IRA Directs Billions Toward Deploying Clean Energy Microgrids

On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act (IRA) of 2022, designed to help Americans that are struggling with rising costs. However, the law also includes nearly $370 billion in incentives for clean energy and climate-related programs and is considered one of the most significant spending packages in history for climate change mitigation and adaptation. This blog is part of a series whereby Guidehouse Insights’ subject matter experts cut through the 755 pages of legislation to identify the IRA’s most significant elements and synthesize what they really mean for the future of clean energy technologies.

The IRA includes billions of dollars to expand the use of microgrids and to support the manufacture of microgrid components, through energy investment tax credits (EITC) and production credits. For example, clean energy projects between 4 MW-20 MW and operational between 2021 and 2025 are eligible for a dollar-for-dollar credit up to 30% of the cost of the project. Similar EITCs have existed in some form in the US tax code since the 1980s, usually as a subsidy for investments in solar or wind generation. For the first time, however, the IRA EITC addresses microgrids. Under the IRA, the controllers microgrids rely upon to balance generation and load within the grid, as well as other microgrid components, are also eligible for tax credits. 

Advanced Manufacturing Production Credit

Manufacturers of turnkey microgrid packages might now be eligible for additional subsidies for any battery modules or inverters they manufacture for microgrids employing renewable generation assets. The Advanced Manufacturing Production Credit provides up to $10.00 per kilowatt of installed battery module capacity and up to $0.11 per kilowatt of nameplate capacity for qualified inverters.
These subsidies provide financial incentives for component manufacturers to bring new battery and inverter technologies to market and to scale up designs specifically intended to improve microgrid operations. The additional tax credits should reduce the costs of deploying microgrids that generate power from renewable resources.

Production Tax Credit

Depending on the generation assets incorporated, the IRA extends additional subsidies for microgrids under the Production Tax Credit (PTC), which provides up to $0.056 per kilowatt-hour for electricity generated from certain renewable resources. Thus, the IRA provides two separate funding streams to offset the cost of microgrids that deploy solar, wind, or other qualifying renewable resources: one stream under the EITC subsidizing the capital costs of microgrid components, the other under the PTC reducing operating costs by subsidizing every unit of power these microgrids generate and distribute.

Alternative Fuel Refueling Property Credit

Microgrids that include bidirectional EV charging capabilities may be eligible for additional support under the IRA’s Alternative Fuel Refueling Property Credit. The credit covers the first $100,000 of capital expenses for qualifying projects, and 20% of all capital expenses thereafter, with no cap on the total credit available.

In addition to incentives specifically reserved for EV charging, these tax credits help underwrite the capital costs of deploying new charging stations that are interconnected to distributed and renewable generation sources and configured to permit connected EVs to operate as mobile batteries contributing flexible supply, which helps stabilize the grid. 

ITC Bonus for Microgrids Serving Marginalized Communities

A key element of the IRA focuses on integrating disadvantaged communities. Microgrids located on Indigenous American land and those located within or serving low income communities may be eligible under the ITC for bonus credit anywhere between 10% and 50% of capital costs, depending on how many of the listed factors the project satisfies.

These bonus incentives ensure that the infrastructure investments spurred by the IRA are not concentrated among the most affluent communities but benefit those who are (and have been) most at risk of the deleterious impacts of burning fossil fuels.

Ultimately, the IRA represents a potential windfall for companies offering turnkey microgrid solutions and those manufacturing innovative microgrid components. By leveraging a more diversified power infrastructure, strategically locating new projects, and fostering partnerships to serve low income communities, microgrid market players can capitalize on the IRA’s multiple, overlapping tax credits to subsidize more than half of the capital costs of new projects, reducing costs and encouraging more widespread deployment and interconnection of distributed and renewable energy resources.

To learn more about how the IRA applies to large energy providers, reference the Guidehouse Guide to the Inflation Reduction Act for Energy Providers. For more information on how Guidehouse Insights can help you navigate the impacts of the IRA, please reach out to richelle.elberg@guidehouse.com.