*Editor’s Note: To learn more about this topic, check out the next week’s Water Power Week session on the topic – led by Tim Jacobs, Partner, Hunton Andrews Kurth LLP.

The Inflation Reduction Act (IRA) offers significant financial incentives for water power developers and asset owners through utilization of the Investment Tax Credit (ITC) and the Production Tax Credit (PTC).

Projects that meet eligibility requirements can receive a base credit of 6% ITC or $5.50 per megawatt-hour (MWh) under the PTC. However, to maximize these benefits—potentially increasing credits fivefold — developers and owners must comply with the Prevailing Wages and Apprenticeships (PWA) rules – applicable to projects greater than 1 MW or that commenced construction after January 2023.

Stated another way, project developers and asset owners seeking to take advantage of these credits should be aware that 80% of the credit is dependent on adherence to the PWA rules.

By deepening an understanding of the PWA rules, focusing on what elements are key to project developers and asset owners, organizations can access vital funding to push projects forward.

Patterson Great Falls in New Jersey,

KEY REQUIREMENTS OF PREVAILING WAGES

A central component of PWA compliance is ensuring workers receive locally established prevailing wages. The Department of Labor (Labor) determines these rates based on construction, alteration, or repair work of similar scope in the project’s locality.

Developers and owners should note:

Broad Application: Prevailing wages must be paid from early development stages, including preliminary site work, and continue through significant repair or alteration within a 10-year PTC period or a five-year ITC recapture window.

Site Limitations: Wage requirements apply to primary construction sites, secondary sites, and adjacent dedicated support areas.

Supplemental Wage Determinations: If a project spans multiple localities or extends beyond initial placement in service, additional wage determinations from Labor may be required.

Regulatory Differences: Unlike Davis-Bacon Act regulations, PWA rules do not mandate weekly payroll submissions or construction site signage, though auditors may still factor these elements into review for non-compliance.

Penalties: Non-compliance, especially those that intentionally disregard the rules, can result in elevated penalties penalties.

APPRENTICESHIP REQUIREMENTS

In addition to prevailing wages, the PWA rules mandate the use of apprentices in registered programs. Compliance hinges on three key criteria:

1. Labor Hours: Apprentices must perform a minimum percentage of total labor hours, increasing from 10% (before 2024) to 15% (after 2024).

2. Journeyman Ratios: Apprenticeship programs must adhere to required apprentice-to-journeyman ratios.

3. Participation: Employers with four or more workers must include apprentices in their workforce.

A “Good Faith Effort” exemption applies if an apprenticeship program denies a valid request or fails to respond within five business days. However, employers must renew requests annually.

RECORDING AND COMPLIANCE

Developers are solely responsible for maintaining compliance records, as outlined by the Internal Revenue Service (IRS) and Treasury Department.

The PWA rules do not incorporate all Davis-Bacon Act requirements beneficial to labor interests. Yet, the recordkeeping requirements hint that auditors will incorporate those facts as part of their intentional disregard review, influencing audit findings and penalty assessments.

One example, the PWA final rules do not require signage displaying prevailing wages at the site of work, but that information will be incorporated into an auditing function to determine whether or not the taxpayer in question intentionally disregarded the rules – thereby, potentially, subjecting them to higher penalties.

The IRS Headquarters in Washington D.C.

NEXT STEPS

For water power projects, compliance with PWA rules is crucial, as up to 80% of available tax credits hinge on meeting these standards.

Given the complexity of wage and apprenticeship regulations, developers and owners should consult tax professionals for help navigating the process effectively.