The energy storage industry has continued to progress over the course of 2024 and into 2025, buoyed in significant part by the federal income tax benefits in the form of tax credits enacted under the Inflation Reduction Act of 2022 (IRA). Energy storage was one of the major beneficiaries of the IRA’s new rules on both the deployment and manufacturing sides.
The IRA enacted the long-sought investment tax credit (ITC) under Section 48 and 48E of the Internal Revenue Code (the Code) for standalone energy storage facilities. It also enacted a new “advanced manufacturing” production tax credit under Section 45X of the Code applying to US production of a variety of clean tech equipment and critical minerals, which include energy storage equipment and underlying materials and minerals. Moreover, the IRA broadly introduced new monetization methods for these and other clean tech industry tax credits of transferability and direct payment.
While the vitality of the IRA tax benefits in their current form is currently subject to uncertainty given the results of the 2024 federal general election, the existing market practice for financing energy storage facilities since the IRA’s passage continues to evolve in reaction to the act’s new requirements and opportunities. This article provides a general update on these matters for the US energy storage deployment industry.
During the almost two-and-a-half years since the IRA’s enactment, the Internal Revenue Service and Treasury have released thousands of pages of guidance under the IRA. Of particular importance to the energy storage industry, the government has released final regulatory guidance for the ITC (both Section 48 and 48E of the Code), prevailing wage and apprenticeship (PWA) requirements, and transferability and direct payment, as well as other guidance on the energy community and domestic content tax credit “adders.”
This guidance has provided welcome clarity for sponsors, investors, lenders, credit buyers, equipment vendors, service providers, and tax credit insurance providers, allowing for the market for financing energy storage facilities based on the monetization of ITCs to take off.
Of note, the ITC final guidance confirms that the pre-IRA “dual-use property” restrictions on claiming an ITC for an energy storage facility co-located with a generation facility are no longer generally applicable and an energy storage facility claiming an ITC may be co-located with an energy generation facility claiming a production tax credit.
The PWA guidance provides rigid rules for how project owners must comply with and document compliance with the PWA requirements. The market continues to evolve in reaction to these rules as they become more relevant as over time fewer projects are eligible for the pre-1/29/23 begun-construction safe harbor from applying PWA requirements.
Specifically, the market continues to evolve regarding the exact scope of PWA compliance risk that EPC, O&M, manufacturer, and other service providers are willing to bear, although most service providers are now agreeing to a long list of PWA guidance–based best practices covenants in their agreements. It is also becoming more standard for third-party accounting and Davis-Bacon Act advisory consultants to be engaged to diligence and maintain records for PWA compliance and noncompliance remediation, including for purposes of sponsors financing their project and procuring tax credit insurance covering PWA compliance risk.
The domestic content guidance establishes relatively stringent rules for determining whether any steel, iron, or manufactured product incorporated into a clean energy facility was produced in the United States in order to be eligible for the adder. Given the current state of battery cell production in the United States, battery energy storage has largely been locked out of a financeable position on qualifying for the domestic content adder given the stated materiality of battery cells to a domestic content analysis.
Critically, the most recent domestic content guidance released in January 2025 effectively prevents a standalone grid-scale battery energy storage facility using foreign manufactured cells from qualifying for the domestic content safe harbor under the “elective safe harbor” test by listing cells’ “assigned cost percentage” as 52% (increased from 38% in the 2024 elective safe harbor list).
The ability to transfer IRA tax credits, including for energy storage facility ITCs, has completely changed the financing opportunities and structures for both sponsors and investors. While at the time of the IRA’s enactment some viewed that the opportunity to transfer credits for cash would end the conventional tax equity investment structure, tax equity remains alive, albeit usually in a modified form generally referred to as a “hybrid” structure/partnership.
Virtually all tax equity investment documents now allow for the investor to elect to have the tax equity joint venture transfer the underlying project’s tax credits rather than the investor having to directly consume the credits for its return. Investors require this flexibility and often choose to have the credits transferred, in large part to address projected diminished tax capacity that has become common across the tax equity investor market, including in reaction to financial accounting conventions and proposed banking regulatory reserve requirements.
Additional equity investment structures predicated on the ability to transfer credits, such as cash and preferred equity joint venture investments, have also proliferated since the IRA’s enactment. One of the asserted benefits of these structures is to involve a third-party investor to better support the viability of a tax basis “uplift” in ITC property above the sponsor’s cost to build to capture a third-party general contractor development fee or turnkey sale premium. The ability to distribute cash proceeds from a partnership’s credit transfer in a way that does not mirror the associated tax-exempt income allocations produces additional opportunities to monetize tax attributes, such as for a “depreciation investor.”
What’s more, the ability to transfer credits now allows sponsors/developers to monetize their project’s tax credits without a need for outside equity investment, fulfilling the most apparent policy objective of transferability. However, the many sponsors adopting this approach have had to grapple with additional tax-related sensitivities associated with not bringing in a third-party equity investor.
For example, these sponsors must now address bearing potentially 100% of ITC recapture exposure in comparison to the 1% ITC recapture exposure in most tax equity investments, making sponsor project and platform sell-downs much more complicated. Additional, often overlooked, sponsor-owner tax profile issues, such as under the at-risk rule ITC limitation, become more acute. And, importantly, the ability to achieve (and cover under a tax insurance policy) a tax basis uplift for ITC property without a third-party equity investor becomes more challenging.
Separately, the direct payment monetization for ITC generating projects, such as energy storage projects, remains relatively uncommon in the market due to guidance that confines the ability to use a public-private partnership structure so that it does not reflect a conventional energy infrastructure sponsor-investor joint venture.