Offshore Wind and the US Inflation Reduction Act
The Inflation Reduction Act of 2022 (IRA), which was signed into law by President Joe Biden on August 16, 2022, has the potential to shape offshore wind development for the foreseeable future. Among other things, the IRA modifies the investment tax credit requirements for offshore wind projects, ties offshore wind leasing to offshore oil and gas leasing while also opening new areas for potential offshore wind development, and appropriates additional funds for the planning and development of interregional electricity transmission and transmission of electricity generated by offshore wind.
There are now more onerous requirements for offshore wind projects to qualify for investment tax credits (ITCs) at the full rate but a renewed opportunity to claim production tax credits (PTCs).
Previously, offshore wind projects under construction by the end of 2025 qualified for a 30% ITC but were ineligible for PTCs at the full rate unless they were under construction by the end of 2016. Wind projects under construction between 2017 and 2021 qualified for PTCs at a reduced rate. Most offshore wind projects are expected to claim the ITC given the high capital costs of constructing such projects.
Now, offshore wind projects under construction by the end of 2024 are eligible for a reduced base credit (6% ITC or 0.3 cent PTCs, adjusted for inflation) that is subject to increase if certain criteria are met. In order to be eligible for the full ITC or PTCs, offshore wind projects must meet certain prevailing wage and apprenticeship requirements or else be under construction no later than 60 days after the Treasury secretary issues guidance on the prevailing wage and apprenticeship requirements.
Prevailing wage requirement: A taxpayer, as well as its contractors and subcontractors, must pay prevailing wages to laborers and mechanics in the construction of the facility and, during the first five (in the case of ITC projects) or 10 (in the case of PTC projects) years of operation after the facility is placed in service, the alteration and repair of the facility. Prevailing wages are determined by the secretary of Labor. Taxpayers have the ability to correct a shortfall in wages by paying to the laborer or mechanic the difference between the prevailing wage amount and what the laborer or mechanic was actually paid plus interest and a penalty to Treasury. The amount owed to the laborer or mechanic for a shortfall is multiplied by three and the penalty is higher, if there was “intentional disregard” of the prevailing wage requirement.
Apprenticeship requirement: A certain percentage of the total labor hours for the construction, alteration or repair work with respect to the facility (including work by contractors or subcontractors) must be performed by qualified apprentices. The percentage is 10% for projects under construction before 2023, 12.5% for projects under construction in 2023, and 15% for projects under construction after 2023. A “qualified apprentice” is an apprentice employed by the taxpayer or its contractors or subcontractors and who participates in certain registered apprenticeship programs. Additionally, any taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the facility must employ at least one qualified apprentice. There is an exception to the apprenticeship requirement if (i) the taxpayer requested qualified apprentices from a program and either the request was denied or there was no response from the apprenticeship program within five days or (ii) the taxpayer otherwise pays a penalty to Treasury for failing to meet the labor hours and minimum participation requirements. The penalty is multiplied by 10 if the taxpayer intentionally disregarded the apprenticeship requirement.
Practical considerations: For wind projects, the determination of whether the prevailing wage requirement and apprenticeship requirements are satisfied is made on a “qualified facility” basis. The IRS generally considers each turbine, pad and tower a separate facility. It is unclear how the requirements will apply to the balance of the wind project. Another consideration is whether the start of construction rules that have been used for qualification purposes over the last nine years, including the “single project” rule, will apply for purposes of determining whether a project was under construction in time to avoid having to meet the prevailing wage and apprenticeship requirements. Recordkeeping will be critical in deals claiming the full tax credit rates. Investors are likely to ask sponsors to make representations that the prevailing wage and apprenticeship requirements are met, if applicable. Beginning of construction analysis will be important for projects looking to avoid having to meet the requirements. Sponsors will need to coordinate with contractors to ensure the requirements are met and may attempt to push these risks on to contractors. It is worth noting that the start of construction deadline for claiming an ITC for an offshore wind project was pulled forward by one year, but projects under construction in 2025 or later may be eligible for a technology-neutral ITC or PTCs as discussed below.
Another change for offshore wind projects is the availability of an additional 10% ITC or a 10% increase in the PTC rate for projects that meet certain domestic content requirements. To claim the additional credit, a taxpayer must certify to the Treasury secretary that any steel, iron or manufactured product that is a component of a facility upon completion of construction was produced in the United States. The 10% adder is available for projects placed in service after 2022.
Manufactured components: Manufactured components are deemed produced in the United States if no less than the “adjusted percentage” of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) mined, produced or manufactured in the United States. The adjusted percentage is 20% for offshore wind projects.
Practical considerations: Guidance from Treasury will be important to understand what parts of the project a taxpayer must draw a circle around to determine if the domestic content requirement is met, as well as to determine how granular the “manufactured component” analysis must be—in other words, how deep in the supply chain the taxpayer must look to satisfy the domestic content requirement for a specific component. As with the prevailing wage and apprenticeship requirements, recordkeeping will be critical. It will be important for projects claiming the 10% domestic content adder to put systems in place to verify the source of materials and components. Investors are likely to ask sponsors to make representations that the domestic content requirement is met. Sponsors will need to coordinate with contractors and suppliers to verify the source of materials and components and are likely to ask contractors and suppliers to make representations about the source of materials and components.
Additionally, offshore wind projects placed in service after 2024 may qualify for technology-neutral tax credits for zero- or net-negative carbon emissions projects. The technology-neutral ITC and PTCs phase down to 75% of the full credit for projects that begin construction in the second year after the later of (i) 2032 or (ii) the calendar year in which Treasury determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the 2022 emissions level. The credit is further reduced to 50% of the full rate for projects under construction the following year and is not available to projects under construction after that.
Practical considerations: Projects may not “double-dip” and claim both a wind ITC or PTCs as well as a technology-neutral tax credit. For offshore wind projects under construction by the end of 2024, the wind ITC and PTCs likely are more attractive in order to avoid having to demonstrate zero-emissions from the project.
The IRA ties new offshore wind leasing to offshore oil and gas leasing. During the 10-year period after the IRA was enacted, the Bureau of Ocean Energy Management (BOEM) may not issue a lease for offshore wind development unless the agency had offered at least 60 million acres for oil and gas leasing on the Outer Continental Shelf in the previous year. This provision could affect decision-making for BOEM’s upcoming offshore oil and gas five-year leasing program. In July 2022, BOEM released a proposed program that considered a range of offshore oil and gas leasing scenarios for 2023 through 2028, some of which offer sufficient sales and acreage to meet the IRA’s criteria for enabling offshore wind leasing while others would not.
However, the law also permits the federal government to issue offshore leases, easements and rights-of-way in areas off the coast of North Carolina, South Carolina, Georgia and Florida, which since July 1, 2022, has been under an offshore leasing moratorium imposed by former President Trump. In 2020, President Trump stated in a memorandum: “I hereby withdraw from disposition by leasing for 10 years, beginning on July 1, 2022, and ending on June 30, 2032: The portion of the area designated by the Bureau of Ocean Energy Management as the Mid Atlantic Planning Area that lies south of the northern administrative boundary of North Carolina,” which is the administrative boundary depicted on the Atlantic NAD 83 Federal Outer Continental Shelf (OCS) Administrative Boundaries map. The IRA has officially ended this offshore leasing moratorium for the Southeast.
The IRA provides staffing funding for BOEM and the National Oceanic and Atmospheric Administration (NOAA), which may be used to help support the review of the at least nine construction and operation plans that have been submitted and the programmatic environmental impact statement and consultations being prepared for the NY Bight area.
The IRA also broadens the definition of Outer Continental Shelf to include specific submerged lands adjacent to US territories, including Puerto Rico, Guam, and the US Virgin Islands. This potentially opens up new areas for offshore wind development. The IRA directs the secretary of the Interior to gauge commercial interest in offshore wind development off territorial coasts and, if there is sufficient interest, authorizes wind lease sales in areas deemed feasible after the secretary has consulted with the territorial governor.
Transmission for Offshore Wind
The IRA appropriates $100 million for the purpose of convening relevant stakeholders and conducting planning, modelling and analysis with respect to the development of interregional electricity transmission and transmission of electricity generated by offshore wind. The planning, modelling and analysis would take into account the local, regional and national economic, reliability, resilience, security, public policy and environmental benefits of interregional electricity transmission and transmission of electricity generated by offshore wind and would focus on issues such as integrating clean energy into the electric grid and economic development opportunities for communities arising from the development of transmission of electricity from offshore wind projects.