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  • Writer's pictureEtienne Lecompte

Domesticating... domestic content in the IRA

Updated: Mar 20, 2023

In our last article on the Inflation Reduction Act’s Prevailing Wage and Apprenticeship Requirements we looked at what they are about, where they come from and some key points to keep in mind to ensure compliance.


In this article we are going to look at what is needed to add a further 10% bonus to either the ITC or PTC.


While there is uncertainty on certain details of the domestic content (“DC”) requirements, we believe the broad lines are quite well defined for DC as part of the IRA. We believe now is the right time for organizations to start defining and testing their DC compliance strategies.


We believe Treasury and the IRS will leverage previous public contract management frameworks (Buy America Act, FAA, etc.) and will not try to cut a new path through the forest so to say.


Sure it can be confusing with the sunsetting of the PTC [26-USC-45] in 2024, especially as the ITC [26-USC-48] and clean electricity investment tax credit [26-USC-48E] both directly refer to the PTC when it comes to domestic content.


To make matters simpler, in this article, we will be focusing on the new updated version of the PTC which comes into effect on the 1st of January, 2025, the clean electricity production tax credit [26-USC-45Y].


In any case, the requirements will be EXACTLY the same for the current PTC, the ITC so don’t worry if your projects are being built before then.


Let’s start at the beginning:


To qualify for the domestic content bonus you must certify, ‘that any steel, iron or manufactured product [..] was produced in the United States as determined under Part 661 of title 49, Code of Federal Regulations’ (Buy America Requirements).)


The PTC refers directly the Buy America Requirements for steel or iron; however for manufactured products it provides distinct requirements. Let’s dig into both.


1) Steel & Iron requirements:

For Steel or iron, you are required to procure or produce (or procure) components ‘, ‘. ..in a manner consistent with section§ 661.5 of title 49, Code of Federal Regulations’. Regulations.’


Where:


All steel and iron manufacturing processes must take place in the United States, except metallurgical processes involving refinement of steel additives.’


and,


‘The steel and iron requirements apply to all construction materials made primarily of steel or iron and used in infrastructure projects such as transit or maintenance facilities, rail lines, and bridges.’


This appears relatively clear and with some upcoming clarification of what construction materials could mean within energy facilities or projects; the implementation of the steel or iron requirements should be quite straightforward.


We can also hope that the expectation of ‘a common-sense procurement preference for materials and products produced [..] in the United States’ as stated in Buy America section 41-USC-8301 (Public Contracts), will be applied to any hurdle our industry faces.

This means that you can and should start considering the above in your sourcing strategy today.


2) Manufactured Products

As for manufactured products, while there is a subsection of section§ 661-5 of title 49, that addresses manufactured product, the Treasury does not reference the subclause from the Buy America Act for manufactured products, and instead provides its own requirements.


The PTC requires; ‘not less than the adjusted percentage [..] of the total costs of all such manufactured products of such facility are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States’.


We anticipate that the Secretary is going to provide guidance to define the steel, iron or manufacturing products used in the energy facilities/projects associated with the tax credits.


The current prevalent interpretation is that if the overall materials and labor costs of the delivered product are more than the adjusted percentage, the total cost of the delivered product may be included in the calculation for the adjusted percentage of the energy facility or project.


For example, if the price of a manufactured product on your project is say $1200 (includes; mark-up, logistics etc.)

The product thus meets the (current adjusted percentage) of 40% of 1000$ domestic content threshold … thus you can claim the full value of the product ($1200) on your project costs.


If you simply take the Buy America view of the world, direct labor should be excluded from the above calculation which would make the entire process quite hard for say solar panels, inverters and wind turbines. We believe however that the intent of the IRA is more of a buy and BUILD in America… and thus we are confident in the interpretation provided above.


Again we look forward to a ‘a common-sense procurement preference for materials and products produced [..] in the United States’ approach with manufactured products as well, which further reinforces our view above.


Even with so much uncertainty at this time, and with further guidelines from the Treasury anticipated, you can (and should) still begin to formulate a plan that would allow you to be ahead of the game.


As in our last article, following these simple steps will have you in good stead for the start of your project;

  1. Create contractual language that;

    1. Clearly identifies the expectations for compliance, recordkeeping and oversight,

    2. Ensures these expectations are flown down throughout the supply-chain as applicable, and

    3. Identifies appropriate penalties for failure to comply.

  2. For steel or iron,

    1. Identify all steel or iron components in the project/facility,

    2. Identify potential sources for the identified components,

    3. Establish competent reliable record keeping and audit protocols, and

    4. Plan for the implementation and costs.

  3. For manufactured products

    1. Establish the overall costs to the project of the manufactured products,

    2. Identify the manufactured products intended to claim the adjusted percentage,

    3. Initiate dialogue with the selected supply-chain to meet your required project threshold

    4. Establish competent reliable record keeping and audit protocols, and

    5. Plan for the implementation and costs.

In our next article we’ll explore how to evidence and demonstrate that your facility is compliant with the above requirements.


Until then be proactive and engage with your vendors on appropriate strategies to implement.

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