January 9, 2025
In DSPTCH's Inflation Reduction Act Field Guide, we demystify the Inflation Reduction Act (IRA) and aim to:
· Synthesize a common understanding of IRA tax credit mechanics
· Review due diligence and documentation requirements
· Walkthrough a hypothetical project from an economics, risk, and transfer sale perspective
· Unpack Prevailing Wage and Apprenticeship (PWA) implications and risk mitigation strategies
· Discuss compliance solutions, trends, and how technology should evolve
Today, we see an irresponsible level of unmitigated risk-taking related to IRA projects—a concern that ultimately became the catalyst for releasing this guide publicly. In our view, the circumstances necessary for financial peril appear to be rapidly culminating, if not, already in place via existing projects.
Current tax credit transfer sale data suggests that buyers appreciate a discount for ITC driven tax credits (vs PTC sales); however, these prices do not yet fully encapsulate PWA compliance risks. Because projects that began construction prior to January 29th, 2023, were exempt from PWA requirements[1], trailing market prices for tax credit transfer sales (2023/2024) likely represent a price ceiling for most types of future tax credits sales—unless significant improvements are made to risk mitigation practices. Luckily, between standardized diligence, technology enhancements, buyer-education, and tapering political risk—there is a relatively straight forward path to price stabilization.
Between new and expanded tax credits, the ability to transfer tax credits (reducing friction costs vs historic tax equity partnerships), and stackable bonus tax credits (domestic content, low-income community, and energy community)—there has never been a more opportune time for clean energy investment.
Today, tax credit due diligence focuses primarily on mitigating three tranches of risk:
1. Eligibility—does the project meet the qualification criteria?
2. Recapture—will the site produce as expected under the ownership structure in the tax claim?
3. Excessive Claim—is the dollar value of the claim larger than it should be? (Carries a 20% penalty)
To capture the full potential of the IRA, taxpayers/developers must comply with a new series of obligations. Specifically, Congress made available a 5x tax credit multiplier for projects that fulfill PWA requirements.
However, we believe current diligence efforts to meet PWA tax credit compliance obligations are oversimplified and insufficient. As we will demonstrate, PWA obligations constitute 99.9%+ of the documentation and compliance requirements of a tax credit claim. Despite the outsize proportion of total compliance documentation, PWA diligence is often boiled down to a single insurance policy and indemnity, potentially lacking sufficient financial coverage.
To date, we believe EPCs carry a vast majority of the industry’s financial risks in the form of indemnities. Insurance companies carry financial risks as well, but with EPCs we have observed widespread contract carveouts, coverage limits, and missing PWA compliance obligations.
Due to these gaps, we believe insurance claims and resulting litigation will likely become more common, messier, and drawn out than expected. As the industry scales, the number of less-than-blue-chip EPCs constructing meaningful projects is expected to increase—compounding the possibility of a contagion effect in the tax credit transaction market and insurance market.
To illustrate these challenges, we review a hypothetical $100M solar project pursuing ITC (30%) + Energy Community (10%) + Domestic Content (10%) Bonus Credits, amounting to a $50M tax credit claim.
Throughout the guide, we provide commentary on industry trends. For instance, through DSPTCH’s proprietary site and permit database, we uncover how savvy developers model forward unemployment trends and shift development plans to capture point-in-time energy-community bonus credit eligibility. Further, we discuss the “pool of total eligible megawatt” process for low-income-community bonus credits and its unique application, recently published reference tables that dramatically simplify domestic content credits, considerations for when to pursue PTC vs ITC, and step-up valuations (can increase total tax credit basis by 15-20%).
For each step, we provide industry benchmarks for transaction costs, risk calculators, documentation and diligence guidance, and unpack implications/opportunities. To that end, we model tax credit transfer transaction costs as follows:
For our example $100M solar project, we estimate 19% transaction costs, for a net-to-seller value of $40.5M (prior to PWA costs) on a $50M total tax claim. Notably, 80% of the value of the entire tax credit claim rests on the assumption that the project will qualify for the PWA multiplier.
We demonstrate how PWA liabilities can snowball, adding two small, but common, errors to our model—failing to clarify Wage Determination/Job Classifications with the DOL and leveraging “Apprentices” from an EPC’s internal program (not a DOL registered apprenticeship program). Subsequently, we calculate backpay, penalties, apprentice cure provisions, and model the cost sensitivity of Intentional Disregard with PWA requirements.
Fortunately, the IRA provides a means for taxpayers to cure issues if their project is found not fully compliant. Based on the IRA’s penalty schedule, we model ~$17.3M in cure provisions, jumping to ~$82.5M with Intentional Disregard penalties. Reference calculations are available in our guide.
The key takeaway is that PWA liabilities are uncapped and calculated independently from the value of the tax credit claim. In fact, penalties would be the same whether the project had claimed $30M or $50M in tax credits.
Faced with value destructive fines, taxpayers might elect to not cure their PWA issues. In doing so, they open a Pandora’s box of litigation, insurance claims, and possible liquidation (reputational damage to the taxpayer and the perpetual Intentional Disregard label). For illustration purposes, we outline a series of potential downside risks, impacted counterparties, and track how losses could flow through to other project stakeholders.
Fundamental misunderstandings of IRA-related PWA risks are driven by the unusual genesis and implementation of the IRA. In short, when Congress passed the IRA via Budget Reconciliation, Prevailing Wage and Apprenticeship enforcement shifted from the DOL to the IRS, resulting in unprecedented reporting mechanisms, cure provision penalties, and novel compounding liabilities.
Specifically, the IRA places the entire onus of compliance on the taxpayer. The IRA provides no legal basis to transfer these liabilities to the EPC or subcontractors. Rather, the taxpayer must establish their own liability transfer mechanisms (and the extent of the transfer of liabilities) across the project through contractual language. This leaves a tremendous amount of contract risk, creates a potentially sprawling series of counterparties, and opens the door for future litigation.
In contrast, with traditional Federal/Public Works Prevailing Wage projects, each subcontractor is obliged to submit certified payroll weekly. Weekly certified payroll inherently caps compliance risk as errors are quickly determined and promptly rectified. For traditional projects, the enforcement authority sits with the agency that creates the Wage Determinations and respective labor laws. For the IRA, taxpayers must solicit feedback from the DOL, submit all respective documentation to the IRS, and effectively self-govern PWA compliance from start to finish.
As a part of our guide, we provide detailed and nuanced commentary around the implementation process for Prevailing Wage, considerations for Apprentices, and how Prevailing Wage and Apprentice compliance risks combine and compound to create even greater complexity (i.e. Wage Progression Schedules, DOL Reporting, Apprentice Recruiting, Apprentice Request Processes). As a part of DPSTCH’s PWA compliance checklist, we've tabulated total compliance documentation requirements (tax credit-specific risks vs PWA) and have found 99.9% of all required reporting documentation are related to PWA.
From our perspective, the market must adapt to the IRA’s new compliance process and understand the realities of enforcement and financial liability. In our guide, we identify two groups that are driving the market toward modern software, real-time tracking, and radically streamlined compliance:
· Megafirms and utilities that want greater oversight of compliance risks and more comprehensive coverage of documentation requirements
· Smaller developers/ISPs/Project Portfolios with thinner margins that need software to reduce audit and compliance costs (vs. wildly unpredictable audit fees)
The existing IRA compliance solutions market breaks down into a few groups. Today, companies often combine multiple contracts, providers, and solutions to patch together IRA, PWA, and downstream reporting to meet their respective compliance needs.
In response to these complicated, costly, tedious, rigid, and unreliable solutions, the DSPTCH™ team set out to create a single pane of glass for IRA compliance, assist project owners and subcontractors alike, and reimagine regulatory technology. The IRA’s seismic shift in PWA liability necessitates adaptable technology. Together with this guide, we hope to help companies acclimate and succeed in the changing landscape of compliance.
We believe opaque requirements only serve to increase existing advisors’ billable hours. Instead, we aim to breakdown and provide color on the respective compliance options across the market:
Leading DBRA Prevailing Wage reporting tools do not provide support for collecting documentation outside of PWA. IRA-specific providers do not typically provide PWA support other than as an audit service contract (i.e. no automated calculation or payment verification efforts)
We remain bullish on our collective ability to overcome compliance challenges and build the future of energy. Each section of this guide contains readily actionable compliance checklists, additional commentary, and a wide breadth of useful resources. Additionally, you can download DSPTCH to join the most-used app in clean energy.
With the most comprehensive site coverage in North America, DSPTCH’s compliance capabilities are rapidly expanding to include due diligence documentation for Canada’s ITC (mirroring the US’s IRA). Today, DSPTCH’s turnkey provincial overtime calculations, safety features, multi-currency support, and suite of field management tools provide modern compliance solutions to clients across Canada.
Godspeed—there’s a lot of work ahead!
If DSPTCH can support your projects, reach out to connect@dsptch.work
