Understanding the Inflation Reduction Act | PowerSecure

Eric Dupont, chief development officer at PowerSecure breaks down the core elements of the IRA, its real-world applications, and why now is the time to realize the best return on investment (ROI) on distributed energy assets.

The energy industry is buzzing with anticipation about how the Inflation Reduction Act (IRA) will enable energy infrastructure investment growth. As an industry-leading microgrid solutions provider, we know people have questions about how they can leverage the IRA in their energy infrastructure and resilience investments.

In this article, we break down the IRA’s core elements, its real-world applications, and why now is the time to realize the best return on investment (ROI) on distributed energy assets.

How Will the IRA Impact the Energy Sector?

The IRA is a massive piece of legislation with economywide elements and implications. So, what are the specific elements that will impact the energy sector? In short, the IRA will impact the energy sector in the following two ways:

• The IRA provides numerous federal tax credits and incentives to produce and purchase an expanded range of energy technologies at lower costs over the next 10 years.
• The IRA also significantly increases market opportunities by expanding financing and monetization options for investors and non-tax-paying entities, including states and tribal entities, as well as municipal, university, school, and hospital markets.

What Are the Energy Investment Implications of the IRA?

If you’re interested in investing in the energy sector, the IRA opens up new paths for investors to save money and cut costs. Below, you can find an overview of the three main energy implications of the IRA:

• New microgrid cost-cutting tax credits: First-ever tax credits for microgrid components could cut costs by approximately 5%-50%. Since microgrids can have high investment costs, and many organizations look for microgrid money-saving opportunities before investing, these tax credits could inspire more investments in microgrids across the country.
• Expanded Investment Tax Credit (ITC): The IRA expands the ITC by 30% for microgrid controllers, stand-alone energy storage, biogas property, dynamic gas, and linear generators that begin construction before Jan. 1, 2025.
• Greater opportunities to cut costs with bonus credits: Organizations looking for the most microgrid savings can do so by qualifying for certain bonus credits. For example, the upper range of cost reductions is contingent upon projects qualifying for bonus credits associated with domestic manufacturing and/or siting criteria.

What Incentives for Clean Energy Production and Technology Are Available Through 2032?

Alongside the expansion of the ITC and new tax credits for microgrid components, the IRA includes several incentives for clean energy production and technologies through 2032. These incentives include:

• Extension of renewable electricity production tax credit (PTC) and ITC through 2024.
• Establishes new (tech-neutral) clean energy PTC and ITC starting in 2025 through 2032.
• Primary IRA energy-related provisions are estimated at approximately $260 billion over a 10-year period.

What Are Some of the Most Attractive Financial Opportunities for Microgrids Provided by the IRA?

When you’re looking for ways to see greater microgrid money savings during or after the installation of a microgrid powered by green distributed energy resources, the IRA offers a few key financial opportunities. Some of the easier and more attractive finance opportunities to take advantage of include:

• Direct pay to states, localities, tribes, rural cooperatives, and nonprofits for qualifying PTC and ITC projects. This direct-pay model allows organizations to make an upfront cash payment to a relevant party instead of claiming certain energy tax credits.
• Tax credit transferability, which allows investors to sell tax credits to third parties.
• Targeted grant/loan programs for states and electric utilities to accelerate the transition to clean electricity.

Microgrid Controllers: A Limited Window for Maximum Microgrid Money Savings on a Critical Component

Those not versed in tax law may still struggle to see how the IRA applies to their microgrid energy project. If you’re looking for a real-life example of how the IRA can provide microgrid savings, you can start with one of the most important elements of a microgrid system—the controller.

A microgrid controller is the brain of your system. As the name implies, it’s the component that controls the flow of energy from diversified energy supply sources in your system and balances the delivery and consumption of electric power on a real-time basis.

The controller networks with all metering systems and protective devices, centralizing performance data and alert notifications across the microgrid. Since the controller provides real-time performance analytics and management capability, it allows you to optimize system performance, realize carbon footprint reduction, and achieve economic savings goals.

Incentives for the controller apply to all types of microgrid projects that begin construction before 2025, including those with fossil-based generation. For example, developers who begin construction of a microgrid that is between 4 kW and 20 MW before 2025 can get a 6% investment tax credit applied to the initial, upfront investment associated with the microgrid controller.

Some organizations can also receive a bonus rate of 30% if prevailing wage and apprenticeship requirements are met. Projects under 1 MW (alternating current) automatically qualify for the bonus rate. With pathways to secure additional tax credits through siting and component considerations, some projects can realize up to 50% in investment tax credits for their microgrid controllers.

What Implications Does the IRA Have for All Microgrid Components?

One of the most lauded features of the IRA is its “all of the above” approach, creating incentives and support for all manner of new energy sources. It supports investments in the production and procurement of biofuels, hydrogen, wind, solar, and storage assets. This feature aligns well with flexible, power source-agnostic technologies made possible with microgrid+ solutions such as those offered by PowerSecure.

The graphic below illustrates how virtually all microgrid elements are impacted through incentives under the IRA. These include a suite of distributed energy resources, controllers, integrated equipment, and transmission and distribution assets. Although the relevant incentives touch each component through different phases of its life cycle, the overall impact is reduced cost for building out the microgrid system, better ROI for the owner, greater microgrid money savings, and more business opportunities for developers.

Key Takeaway: A Decade of Opportunity and No Time to Waste

Through its range of incentives and financing reforms for domestic manufacturing, procurement, and deployment of clean energy technology, the Inflation Reduction Act will reduce costs and enable tremendous growth in microgrid development over the next decade. But with a limited window to realize maximum savings, the time to act is now.

Take Advantage of the IRA and Opportunities for Microgrid Savings With PowerSecure

As the nation’s leading distributed energy innovation company, PowerSecure can design, install, monitor, and maintain a microgrid for your organization. Due to our expertise in the energy sector, we can help you access greater microgrid savings through the IRA and create a microgrid that runs on clean and resilient energy.

Learn more about our distributed energy solutions today. If you have any questions or want to partner with us for your microgrid needs, please contact us.

Eric Dupont is chief development officer at PowerSecure.

A version of this article was originally published by Microgrid Knowledge in December of 2022, and has been updated in March 2024.