Contributed by Eric Rubinstein, EVP and Chief Investment Officer at Leyline Renewable Capital, LLC
The landmark Inflation Reduction Act (IRA) extends and develops important renewable energy tax credits that will incentivize zero-emission projects over the next decade and beyond. In addition, analysts predict that the IRA will generate more than nine million new jobs in the next 10 years. As a result, we can expect growth in the clean energy, manufacturing, and transportation sectors to skyrocket, as well as other low-carbon sectors like efficient buildings, environmental justice, and natural infrastructure.
As the workforce develops and expands, new labor standards will emerge. Based on the key foundational principle that the industry’s workers should benefit from the clean economy that they build, the IRA incentivizes safer, healthier labor standards. The Biden administration recommends employers take a “high-road” focus to support employees’ on-the-job success and daily life needs. This includes providing higher wages, safe work spaces, continued training, and adequate benefits like paid leave and healthcare. In turn, these factors will attract and retain talented workers, driving productivity and innovation.
By financially incentivizing a pro-worker green economy, the IRA has set the industry up to maximize prosperity and while combating climate change. This article breaks down the labor requirements in the IRA and discusses the implications for key industry stakeholders.
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Prevailing wage and apprenticeships
The high-road concept plays out for new IRA tax incentives like the federal solar investment tax credit (ITC). The ITC was originally scheduled to expire next year; the IRA not only extended it for another decade, but it also expanded the ITC to include a full range of clean energy technologies. Receiving the full 30 percent tax credit, however, has a critical new caveat: Privately-financed projects with a capacity of 1 megawatt (MW) or larger will only qualify if they meet specific prevailing wage and apprenticeship requirements:
The IRA requires that all laborers and mechanics involved in construction, alteration, or repair of a clean energy project are paid the prevailing wage for their worker category. Prevailing wages are a combination of basic hourly wages and fringe benefits set by the U.S. Department of Labor (DOL) for different worker classifications. Qualified projects include but are not limited to facilities producing electricity from certain renewable resources, energy storage facilities, carbon capture initiatives, and energy efficient buildings. The requirement affects laborers and mechanics performing primarily physical or manual work, such as electricians, truck drivers, and equipment operators, and does not typically apply to workers with administrative, executive, or clerical roles such as architects, engineers, and inspectors.
The IRA also requires that each taxpayer, contractor, or subcontractor on a project with four or more employees employ at least one qualified apprentice or journeyman (a worker who has completed the apprenticeship process). Apprenticeships are industry-driven, industry-funded, paid training programs. They typically last four to five years and provide good long-term career opportunities for workers.
As those who do not adhere to the IRA labor standards will only receive a base rate credit of six percent, these requirements are expected to drive industry growth, generate competitive options for high-road employers and unions, broaden opportunities for new skilled, productive laborers, and increase equitable pay.
Such ambitious requirements and goals come with many questions; the Internal Revenue Service (IRS) issued its first phase of guidance last November to answer many of them:
- What projects are eligible?
The IRS emphasized that prevailing wage and apprenticeship requirements begin 60 days after guidance is issued – on or after January 29, 2023. Projects with output less than 1 MW or with construction beginning before January 29 will automatically receive the 30 percent “increased” rate ITC and are exempt from the wage and apprenticeship requirement. Projects beginning on or after January 29 that do not meet criteria will receive a six percent ITC “base” rate.
- How are prevailing wages determined?
The IRS directs taxpayers to determine prevailing wages based on preexisting determinations from the U.S. Secretary of Labor. Positions without listed classifications or those that are difficult to determine may request determinations and rates from the DOL.
- What are the apprenticement requirements?
Contractors seeking the full ITC credit must employ apprentices for 12.5 percent of labor hours in 2023, and 15 percent beginning in 2024. Apprentice rates may be less than the prevailing wage if workers are employed and registered in a federally-recognized apprenticeship program. The IRS includes a good faith exception for contractors that request apprentices from qualified programs but either 1) receive no response within five business days, or 2) are denied a request at no fault of their own. The apprenticeship requirement is considered satisfied under these conditions.
- How is compliance proven?
Compliance will be shown through sufficient records that can prove the amount of eligible credit or deduction. The IRS and DOL provide general descriptions of documentation that suffice, though the lists are not exhaustive. If contracts cannot demonstrate compliance, the IRA text also allows taxpayers to “cure” prevailing wage shortfalls. Contractors may pay catch up wages, with interest, to workers who did not receive the prevailing wage. The contractor will also pay a $5,000 IRS penalty per affected worker. Intentional disregard for requirements incurs higher penalties and payments. This cure mechanism will be particularly important in the early days of prevailing wage requirements as contractors and developers get affairs in order.
Implications for developers, investors, and contractors
The ITC has historically driven renewable energy innovation and should continue to accelerate industry growth. What do the new labor standards mean for developers, investors, and contractors? In addition to ensuring fair wages and worker treatment, project stakeholders will need to be diligent about adhering to – and documenting adherence to – IRS standards.
First, it is essential that workers are categorized and paid appropriately. This should generally be a simple task. Definitions and prevailing wage classifications are based on long-established structures. The Davis-Bacon Act codifies rate determination for laborers and mechanics, and the DOL provides worker categorizations. But some details still need clarification before the 60-day period ends. Certain types of work are not clear under current DOL postings, and contractors must request further information. It is uncertain how quickly DOL will respond to requests, or if determinations from individual inquiries will then be made public.
Secondly, project developers must ensure that apprentices are properly registered, which may pose potential challenges. The DOL reports nearly 27,000 registered apprenticeship programs across all industries, and apprenticeships don’t need to be specifically renewables-focused. If necessary, developers and contractors may fall back on the good faith effort exception and will not be penalized if their apprentice request is not adequately met.
Lastly, records must be accurately maintained: Clear and meticulous proof of compliance will ensure that projects are awarded the increased credit rate.The IRS provides a general description of “sufficient” recordkeeping in its initial guidance, and contractors have requested more specific information about forms of documentation. New standards will likely impact contract development and execution, including provisions for recordkeeping, hiring, and potentially insurance against tax credit risks.
Further IRS guidance is already planned, but it must provide significantly more administrative detail before IRA requirements take effect. Without clarity, many worry that the new labor standards will increase costs, slow development, and undercut the national climate targets the IRA seeks to support.
As long as industry players hold the IRSaccountable to answering lingering questions, however, these worries are likely unfounded. The IRA includes many safety measures to address potential challenges with meeting requirements. And evidence demonstrates that heightened standards will not make projects too expensive or delay industry growth, but will in fact incentivize production. Higher wages attract and retain skilled, more productive workers, often offsetting any extra employer costs.
Additionally, hiring apprentices lowers labor costs while providing good careers for a new, talented workforce. Overall, the IRA’s new standards should be good for the clean energy industry, drive our economy forward, and help meet climate targets in a way that is more equitable for all.