Impact Investing | July 3, 2024

Dueling priorities as green infrastructure projects meet prevailing wage requirements

Lynnley Browning
Guest Author

Lynnley Browning

The Inflation Reduction Act is already producing results for America’s once-in-a-generation shift to green technologies. Now, a thorny legal hurdle is complicating the economics of some projects.

Developers eligible for grants, financing or tax credits under the IRA face a host of legal requirements to prove their clean-energy projects are working as intended and benefit local communities. One obligation lies in a Depression-era federal law requiring that laborers and mechanics on all public works projects be paid what are known as local prevailing wages. That requirement applies both to the IRA’s $27 billion Greenhouse Gas Reduction Fund, or GGRF, and to more than $200 billion in corporate tax incentives for development of wind, solar, carbon sequestration and electric vehicle battery supplies. 

The longtime requirement got a surprise shakeup last year when the Davis-Bacon Act of 1931 was tweaked by the Department of Labor, giving IRA project workers and other laborers “pathways to the middle class” via boosted earnings and benefits. The revision means that IRA project developers whose financing comes together on or after Oct. 23, 2023 must now consider the higher wages of urban locales when calculating wages for nearby rural workers — a boon to rural laborers.

The Treasury Department, which is responsible for implementing much of the lRA, and the Internal Revenue Service issued final regulations last month affirming that the requirement also covers apprentices. That category of worker will play a big role in IRA projects — any contractor, subcontractor, or taxpayer who employs four or more individuals on a project must hire at least one qualified apprentice. Job creation is a big component of the IRA, which could cost $1 trillion or more over a decade and is expected to create more than 400,000 new jobs, nearly a quarter of them permanent, according to environmental nonprofit E2.

The Treasury Department “encourages” IRA project developers to craft pre-hire collective bargaining agreements with workers if they want to avoid potential penalties for running afoul of the new wage rule, including a $5,000 fine per worker not properly paid, plus 3% interest. A pre-existing provision in the wage law requires that contractors and subcontractors working on federal projects pay laborers and mechanics, including security guards and site watchmen, at least 1.5 times their regular rate for all hours worked over 40 in a workweek.

IRA-related investments are concentrated in areas where college graduation rates are below average and people have typically earned less, so the new rule is a boost to underserved communities, the Treasury Department says.

Rural wages turn urban

The combined effects of the wage-law tweaks: higher pay for rural workers, and greater costs for funds and financial institutions working on IRA projects. Projects whose financing was in place before the wage law revision are exempt from complying with it, government contracts lawyer Michael Schrier of Husch Blackwell in Washington, DC, said. But developers that fail to comply with the new rules can potentially find their IRA contract funds withheld — and unrelated federal contracts in jeopardy — or their tax credits reduced. 

“The wage determinations in Davis-Bacon apply to the IRA,” Schrier said. “It’s going to cost more to pay for these projects.”

To complicate matters, pinning down labor costs gets tougher when there are no prevailing wage determinations for, say, rural workers on solar projects in isolated areas with no pre-existing such industry.

Looming challenge

Developers can get bonus tax credits for using union labor, apprentices and paying prevailing wages, as well as by sourcing inputs domestically and benefiting low-income communities. But some benefits may shrink if developers run afoul of the new wage rules. The IRA allows project developers to sell their tax credits to third parties, opening up the Biden administration’s signature climate initiative to nonprofits, municipalities, tribes and other non-taxed entities, as well to as a broader group of outside investors.

But if IRA projects get bogged down in wage compliance expenses, they could end up running over budget, with diluted economic impacts to the communities they’re in. That in turn could scare off private capital.

In the first 12 months since the IRA was unveiled, the private sector announced more than $110 billion in new clean energy manufacturing investments, including more than $70 billion in the EV supply chain and $10 billion in solar manufacturing, the White House says. More will follow, but developers need “to be aware of the pitfalls” and keep good records, Schrier said.