Schumer-Manchin Deal Bolts Forward

Schumer-Manchin Deal Bolts Forward

July 28, 2022 | By Keith Martin in Washington, DC

The tax equity market will look different if the surprise deal that the Senate majority leader, Chuck Schumer, sealed yesterday with Democratic holdout Joe Manchin (D-WV) to advance a package of clean energy incentives clears Congress.

Schumer will have to try to move the bill quickly.  If it sits for a month while Congress is in recess, it risks being picked apart by lobbyists.  The House is scheduled to leave Washington for the August recess on Friday. The Senate will leave a week later.  If the bill clears the Senate, presumably the House will come back to pass it.

Schumer cannot afford to lose a single vote among Senate Democrats. Covid is adding to the drama as it keeps some Senators out.  Nancy Pelosi, the House speaker, faces an equally daunting task.  She can only afford to lose a few Democratic votes in the House.

Major Boost

The Schumer-Manchin deal would restore federal tax credits to the full rate for renewable energy projects completed in 2022 or later. 

They would remain at this level for at least the next 10 years.

Thus, for example, solar projects completed in 2022 would qualify for a 30% investment tax credit. 

The ITC could reach as high as 50% depending on the location of the project and whether it uses domestic content, but only for projects that are completed in 2023 or later.

Wind and geothermal projects completed in 2022 should qualify for production tax credits of $26 a MWh.  The PTC amount is adjusted each year for inflation.

The tax credit amounts would start to phase down after annual greenhouse gas emissions from US electricity generation fall by at least 75% from 2022 levels, but not before 2032.  

Projects starting construction two years after the phase down starts would qualify for tax credits at 75% of the full rate.  Projects starting construction three years after would qualify for tax credits at 50% of the full rate.  Thus, for example, if the phase out trigger is reached in 2032, projects starting construction in 2033 would still qualify for tax credits at the full rate.

The bill provides a new 30% investment tax credit for standalone storage.

Solar developers would have the option to claim PTCs instead of ITCs on projects placed in service in 2022 or later. 

Tax Equity

Starting next year, companies would be allowed to sell most energy-related tax credits to other companies without having to resort to complicated tax equity structures. The seller will not have to report the cash purchase price as income. 

The buyer must pay cash.  It cannot be related to the seller.

The seller can sell all or part of its tax credits. It can decide each year how much to sell.

The bill also allows most energy-related tax credits that a company cannot use to be carried back three years to get refunds of taxes paid in the past and to carry any remaining tax credits forward for up to 22 years (rather than the current 1-year carryback and 20-year carryforward).  This change does not take effect until 2023. Tax credits that are carried backward or forward cannot be sold.

The renewable energy industry had been hoping for a “direct-pay” alternative to tax credits where companies could be paid the full cash value of the tax credits by the IRS under a tax refund mechanism.

A narrow direct-pay provision is in the bill, but with the exception of three types of tax credits, it is limited to tax-exempt entities, state and local governments, the Tennessee Valley Authority, Indian tribes and Alaskan native claims corporations.

The three types of tax credits that real taxpayers can ask the IRS to pay them in cash are section 45Q credits for capturing carbon emissions, production tax credits for making clean hydrogen and production tax credits for “advanced manufacturing” of wind turbines, towers, blades, solar panels, inverters, trackers, batteries and lots of other products.

It will probably be better to wait for an IRS refund for 100% of the credit amount in cash rather than sell these three types of tax credits to third parties for less than the full credit amount. However, direct payments would only be made for one to five years of credits.


There is one complication. 

The complication is the way the bill is written.  It is a mash up of a House bill that amends the existing renewable energy PTC and ITC tax code sections and a Senate bill that would insert two new tax code sections that authorize technology-neutral PTCs and ITCs for any power project that can generate electricity with zero greenhouse gas emissions.

The House bill sticks with the approach of setting a deadline by when renewable energy projects must be under construction to claim tax credits.  It applies to projects put in service in 2022 or later and that start construction by the end of 2024.  The Senate provisions apply to projects put in service in 2025 or later.

The problem with using a construction-start deadline to qualify is the IRS requires projects to be completed within four to six years after construction starts.  The IRS should really waive this requirement for projects that are completed before the tax credits start to phase down.  The renewable energy trade associations will have to press it to do so.  Otherwise, any project that reaches the end of the IRS completion period would have to wait until 2025 or later, when the Senate provisions kick in and allow a full tax credit based solely on going into service in 2025 or later.

Fine Print

There are two sets of fine print.

Project owners must make sure their construction contractors pay laborers and mechanics the same Davis-Bacon wages that are paid on federal construction jobs not only during construction, but also on later repairs and improvements during the period PTCs are claimed or any ITC claimed remains subject to recapture.   

The contractor must also use qualified apprentices for 10% to 15% of total labor hours during the same period.

These requirements will not apply to any project on which construction starts no later than 59 days after the IRS issues guidance to implement the wage and apprentice requirements.

Possible 50% ITC

The bill has domestic content requirements that are both a carrot and a stick. 

The carrot is the ability to claim as much as an extra 10% investment tax credit (or a 10% increase in PTC amount) by using domestic content.

Domestic content means all steel, iron and manufactured products must be produced in the United States.  Manufactured products would be considered US made if at least 40% of all the manufactured products used in the project are US made.  The percentage would increase for projects that start construction after 2024 and eventually reach 55% for projects with 2027 or later construction-start dates.  The percentage for offshore wind projects would start at 20% and increase over time, reaching 55% for projects with 2028 or later construction starts.

The stick is inability to receive a direct cash payment in lieu of tax credits from the IRS.  However, since the bill narrowed direct pay essentially to tax-exempt and government entities, this is not much of a stick.

Projects in certain locations will qualify for as much as another 10% ITC (or another 10% increase in PTC amount).

The extra tax credits will apply to projects on brownfield sites, in any “area” that at any time after 1999 had “significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas” or in census tracts (or adjoining tracts) where a coal mine closed after 1999 or a coal-fired generating “unit” was retired after 2009. 


The bill makes it easier for storage projects to contract with tax-exempt or government entities without losing the investment tax credit and accelerated depreciation.  Any project leased in substance to such an entity does not qualify for such tax benefits.  A safe harbor that ensures currently that power contracts with tax-exempt and government entities are “service contracts” rather than leases would be extended to storage projects.

The bill would let all storage facilities be depreciated using 5-year MACRS depreciation.

It also increases and liberalizes section 45Q tax credits for carbon capture and allows a tax credit of up to $3 kilogram for producing clean hydrogen.