The U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) have released additional guidance on the Inflation Reduction Act’s (IRA) domestic content bonus for clean electricity production and investment tax credits.

The updated safe harbor applies to solar projects, domestic solar wafers, land-based wind projects, and battery energy storage systems.

The IRA amended tax code Sections 45 and 48 to provide a domestic content bonus credit amount for certain qualified facilities or energy projects beginning service after December 31, 2022.

It included Sections 45Y and 48E, which provided a domestic content bonus credit amount for specific investments in qualified facilities or energy storage technologies beginning service after December 31, 2024.

The Treasury Department’s guidance updated the domestic content safe harbor, which allows clean energy developers to rely on default cost percentages provided by the Department of Energy (DoE) to determine eligibility for the domestic content bonus.

The updated guidance provides new tables for solar and domestic solar wafers.

Applicants can utilize the safe harbor tables in the guidance for projects beginning construction for up to 90 days after publication in the Federal Register of proposed regulations on the domestic content bonus credit requirements.

The guidance provides optional alternative cost percentages for solar project developers that use solar cells with domestically produced wafers to help enhance incentives for onshoring wafer manufacturing.

On May 24, 2024, the Treasury Department and the IRS modified the existing domestic content safe harbor by expanding the nonexclusive list of applicable projects to include hydropower and pumped hydropower storage facilities. The update replaced utility-scale photovoltaic (PV) systems with ground-mounted and rooftop systems and included specific manufactured product components for previously listed applicable projects.

The domestic content bonus aims to support American manufacturing of iron, steel, and manufactured products used in clean energy projects like solar and wind farms.

The DoE derived cost data from multiple sources to calculate the updated assigned cost percentages for solar projects using its new ground-mounted and rooftop solar component costs.

The data was sourced from system characteristics, price indices, U.S. survey data from the government and private sector, public filings from corporations, and comprehensive interviews of manufacturers, installers, developers, and owners of the representative technologies. The DoE also used data from three national laboratories.

Companies have announced investments of over $196 billion in clean energy and $92 billion in clean energy manufacturing.

According to an analysis by ROTH Capital Partners, the inverter and tracker contributions decreased from 5.5% to 4.1% and 28.7% to 22.5%.

There are now two distinct tables for ground-mount PV systems (tracking and fixed) and rooftop PV systems (Module Level Power Electronics (MLPE)and string). Two new columns were added to each type of ground-mount and rooftop, providing a path for cells and wafers.

The module contribution to the domestic content threshold remains the same for a utility-scale project using trackers at 66%. The new category incentivizes domestic wafer production through an approximately 52% cell credit for crystalline silicon modules; however, there is still minimal crystalline silicon wafer capacity that could realistically materialize in the near term.

The different Manufactured Product Components (MPCs) credits have shifted around. The tracker overall has increased by approximately four percentage points for projects without domestic crystalline silicon wafers.

The contribution for the module-level power electronics inverters category as a whole decreased from 35.6% to 24.8%. The production credit declined from 16.4% previously to 0.9% in the new guidance update.

The investment tax credit remains at 40%.

The financing companies could have some flexibility in sourcing domestic components to meet the minimum threshold. With a smaller inverter contribution, the new tables will be incrementally negative, as they are slightly more restrictive and may require US-assembled modules.

With the previous guidance, the threshold could be met without a domestic cell/module. However, the update renders blending domestic module MPCs with the minimum threshold impossible. MLPE combined with racking can still qualify at 44.4%. Under the old table, inverter plus racking combined added up to 61% for MLPE and 44.6% for string inverters; it now represents 44.4% for MLPE and 30.8% for string inverters.

The maximum battery energy storage system domestic content level achievable without a U.S. cell under the safe harbor method is reduced to 40.0% from 40.9%. A project can reach a maximum of 40.0% domestic content by sourcing all MPCs in the U.S.

At a level of 45% or above, a domestically produced U.S. cell is required to qualify under predefined domestic content values.

The Treasury and the IRS recently released final rules for the clean electricity investment and production tax credits (technology-neutral credits).

In October 2024, the Treasury and the IRS released the final Advanced Manufacturing Production Credit regulations to boost the growth of domestic clean energy manufacturing under the IRA.