Your Guide to the Inflation Reduction Tax Credit (ITC) with Capstone President and CEO, Darren Jamison

November 14, 2022

How does the Inflation Reduction Act (IRA) enacted in August 2022 impact the Investment Tax Credit (ITC)? In what ways does it affect Capstone customers?

DRJ: The IRA invests $369 billion in climate and energy security programs, including boosting the tax credit available to our combined heat and power (CHP) customers, reinstating the tax credit for renewable electricity from biogas projects, extending the tax credits’ expiration dates and expanding eligibility to some tax-exempt customers, including to nonprofit, state and municipal entities that previously could not benefit from tax credits.

Prior to the bill passage, the investment tax credit was 10% for CHP projects. That’s now been increased to 30% for projects that begin construction by the end of 2024. And the bill rewards U.S. manufacturers by adding a bonus 10% for U.S.-made CHP solutions that are commissioned starting in 2023. While the IRS is in the process of clarifying the rules for what qualifies as “made in the U.S.”, the gist is that in order to receive the extra 10% tax credit, any structural steel and iron for the project must be produced in the U.S. and 40% of the cost of the equipment used in the project must be produced in the U.S. Since a Capstone system uses about 70-80% U.S. content, and we and most of our suppliers manufacture in the U.S., choosing our product will help our customers qualify for the bonus and receive a full 40% tax credit. That’s the biggest subsidy we’ve had for our technology in the history of the company. It’s really a game-changer that puts highly efficient, low emission CHP projects on a more level playing field with fuel cells, solar, and other technologies that have received significant incentives over the years. In addition, customers whose facilities are located in an energy community may be eligible for another 10% bonus.

What’s also exciting is that for the first time, the financial incentive extends to organizations not subject to federal income tax. So if, say, you’re a university, a city-owned wastewater treatment plant or NGO, instead of federal tax relief, you can get a cash payment in the amount of the credit from the government once the project is placed in service to help offset the project cost.

There is also a Production Tax Credit available to renewable electricity produced from biogas, which a customer can elect to take as an ITC instead. That 30% credit had been in place previously, but it had expired at the end of 2021, and now it’s been restored. That’s not only a help to those looking to tap the biogas renewable market but also our CHP and CCHP customers.

What can that mean for a customer in investment payback terms?

With that level of financial incentive, we estimate the payback would be roughly one-and-a-half to two years faster for simple payback. For projects that would normally have a five-year payback, it puts you closer to a three- to three-and-a-half year payback. That’s very significant since payback is often what drives these kinds of investment decisions, especially for CHP projects.

What do the new labor requirements mean for customers?

They could mean increased construction and operational costs. The 30% ITC will eventually be subject to prevailing wage and apprenticeship requirements that have not yet been published by the IRS. These provisions focus on wages paid to laborers and mechanics working on construction of the project and later alteration and repair for a 5-year period following commissioning and targeting 10-15% of the labor hours during construction to be performed by qualified apprentices.

For projects under 1 MW, these labor requirements do not apply. For customers with larger energy needs, these requirements will come into force for projects beginning construction starting 60 days after they are actually published. If a project does not satisfy the labor requirements, they are still eligible for a 6% ITC.

Are there older projects that didn’t go forward that would now be viable?

We certainly see this as an opportunity to reach out to past customers and contacts that walked away from projects because the payback was not competitive with other investment options. It’s great to be able to follow up with our contacts and say, “You looked at this project a couple years ago. Back then, the payback was seven years, now it’s going to be five.” That’s pretty compelling.

Many distributed energy projects are delayed by lengthy and expensive interconnection processes. Does the ITC help address these barriers?

Yes! We’ve seen interconnection processes that are supposed to take a few months stretch out to 2 years or longer for some utilities. For projects under 5 MW that are commissioned starting next year, the 30% ITC was expanded to apply to amounts paid or incurred for interconnection to a utility transmission or distribution system. There is also a "safe harbor” provision, which for the ITC historically has meant once a project begins construction, it has four years to be completed and commissioned. That gives customers additional time to ensure a project started before the end of 2024 deadline will still be eligible for the ITC despite potential delays in interconnection.

Is there a connection between the IRA and the big infrastructure bill passed last year?

The infrastructure bill and the IRA are really complementary. The infrastructure bill targeted federal investment in energy modernization that is needed to support growth in clean energy. The IRA targets that growth in clean energy.

For example, the IRA incentivizes purchases of electric vehicles. That in turn will generate demand for charging stations and power generation. There is no way utilities alone are going to be able to meet that demand. Customers need distributed generation and energy storage options. In California alone, the state projects that they’re going to need 1.2 million electric vehicle (EV) chargers by 2030.* At the same time, the state hit record demand this summer during an extended heat wave and saw 8 days of power outage warnings. More EV charging requires more power generation in a state already constrained in meeting current demand. One way to bridge that need gap is through installing on-site CHP projects at high demand centers. And with those projects generally delivering over 70% total system efficiency, it’s a huge benefit for everyone.

*According to California Energy Commission

The bill stipulates that the systems have to start construction by the end of 2024. What kind of planning or lead time should people be looking at?

The challenge in answering that question is that many in our industry are still dealing with global supply chain issues that started during the pandemic. So, we're telling customers to anticipate a 12- to 14-week delivery, but we recommend getting orders in ASAP because it could go a lot longer, we just don’t know. Meeting the start construction deadline by ordering equipment early and ensuring between lead times, construction timelines and interconnection queues that customers can commission the project well within the four-year safe harbor period should be top of mind for anyone hoping to benefit from the ITC. In addition, any customers considering projects over 1 MW who may be concerned about the coming wage and labor requirements would benefit from beginning construction prior to their effective date.

That said, once the equipment is on hand, the installation of our CHP solutions is quick. Our microturbine technology is the closest thing to plug-and-play. The utility controls and safety controls, the fuel system and the control system, they’re all contained in the housing with the microturbine. There's no ancillary oil or antifreeze. We are literally a power plant in a box.

So what’s the longevity for a Capstone system?

We are a relatively young company so our first systems were deployed 23 years ago. We have systems that have run for over 20 years, and many that are still going strong at 23. Unlike engines that wear themselves out as they run, our turbines don't have any friction when we're running because we use air bearing technology. And it’s best to run the units continuously. We tell customers to just turn them on and don't shut them off unless you absolutely have to. We say 20-25 years’ longevity, but it could be 50, we just don’t have systems in the field long enough to say.

What is the process for a customer to get started on exploring whether a CHP project is a good fit?

We encourage customers to review the information on our website, and then reach out to their local distributor or come directly to us, and we'll get them started. Having a year’s worth of gas and electric utility bills is helpful to understand their power and thermal needs and current cost of energy. We can run the economics pretty quickly on a high level to see what kind of payback the new IRA bill incentive may be able to offer.

Beyond economics, why else would a customer consider doing a project with Capstone?

Between the environmental benefits, the long-term cost benefits from our lower maintenance requirements, and the resiliency benefits, there really is no reason not to explore the feasibility of on-site power generation.

Think about the resiliency issue alone. We just went through another devastating hurricane in Florida with all the associated power outages. Luckily this year’s fire season in California isn’t like last year’s, but keep in mind that anytime a fire got close to utility lines, they shut down or conduct rolling blackouts. If your business or school or other organization is crippled without power, now is the time to start hedging your bets against utility reliability because it’s not likely to get better as growing vehicle and building electrification causes demand to skyrocket.

That doesn’t even address the environmental benefits, which are significant both in terms of overall efficiency of CHP solutions that can reach over 90%, as well as lower emissions compared to utility delivered power, which in the US was around 950 lb/MWh delivered last year. A CHP system can easily achieve at least a 20% improvement in emissions reduction. For a 1 MW system, those emission savings over one year would be equal to carbon sequestered by more than 152,000 tree seedlings grown for 10 years.

Are there industries for which on-site power generation is especially beneficial for?

This is an enormous opportunity for any industry that is energy intensive. The customers we’ve provided the best results to have been hospitals, hotels, commercial facilities, and especially manufacturing plants where they are running 24-7. We’re an especially valuable option for sites with thermal loads, whether it's hot water, chilled water, steam, or direct exhaust applications, like dryers. And customers can consider on-site power just to support their critical loads or for entire sitewide needs where unplanned grid outages can cost millions of dollars in lost or ruined product.

Especially in parts of the country where power is more expensive—which is essentially, the whole eastern seaboard down into the south and out west—our systems provide dramatic cost savings.

Any final thoughts?

I keep coming back to the word transformational. This is a big deal for Capstone, so it’s a big deal for our customers. Let’s start with lowering energy costs 30-40% for the next 20 years. And then add the ability to increase energy efficiency and improve reliability, all while dramatically reducing your environmental impact. For a business, it’s almost irresponsible to not at least take the first step to see whether a CHP solution might be a good fit for their operations.

Contact a local distributor today to discuss your next CHP Project: