How Renewable Energy Developers Can Maximize ITC Value in Deal-Making
On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act of 2022 (the “Act”). Among other things, the Act has notable consequences for the renewable energy industry, including restoring the production tax credit (“PTC”) and the investment tax credit (“ITC”), the former of which was established under the Energy Policy Act of 1992, and the latter of which was established under the Energy Policy Act of 2005. Although each of the PTC and ITC have been extended through various forms of legislation since they were established, each were set to gradually phase down in coming years. Fortunately, the Act changed that and took a much-needed step in the right direction toward building a more sustainable and greener energy generation infrastructure in the United States.
The purpose of this article is to take a closer examination of the ITC, while providing some practical considerations for renewable energy development stakeholders when contracting for and sharing in the potential economic benefits of the ITC and various incremental credits; or for purposes of this article, “adders,”  that may be applicable to renewable energy projects (“Project” or “Projects”).
General Overview of the PTC and ITC
The PTC is a 10-year inflation-adjusted U.S. federal income tax credit for each kilowatt hour of electricity generated by certain types of Projects.  The ITC, on the other hand, is a one-time, U.S. federal income tax credit available for certain types of eligible Projects.  One of the main differences between the two is that the PTC generates the credit for the first 10 years of the Project’s lifetime, whereas the value of the ITC is provided upfront once the Project is placed in service. Assuming eligibility, there are key considerations for a renewable energy developer to examine before determining whether to elect for the PTC or the ITC, such as upfront cost versus annual energy projection and performance. This determination is likely to be made on a project-by-project basis. While there are advantages and disadvantages to both the ITC and PTC, as noted above, this article takes a closer look at the ITC, particularly in the renewable energy development space.
Qualifications for the Base, Bonus, and Adders
At its foundation, the ITC is a one-time, U.S. federal income tax credit on eligible Projects which can fluctuate from 6 percent (the “Base”) to 30 percent (the “Bonus”). The Base is automatically available for eligible Projects, however for Projects with a maximum net output of greater than 1 megawatt , the Bonus is only available if the Project satisfies the Treasury Department’s labor requirements , such that all wages for construction, alteration, and repair for the first five years of the Project must meet “prevailing wage” requirements in the locality the Project is located , and a certain percentage of the construction labor hours for the Project must be performed by a qualified apprentice. 
While the Base and the Bonus are the beginning point for capturing the ITC, a Project may also be eligible for certain adders (or incremental increases to the Base or Bonus) that can make the benefits even more lucrative. Specifically, a Project may qualify for a 10 percent increase to the Base or the Bonus if it satisfies the “domestic content” requirement (the “Domestic Content Adder”), which, broadly speaking, requires a specified percentage of the steel, iron, or other manufactured products that comprise the Project be produced in the United States.  A Project may also qualify for an additional 10 percent increase to the Base or Bonus if it satisfies the “energy community” requirement (the “Energy Community Adder”), which relates to the land the Project is built on (such as a brownfield site or near a former coal mine or coal generation facility) and communities that focused on the different stages of fossil fuel energy generation (i.e., coal, oil, or natural gas) and had an unemployment rate at or above the national unemployment rate for the prior year.  Lastly, a Project may qualify for an incremental increase (ranging from 10 percent to 20 percent) if it satisfies the “low-income” requirement (the “LMI Adders”), which relate to Projects that are 5 megawatts or less that are located in low-income communities or on American Indian Land (10 percent) or are part of a qualified low-income residential building (20 percent). 
Sharing in the Financial Benefit
All told, as of the writing of this article, it is possible for a Project to qualify for a one-time, U.S. federal income tax credit of up to 70 percent when combining the Bonus with the various adders. Because of this, the ITC will impact the pricing and return on investment of a Project, and the financial assumptions made among the various stakeholders involved in the development of a Project who are responsible for placing the Project in service. Regardless of the stage of development, when negotiating a purchase and sale of a Project prior to its placement in service, due consideration must be given by both buyer and seller to the various requirements needed to satisfy the Bonus and each of the various adders.
An acceptable approach to capturing the ITC adders in a purchase agreement (and the potential economic benefit of the ITC adders) is incorporating a post-closing purchase price adjustment in the event the Project qualifies for one or more adders. For example, when utilizing this approach, it’s common to see either an exhibit or provision in the body of the purchase agreement that lists out each of the above-referenced adders, and the parties agree as to (i) how each adder, if achieved, affects the purchase price, and (ii) how the parties share in the economic benefit of such adder.
Practically speaking, however, a determination as to whether a Project meets the requirements of an adder (or relatedly, whether the buyer elects for a Project to even to try to meet such requirements), occurs after the purchase agreement is agreed upon and once the Project is placed into service. This means that both buyer and seller must communicate prior to negotiation of the purchase agreement, during negotiation of the purchase agreement, and after the purchase agreement is signed, particularly in respect of how the purchase price adjustments will be determined and calculated (and any assumptions relating thereto), and also whether the buyer actually meets, or is actively working to meet, the requirements of one or more adders. This requires transparency from both parties, and, to a certain extent, allowing the seller to peek behind the curtain when the buyer is working to satisfy the various adder requirements after closing of the purchase agreement.
From a seller’s perspective, this last point means the seller should negotiate contractual information and inspection rights concerning, among other things, the steps a buyer has taken to qualify for an adder, the stage of Project development (and timing until the Project is placed in service), and visibility on tax related filings required to obtain the economic benefit of an adder. On the other hand, a buyer is likely to have some concern about how much insight a seller is given with respect to understanding the buyer’s internal processes, and will want to mitigate broad, unreasonable, or unduly burdensome requests for unfettered information or inspection rights being given to a seller.
For example, a seller will want to review certain records, metrics, calculations, and qualification materials that a buyer or its third-party advisors are creating or using with regard to how the buyer is (or is not) satisfying any of the requirements of an adder so that both parties mutually agree as to whether an adjustment to the purchase price is warranted. The buyer, of course, may be inclined to limit the seller’s access to review such information, the amount of information the seller is actually allowed to review, and how quickly the buyer has to respond to the seller’s requests to review such information.
Relatedly, how does this information get used, and who determines whether a Project qualifies for an adder? As of the publish date of this article, interested stakeholders are patiently waiting for additional IRS guidance on qualifying and substantiating that a taxpayer is eligible to claim the Domestic Content Adder and/or the Energy Community Adder. Since renewable energy development can’t (and shouldn’t) be put on hold pending release of IRS guidance, buyers and sellers must take steps to create a fair process to determine if a purchase price adjustment is justified because the buyer reasonably believes the Project qualifies for the Domestic Content Adder and/or the Energy Community Adder. Until IRS guidance on the topic is released, an option that is available is for the parties to agree on a third-party professional (such as a tax attorney or CPA) who can issue an opinion (such as a “should-level” or other negotiated level opinion) that a Project will qualify for the Domestic Content Adder and/or the Energy Community Adder.
While currently verifying the likelihood of qualifying for the Domestic Content Adder and/or the Energy Community Adder would likely require the opinion of a third-party professional, the LMI Adders require an allocation from the IRS. This means that the parties could utilize an allocation by the IRS as a metric for verifying the likelihood of qualifying for one of the LMI Adders.
Furthermore, what if the Project does qualify for any adders? And how is the purchase price adjustment calculated and what portion of the economic benefit should go to the seller? To answer these questions, the parties must first consider the total qualifying costs associated with the Project. Then, they will need to determine what the gross financial benefit of a particular adder is (or the “upside”) and if there are any compliance-related costs associated with qualifying for the adder that should be deducted from the upside before the seller shares in it. On this latter point, the buyer is likely to want the seller to share in the costs the buyer incurs satisfying the requirements for a particular adder. Once these initial items are agreed upon, the parties will need to agree on the percentage, fixed dollar amount, or combination of both that the seller will be entitled to with respect to the upside of an adder.
Finally, the parties should also consider the timing as to (1) when the buyer decides (if at all) to pursue an adder, and (2) when payment should be made from buyer to seller reflecting an adjustment (if any) to the purchase price with respect to the percentage (or other amount) the parties agree to share in the upside of an adder.
To be clear, this section is not an exhaustive list of factors parties should consider when negotiating the ITC and how to share in the potential financial benefits of the various adders, but rather highlights some important considerations parties might want to take into account. It additionally highlights the complexity and breadth of issues that may arise when negotiating for the sale of a Project, and how having counsel that understands these issues will result in a more equitable purchase agreement.
Conclusion and Takeaways
Regardless of which side of the transaction you are on, there are clearly economic benefits to each adder that must be considered and negotiated among the parties in advance and then properly memorialized in the purchase agreement. In order to achieve this objective, the seller and buyer will need to consider and discuss a multitude of factors—including various Project assumptions and which adder or adders may be pursued—in order to fairly memorialize the potential financial benefit to the seller of a Project to the extent the Project later qualifies for one or more adders after it is placed into service. Ultimately, while this article provides a high-level overview of the ITC, it is critical to have sophisticated counsel by your side when buying or selling a Project that understands the nuances of both the PTC and ITC—no matter which party to the negotiation.
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 While not defined under the Act, “Adder” is a term of art used to describe the incremental portion(s) of the ITC “added” if a Project so qualifies.
 I.R.C. § 45.
 I.R.C. § 48.
 For Projects with a maximum net output of less than 1 megawatt the prevailing wage and apprenticeship requirements are deemed satisfied.
 On November 30, 2022, the IRS released guidance on the prevailing wage and apprenticeship requirements, which include, among other things, what constitutes a prevailing wage, the determination of qualified apprenticeships, accompanying examples, and record-keeping requirements. See IRS Notice 2022-61.
 IRS Notice 2022-61 lays out the parameters for determining the prevailing wages for a given geographic area, including directing taxpayers to utilize www.sam.gov for prevailing wage determinations so long as the Secretary of Labor has published a prevailing wage determination for the geographic area and type of construction.
 10% for projects beginning construction before 2023, 12.5% for projects beginning construction during 2023 and 15% for projects beginning construction thereafter. HR 5376, § 13101(f)(8)(A)(ii).
 HR 5376, § 13101(g)(9)(B)(ii).
 HR 5376, § 13101(g)(11)(B).
 HR 5376, § 13103(a).