Companies Craft Contracts Absent Firm Clean Energy Labor Rules

Many of the lucrative clean energy tax credits from President Joe Biden’s tax-and-climate law hinge on labor requirements that still lack any regulations.

The Inflation Reduction Act of 2022 ties labor mandates to the clean energy tax credits, increasing the credit amount to 30% from 6% of project costs if companies pay workers the local prevailing wage and employ some workers who participated in a Department of Labor-registered apprenticeship program.

The IRS and Treasury Department first released guidance on the labor requirements Nov. 29, detailing when and how to apply the rules. The guidance, though, left some unanswered questions that are complicating project and investing decisions.

To meet the apprentice requirements, clean energy companies can partner with an established registered apprenticeship program or register their own. If a company can’t get the required number of apprentices but can show it made a good faith effort to meet the rules, that company can still get the full tax credit amount.

Companies still don’t know how many apprenticeship programs they will need to reach out to, how far-reaching the search needs to be, and how to document attempts to meet the requirements.

As clean energy companies, contractors, and investors anticipate delayed rules, many are advancing projects even with the remaining ambiguities propelling more investment into the clean energy transition.

“People are moving ahead with the caveat that a lot of agreements have change-in-tax law provisions that provide for amendments or adjustments to purchase price if any future guidance is materially different than what we’ve assumed or based on the old guidance,” Lauren Collins, a tax partner at Vinson & Elkins LLP, said in an interview.

Getting Answers

The initial guidance was helpful, but it didn’t answer some key points that could give companies more security and make negotiations between parties easier, tax professionals said. Now, they are optimistic the upcoming proposed rules will address the uncertainties.

“The clients and also the contractors are all dealing with this stuff in real time, and no one is that familiar with it,” Scott Cockerham, a tax partner at Orrick, Herrington & Sutcliffe LLP, said in an interview. “The negotiations on this are very difficult.”

The Department of Labor lists the wage rate companies are expected to pay to meet the prevailing wage requirements in the law. If a rate isn’t listed for a particular job or location, companies can ask DOL for a specific determination.

DOL didn’t specify when companies can expect to receive a determination after making a request.

The agency “is assisting taxpayers, developers and contractors in understanding the prevailing wage provisions of the IRA, responding to taxpayer requests for wage determination information, and continues to partner with the Department of the Treasury to provide taxpayers, contractors, subcontractors and other stakeholders with the resources necessary to take advantage of this tremendous opportunity,” a DOL spokesperson said by email.

In the meantime, companies are trying to make an estimate based on the market.

“It’s particularly difficult if you’re in a location where there are very few unions so you have very little information for purposes of benchmarking whether or not the rates that you’re thinking about paying is too low or or even too high,” Eric Su, a partner at Crowell & Moring’s Labor & Employment Group, said in an interview.

Those investing in a tax equity deal or choosing to buy one of the clean energy credits are looking at projects that started construction before the labor rule took effect in January to ensure they are getting the full credit amount.

“If you get it wrong, you really get it wrong,” Collins said. “People are very focused on getting it right and making sure they get the full credit.”