As a companion to last week’s article, we’re discussing the Inflation Reduction Act (IRA) tax credits introduced to fuel the growth of U.S. clean energy manufacturing, with a particular focus on reducing reliance on foreign imports. Join us as we dive into two key incentives that have sparked $80 billion in U.S. manufacturing investments!
Contact: Betsy Barry
Communication Manager
706.206.7271
betsy.barry@acculonenergy.com
The Inflation Reduction Act (IRA), passed in 2022, introduced new tax credits to accelerate the transition to clean and renewable energy, recognizing the critical role of domestic manufacturing in this shift and the need to incentivize U.S. manufacturers. Two significant credits were included: the Advanced Manufacturing Production Tax Credit (45X) and the Advanced Energy Project Investment Tax Credit (48C). Both have spurred approximately $80 billion in investments in U.S. manufacturing, as well as supported job creation and innovation in the energy sector. Additionally, both credits are transferable, allowing them to be sold to third parties with qualifying tax liabilities.
Understanding Advanced Manufacturing Tax Credits
The key difference between 45X and 48C is that 45X is a Production Tax Credit (PTC) based on output from a manufacturing facility, while 48C is an Investment Tax Credit (ITC) linked to upfront project costs. Facilities can opt for either credit, but not both for the same project. Additionally, manufacturers may claim both types of credits for different parts of their operations, as long as they meet the distinct criteria for each. Existing manufacturing sites can currently generate PTCs through 2032, while new investments are needed to qualify for ITCs.
A Closer Look at 45X Credits
To qualify for 45X credits, manufacturers must produce components considered “advanced energy property,” such as solar and wind components, battery storage, inverters, and certain critical minerals. The production of these components qualifies for a tax credit, which is determined either by multiplying a dollar value of credit by the capacity or unit produced or by applying a percentage to the production cost, depending on the specific product. These credits can be sold, claimed directly by the manufacturer, or converted into cash through elective pay.
Unlike ITCs, which can be subject to a recapture period over five years, 45X credits carry lower risks because they are only issued after eligible goods have been produced. Another key feature is that 45X credits are often allocated in shorter tranches (several years) rather than the 10-year terms common in the power sector, reducing risk exposure for buyers and making the credits more flexible and accessible.
Manufacturers have several options for monetizing 45X credits, whether through selling them, applying them to tax balances, or receiving cash refunds through elective pay for the first five years.
The 48C Credits
Unlike many of the IRA’s other tax credits, the 48C program has a total allocation limit of $10 billion. This means competition is stiff, with only the most impactful projects—those that address key supply chain gaps or align with other policy priorities—receiving the credit. Of the $10 billion, 40% is reserved for projects located in energy communities that have been affected by the closure of coal mines or plants to ease the transition to alternative energy sources and shore up the workforce.
Projects seeking 48C credits fall into one of three categories: investment in clean energy manufacturing, reduction of greenhouse gas emissions from existing industrial facilities, or production/recycling of critical minerals. This broad scope encourages a diverse array of projects aimed at strengthening the domestic clean energy supply chain.
The tax credits provided under the Infrastructure Reduction Act (IRA) offer a significant boost to U.S. battery manufacturers, fostering growth in domestic clean energy production & driving innovation in energy storage technology, helping to position the U.S. as a leader in battery manufacturing.
Why These Credits Are Attractive to Investors
Despite their unique purposes, both the 45X and 48C credits follow the same standard transfer process as other transferable credits, simplifying transactions for investors.
For projects that qualify for 48C, these credits offer more than financial benefits—they help support domestic job creation and promote investment in former fossil-fuel-dependent communities, contributing to both economic revitalization and sustainable growth.
Investors eyeing 45X credits benefit from a clear view of credit generation and enjoy the flexibility of shorter tranches, which create a low-risk profile in the clean energy tax credit market.
Looking a bit closer into the 45X, the advanced manufacturing production tax credit, it provides tax credits to US manufacturers of batteries and other components such as:
Battery cells
- A credit of $35 per kilowatt-hour (kWh) for cells with a capacity greater than 12 kWh
Battery modules
- A credit of $10 per kWh for modules with a capacity greater than 7 kWh, or $45 per kWh if the module doesn’t use battery cells
Electrode active materials
- A credit of 10% of the cost of production for materials like cathodes, anodes, solvents, and additives
Critical minerals
- A 10% production cost credit for mining and producing critical minerals
Additionally, the 45X tax credit is available from 2023 to 2032, but the credit value phases down over time: 75% of its value in 2030, 50% of its value in 2031, and 25% in 2032.
Domestic Content Bonus Credit
As discussed, U.S. manufacturers have unique opportunities to claim credits for eligible energy properties under the section 48C and 45X programs. To fully take advantage of these incentives, however, it’s important to also be aware of the domestic content requirements and incentives that allow for an added 10% bonus tax credit for using a certain percentage of domestic-made components in a project.
There has been some confusion surrounding the domestic content credit, but the IRS has created simplified guidelines for manufacturers seeking to take full advantage of these bonus credits.
Manufacturers must categorize materials used in their projects into two groups: construction materials and manufactured products.
Construction materials, such as rebar and steel foundation posts, must be entirely U.S.-made and are primarily iron or steel with structural functions. Manufactured products, however, which make up the rest of the materials, must be at least 40% U.S.-made initially, increasing to 55% over time, while offshore wind projects start at 20%. Confusion surrounding domestic content has prompted the IRS to issue clarifying guidelines on several occasions in the past year, the latest being in May of 2024, which makes it easier to determine eligibility. According to current guidelines, domestic content percentages must be calculated based on the manufactured cost of the products, underscoring the need for close collaboration between manufacturers and third parties responsible for verifying content compliance.
Conclusion
The tax credits provided under the Infrastructure Reduction Act offer a significant boost to U.S. battery manufacturers, fostering growth in domestic clean energy production and driving innovation in energy storage technology. These incentives not only position the U.S. as a leader in battery manufacturing but also contribute to achieving a robust domestic supply chain, both of which will help the US reach broader climate goals and more cost-effective options as the electrification movement spreads to all market sectors. However, with upcoming elections and the potential for a new administration, policy landscapes could shift. It remains to be seen how future changes might impact the long-term support for initiatives and tax credits like these, underscoring the importance of staying informed as new policies emerge. One thing is certain: electrification will continue to move forward globally, and if the US wants to keep up, it will have to continue moving forward as well. Stay tuned for other installments in this series, focusing on how the US can be competitive in an evolving electrification landscape.