The US investment tax credit (ITC) and production tax credit (PTC), enacted in 2006 and in 1992, respectively, are the main federal subsidies for large-scale solar and onshore wind. The full ITC rate is 30% of a project’s capital expenditure and $26/MWh for the PTC adjusted annually for inflation over the initial decade of operation.

There is also a 30% ITC for offshore wind that gives projects until 2025 to begin construction and 10 years to complete it. The bill changes that by allowing facilities the ability to transition to a technology-neutral regime if they are placed in service after 2026, effectively extending the tax credit.

To qualify for either the ITC or PTC, the bill sets a new requirement that project sponsors’ contractors and subcontractors pay labourers and mechanics locally prevailing wages and benefits on par with those paid on federally funded or assisted construction projects, and any alterations and repairs.

In Illinois, Michigan, northeastern and west coast states where Democrats are in control politically, prevailing wages and benefits are often those paid to workers in unions, a constituency Biden is courting with an eye on a potential 2024 bid for a second term.

Project cost driver?

This requirement, however, could drive up project costs by limiting sponsors’ flexibility to contract cheaper non-union labour, making clean energy less cost-competitive. The cost differential is less of an issue elsewhere in the country where most workers don’t belong to unions.

ITC and PTC amounts would begin to step down once US annual greenhouse gas emissions from electricity generation decline by at least 75% from 2022 levels, but not earlier than 2032.

The bill gives projects the opportunity to qualify for ITC value as high as 50% and a maximum PTC value of $31.30/MWh if projects meet certain domestic content and siting requirements.

Domestic content signifies all iron, manufactured products, and steel must be US produced. The bill considers manufactured products as US if a minimum 40% of those items used in a project are domestically sourced. That percentage increases after 2024 and tops at 55% for projects with construction start dates of 2027 or later.

For offshore wind, the hottest renewable energy segment, the percentage begins at 20%, increasing to 55% for projects that begin construction in 2028 or later. All clean energy projects can obtain waivers if US-made products raise the total cost by more than 25% or if manufactured goods are of insufficient quality or quantity.

If US content criteria are met, a project would qualify for an extra 10% ITC or a 10% increase in the PTC amount. Similar additional amounts will apply to those on brownfield sites that once had “significant employment” tied to extraction, processing, transport, or storage of fossil fuels.

The bill also gives solar projects the option to claim the PTC in lieu of the ITC if placed in service this year or later. This is significant because PTCs claimed over 10 years are worth a lot more than the ITC claimed in year one of a project. Over time, as capital costs fall and capacity factors increase, solar will be better off with PTCs, according to many developers.

The provision for so-called "direct pay" alternative to the tax credits is limited. The option to elect cash in the form of a tax refund in lieu of tax credits is limited to state and local governments, a federal power company, and Indian tribes.

In another big industry win after years of lobbying, standalone storage systems will benefit from a 30% ITC, placing the fast growing sector on a level playing field with solar and wind. Until now, energy storage only qualified for the ITC when integrated with ITC-eligible solar resources under a narrow set of conditions.

Power lines and permits: where the US' big breakthrough climate bill falls short