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The Fine Print on Labor in the US Climate Bill Could Complicate the Rush for Tax Credits

The US climate bill offers subsidies worth hundreds of billions of dollars for clean energy sources ranging from hydrogen to nuclear power. However, projects that don't meet certain new wage and labor requirements only receive a fraction of the credit.

January 23, 2023
5 minutes
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The US climate bill offers subsidies worth hundreds of billions of dollars for clean energy sources ranging from hydrogen to nuclear power. However, projects that don't meet certain new wage and labor requirements only receive a fraction of the credit.

In order to take advantage of the 30% investment tax credit for solar power, fuel cell, and other clean energy projects, developers must pay workers at least the wage level set by the US Department of Labor and use a minimum share of labor from workers who are in registered apprenticeship programs.

Projects that don’t meet the requirements of the Inflation Reduction Act only get a 6% base rate. This rule applies to other credits under the Act as well, including a production tax credit commonly used for wind projects, tax incentives for carbon capture projects, and new tax subsidies for hydrogen and nuclear power.

Meeting the pay and hiring thresholds for new projects later this month is not going to be easy, say renewable energy and construction trade associations.

Brian Turmail, a vice president with the Associated General Contractors of America, has said that the apprenticeship requirement makes it nearly impossible to meet the goals set forth in the order.

Companies that do not comply with the new regulations could miss out on millions of dollars in potential revenue. The uncertainty around the details of the regulations risks delaying projects and making it harder for developers to find financing.

Abigail Ross Hopper, president of the Solar Energy Industries Association, said that while the provisions in the bill are workable, the industry needs more guidance from the federal government. She noted that in some parts of the country, the infrastructure is not yet in place to support solar energy, and that there may not be enough apprenticeship programs in some states.

In order to take advantage of the full value of the credit, 12.5% of a project's labor hours starting on January 29th must come from "qualified apprentices" who are participating in an apprenticeship program that is registered with the Department of Labor or a state equivalent. Next year, the threshold will increase to 15%.

The apprentice requirement is a new way to ensure that IRA funding is used for paid on-the-job and classroom learning. This will help to create new jobs in the clean energy sector, said Jason Walsh, executive director of the BlueGreen Alliance. This is a coalition of environmental and labor groups that support the new standards.
"While solar, wind and other renewable energy sectors have been growing rapidly, they have not always provided good-quality jobs, particularly in the construction industry," Walsh said. "We think it is appropriate that in exchange for the credits there are requirements in place that lead to high-quality jobs."

The White House is committed to helping working families access good-paying jobs. The Inflation Reduction Act incentivizes prevailing wages and hiring apprentices, prevents companies from ripping off workers, and boosts American manufacturing and competitiveness. The administration is investing in apprentice programs to help more Americans get good-paying jobs.

However, developers in the clean energy and construction industries are objecting to the rules, arguing that they are unrealistic given the limited number of apprentices. According to the US Department of Labor, there were close to 600,000 active registered apprentices nationwide across all industries in 2021, with numbers varying significantly from state to state.

"This just exacerbates the need for qualified workers to build out renewable energy projects," said Allison Nyholm, a vice president at the American Council on Renewable Energy, a trade group representing renewable project developers.

The legislation does provide a “good faith” exception to the apprenticeship requirement if companies are rejected by a registered apprenticeship program they approach for hiring, or if the program fails to respond within five days. However, questions about the logistics of that exception remain.

The US Treasury Department said it plans to issue additional guidance and regulations on the rules. This guidance will help ensure that the rules are applied consistently and fairly.

Treasury is working to ensure that clean energy jobs are good-paying jobs and that workers are trained to fill openings in these growing industries,” a spokesperson said. “The implementation of the Inflation Reduction Act is an ongoing process, and Treasury is continuing to engage with stakeholders.”

The IRA also requires developers to pay both construction workers and project operators the average wage of similarly employed workers in specific occupations as determined by the Labor Department.

The requirement to pay prevailing wages should be easy to meet in theory, since the industry says it already does so. However, the Labor Department does not list the prevailing wage for many of the renewable and other technologies covered in the massive climate bill, said Heather Cooper, a partner at the law firm McDermott Will & Emery LLP. This makes it difficult for project developers and utilities to comply with the law. For instance, the prevailing wage for a nuclear engineer isn’t listed, Cooper said.

"It's difficult to know how to satisfy the wage requirement if we don't know what those wages are," Cooper said. "People want to comply, but it's hard to do so without knowing the specifics."

A spokesperson for the Department of Labor said that the agency is supporting the Treasury Department in its implementation of the Individual Retirement Account (IRA). The agency has developed resources and provided training to help with this process.

The agency has been working to update its prevailing wage categories to explicitly include solar, wind, EV charging and other clean energy workers since last March. However, there is no indication of when that will be completed, according to Derrick Flakoll, an analyst with clean energy research group BloombergNEF.

Flakoll says that contractors should use existing prevailing wage categories or request clarification from the Labor Department based on the jobs they anticipate needing. However, given the high penalties for missing the targets, developers may be hesitant to request clarification, as it is not clear how long the agency’s Wage and Hour Division will take to respond. This could potentially slow down projects significantly.

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