, the Inflation Reduction Act offers bonus tax credits for projects that meet additional requirements. The domestic content bonus tax credit is one of these bonus credits. Renewable energy projects and energy storage projects that meet certain domestic content requirements allow project owners to qualify for a “bonus credit amount” worth up to an additional 10% of qualifying costs for the ITC or an additional 10% for the PTC (i.e., 110% of the “full” rate), which can translate into millions of dollars in additional tax credits.
How does the domestic content bonus tax credit work?
Projects eligible for both the ITC and PTC are entitled to a base tax credit rate. However, to qualify for the “full” base tax credit rate (30% ITC or a $0.0275/kWh PTC (2023 value)), they must satisfy prevailing wage and apprenticeship criteria. Projects may then earn bonus tax credits by fulfilling additional eligibility requirements.
The domestic content bonus tax credit requirements are applied in conjunction with satisfying the original ITC/PTC requirements. If the project meets the ITC/PTC wage/apprenticeship requirements, and then also satisfies the domestic content requirements, the project is eligible for the full 10% bonus tax credit. However, if the ITC/PTC wage/apprenticeship requirements are not met, the value of the domestic content bonus tax credit diminishes significantly (dropping from 10% to around 2% in the case of ITC).
What’s in the Treasury’s guidance on domestic content?
The U.S. Department of the Treasury released a NOI to propose regulations. The guidance includes the initial rules for wind, solar, and energy storage projects. It is the first step in the rulemaking process and is intended to provide near-term certainty for the industry. To this end, the notice includes a safe harbor provision, which allows renewable energy projects and energy storage projects to claim the domestic content bonus tax credit if they started construction before the day that is 90 days after the proposed regulations are published in the Federal Register.
How are the domestic content requirements broken down?
The definition of what constitutes domestic content is complicated, but below we list the two most important criteria. To qualify for the domestic content bonus tax credit, a solar, onshore wind, or storage project must meet these two criteria:
1. The project must use 100% domestic steel and iron for construction materials that are structural in nature.
This first requirement means that for structural iron and steel, each item must be 100% manufactured in the U.S., including all processes down to the smelting of the crude steel. For example, utility-scale racking, ground screws and foundation rebar will have to comply with this requirement. However, nuts, bolts, and screws – as they are not structural in function – do not need to comply.
2. Projects that begin construction before 2025 must use at least 40% domestically manufactured products.
The second requirement is even more complex. For projects to comply with this requirement, at least 40% the manufactured products in a project must use domestic content. There are two types of products that are evaluated: U.S. manufactured products and non-U.S. manufactured products.
In the notice, manufactured products are further broken down using a list of product components to be considered. Only these products and product components are evaluated when calculating a project’s domestic content percentage. It’s important to note that the 40% domestic content requirement increases 5 percentage points annually for projects that begin in 2025, 2026, and 2027, maxing out at 55%.