The Inflation Reduction Act (IRA) of 2022 and Wastewater Energy Transfer (WET)

On Aug. 16, 2022, President Joe Biden signed into law the Inflation Reduction Act of 2022 (IRA), which includes new and revised tax incentives for clean energy projects.

These eligibility highlights related to Wastewater Energy Transfer and the IRA are intended as a guideline only, consult expert legal & tax advice.

Does the Inflation Reduction Act apply to wastewater energy?

The IRA of 2022 has introduced an array of energy tax incentives that can make WET projects much more financially attractive, accelerating the adoption of sustainable energy solutions.

The IRA states that a “waste energy recovery property” is eligible for the 30% rebate – both SHARC and PIRANHA wastewater energy transfer systems meet this definition, but many details apply that you should seek professional legal/tax advice on.

For building owners considering SHARC systems for district energy or PIRANHA systems for multifamily buildings, understanding how to qualify for and maximize these incentives is key.

The economics of using the IRA for Wastewater Energy projects are compelling!

By strategically leveraging the IRA’s incentives, WET projects can offer compelling economics and rapid payback periods, driving widespread adoption of these sustainable technologies.

District Energy / TENs example

For a district-scale SHARC example, picture a $5M WET system paired with geothermal exchange, serving a government-owned district loop. With the 50% 1 MW+ ITC rate (40% base + 10% domestic bonus), the project gets a whopping $2.5M tax credit.

As a government entity, they can take that as a direct cash payment instead of a credit. That cuts the effective cost in half!

Factor in the 179D benefit for the connected buildings' efficiency gains and the financials only get better.

Latest IRA amendments are favorable towards wastewater energy

The IRA has expanded the eligibility to claim the “full” existing energy investment tax credit (ITC) described in Section 48 of the Internal Revenue Code of 1986, as amended (Code), to certain projects that previously only qualified for a reduced ITC or did not qualify at all, including:

What is a "thermal energy storage property" ?

As amended by the IRA, Section 48 of the Code defines “energy storage technology” as: (1) a property that receives, stores, and delivers energy for conversion to electricity or storage and has a minimum nameplate capacity of five kilowatt hours and (2) “thermal energy storage property.”

The term “thermal energy storage property” is defined as a property in a system that

(1) is directly connected to a heating, ventilation, or air conditioning system,

(2) removes heat from or adds heat to a storage medium for subsequent use, and

(3) provides energy for the heating or cooling of the interior of a residential or commercial building.

“Thermal energy storage property” does not include “(I) a swimming pool, (II) combined heat and power system property, or (III) a building or its structural components.” Additionally, the credit for energy storage technology under this section only applies to projects on which construction begins before December 31, 2024. However, at that point, a credit under I.R.C. 48E for energy storage technology becomes available.

Project timing

Did WET project start between Dec 31, 2022 and Jan. 1, 2025?

Under the IRA, the full Section 48 Credit, i.e., the 30% energy ITC, will be available to combined heat, power system property, energy storage technology, and waste energy recovery projects that begin construction before Jan. 1, 2025.

WET project construction starting before Jan. 1, 2035?

Meanwhile, ground and groundwater heating and cooling equipment projects that begin construction before Jan. 1, 2035, will also be eligible for the full Section 48 Credit, subject to a phase-out for such projects where construction does not begin until after Dec. 31, 2032.

What are other considerations for Wastewater Energy Transfer project eligibility for IRA?

Project definition

Central to the IRA framework is the Investment Tax Credit (ITC) under Section 48, which classifies WET systems as “waste energy recovery property” eligible for generous upfront tax credits.
This means that SHARC and PIRANHA projects may be eligible for substantial upfront tax credits, with the specific rates and bonuses dependent on a multitude of factors.

Part of an energy efficiency upgrade?

If your WET system is part of a larger building efficiency upgrade, evaluate its eligibility for the Section 179D Energy Efficient Commercial Buildings Deduction.
On top of the ITC, the Section 179D deduction for energy efficient commercial buildings can provide $2.50-$5.00 per sq ft, depending on the efficiency gains achieved.

Project Ownership

Determine how your project’s size, ownership structure, and location impact available incentives, such as bonus credit rates for government-owned projects.

Low-income communities

If your project is located in or benefits low-income communities, it may qualify for an additional 10-20% credit on top of the base ITC.

Optimize for Domestic Content

Aim to meet domestic content thresholds to qualify for elevated incentives, supporting U.S. manufacturing and job creation.

Tax Exempt status

If your organization is tax-exempt, the IRA allows you to elect a direct pay option to receive the incentives as cash instead of a credit starting in 2023.
Alternatively, taxable entities can transfer their credits to unrelated parties for cash, providing helpful flexibility.

Prevailing Wage & Apprenticeship

To qualify for the bonus rate (30%) under Sections 48 and 48E, an energy storage project must satisfy the prevailing wage and apprenticeship requirements, otherwise the project will be eligible only for the base rate (6%).

In Notice 2022-61, the IRS provided the first guidance on how taxpayers may demonstrate they have achieved these objectives.

Specifically, a taxpayer will need to (i) pay “laborers and mechanics” (distinct from managerial and administrative workers) a prevailing wage, and (ii) ensure the employment of an adequate number of apprentices from registered apprenticeship programs.

Prevailing wages must match the pay rates published by the Department of Labor (DOL) for geographic areas and for types of jobs or labor classifications.
Apprentice employment generally requires that no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices.
The applicable percentage is (i) 10% for projects that begin construction in 2022, (ii) 12.5% for projects that begin construction in 2023, and (iii) 15% for projects that begin construction in 2024 or later.
Apprentice labor hours are the dominant factor in establishing apprentice employment but, depending on the project or contractor characteristics, the adequacy of apprentice employment also can include specific headcount requirements.

Compliance with prevailing wage and apprenticeship standards is demonstrated through recordkeeping. Notice 2022-61 included examples of the types of records a taxpayer must keep.
The apprenticeship labor requirements have a good-faith exemption that applies if the taxpayer requests qualified apprentices from a registered apprenticeship program and the request is denied or goes without response for more than five business days — effectively keeping taxpayers from being penalized if there are insufficient apprentices to hire.
Additionally, taxpayers are generally permitted to cure noncompliance with additional payments to the worker, plus interest, and/or penalty payments to the IRS.

Two exemptions from the prevailing wage and apprenticeship requirements exist:

Smaller-scale energy storage projects (under 1MW of storage capacity) qualify for the 30% bonus rate regardless of compliance with the prevailing wage and apprenticeship requirements.
Energy storage projects (i) not in service prior to Jan. 1, 2022, and (ii) on which construction begins prior to Jan. 29, 2023 (60 days after the IRS issued Notice 2022-61), qualify for the bonus rate regardless of compliance with the prevailing wage and apprenticeship requirements.

The clarification of recordkeeping requirements and taxpayer’s affirmative duties to get wage determinations are important developments to arise from Notice 2022-61, but the most significant aspect of the notice is the start of the 60-day clock on the second exemption. The IRS has promised additional guidance and regulations on these requirements and exemptions, which may change the recordkeeping and exemption landscape in 2023.

Extension of Energy Investment Tax Credit (Section 48)

This tech-specific ITC ends in 2024 for most technologies and is replaced by the new tech-neutral Clean Electricity ITC (48E), which begins in 2025.

Extends date of construction in most cases to 2024 and maintains a 10% or 30% credit.
- Maintains 30% credit for solar energy property, geothermal property, fiber-optic solar property, fuel cell property, microturbine property, small wind property, offshore wind property, combined heat and power property, and waste energy recovery property constructed before January 1, 2025.
- Creates 30% credit for energy storage technology, biogas property, microgrid controllers, dynamic glass, and linear generators constructed before January 1, 2025.
- Extends 10% credit for microturbine projects constructed before January 1, 2025.
- 30% credit for geothermal heat pump projects constructed before January 1, 2033. Credit reduces to 26% in 2033 and 22% in 2034.
Applies a 10% bonus for meeting domestic manufacturing requirements for steel, iron, or manufactured components.
Applies a 10% bonus for projects located in energy communities (defined as brownfield sites or fossil fuel communities).
Includes Direct Pay and Transferability.

SHARC International Systems Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.