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Development of Charging Station Infrastructure in Light of Changes To Alternative Fuel Vehicle Refueling Property Language in the Inflation Reduction Act

October 20, 2022

The Inflation Reduction Act (IRA) recently extended, expanded, and renewed the Alternative Fuel Vehicle Refueling Property (AFVRP) tax credits for electric vehicle charging stations, LNG, CNG, LPG, hydrogen, ethanol, and biofuels. In particular, the AFVRP credits are a new opportunity for charging station infrastructure developers to receive multiple credits on a single property, but also provide a new set of challenges with the introduction of geographic and prevailing wage requirements to realize the maximum credit. While the AFVRP credits will receive less fanfare than the headline renewable energy and vehicle purchase credits, the impact is already being felt in the Electric Vehicle Charging Stations (EVCS) industry, and infrastructure developers should be prepared to negotiate with vendors that incorporate the tax credit into their sales assumptions.

Maximizing Tax Credits Available for AFVRP

Under the IRA, investors or owners of electric vehicle infrastructure can obtain up to “$100,000” in tax credits per “item” of alternative refueling property (defined below). Caution and careful planning are required to receive the maximum amount as that number can be as low as “$6,000” per “item” of alternative refueling property at an AFVRP (see SEC. 13404 of the IRA). An item of alternative fuel vehicle refueling property is defined as follows:

  • (3) BIDIRECTIONAL CHARGING EQUIPMENT …” (see SEC. 13404 of the IRA)
  • “(2) BIDIRECTIONAL CHARGING EQUIPMENT…Property shall not fail to be treated as qualified alternative fuel vehicle refueling property solely because such property— ‘‘(A) is capable of charging the battery of a motor vehicle propelled by electricity, and ‘‘(B) allows discharging electricity from such battery to an electric load external to such motor vehicle.’” (see SEC. 13404 of the IRA)
  • …‘‘(1) IN GENERAL.—The term ‘qualified alternative fuel vehicle refueling property’ includes any property described in subsection (c) for the recharging of a motor vehicle described in paragraph (2), but only if such property‘‘(A) meets the requirements of subsection (a)(2), and ‘‘(B) is of a character subject to depreciation.” (see SEC. 13404 of the IRA)

The range of uncertainty arises from the metrics underlying the tax credit percentage calculation since the allowed amount can range from 6 percent to 30 percent of the item of alternative refueling property — the key variability stems mainly from (i) statutory changes based on a per item approach (as set forth below); (ii) geography and (iii) prevailing wage and apprenticeship requirements.

Perceived Improvement on Previous AFVRP Tax Credits for Volume Infrastructure

Previously, IRC § 30C defined tax credit levels instead of the IRA. The IRA levels represent a significant change from IRC § 30C as the previous maximum tax credit was calculated on a single location basis instead of on a per-item approach. While previous levels may have guaranteed a higher base percentage (30%), favoring single charging station properties, the new tax credit regime will likely provide more tax credit value per item of AFVRP property and thus should be more scaleable for infrastructure players looking to build in volume.

AFVRP Tax Credit Impact on Pricing and Warranties

It is near certain that OEMs and equipment vendors are currently increasing prices of US landed EV equipment in contemplation of slicing a segment of this tax credit incentive for themselves (an aggressive Vendor may ask for as much as a 30% price hike, even though the base tax credit has fallen to as low as 6% in certain circumstances). Investors and owners should be aware of underlying fundamentals that define the price, and negotiate discounts if the price betrays the reality of tax credits and market trends.

With higher margins, OEMs/Vendors should look for more robust and durable warranties. EV equipment vendors may offer as little of a warranty period as three to six months, and limit severely the scope of the warranty.

Investors or owners (especially Buyers of substantial volume) should push for longer warranty periods, keeping in mind that some industries that manufacture and sell sophisticated heavy electrical equipment offer anywhere from one to five years of warranty coverage.

Key areas of warranty coverage should include typical Buyer protective warranties common to electrical equipment such as the equipment being free from defects, conformance to specifications, etc. Also, more importantly, buying teams should also push for coverage of firmware and to the extent, it is incorporated software. Firmware and software warranties are typically for the life of the functionality, expressed in service levels, and paid in liquid amounts equal to 1-5% of the subscription cost of the software.

Tax Treatment

Qualifying for an enhancement from 6% to 30% under the new IRA tax credit regime is a fact-intensive exercise. Geography for instance will play a significant role, with distressed urban areas and areas outside urban centers obtaining the highest level of tax credit enhancement.

Projects that observe Prevailing Wage and Apprenticeship regulations (rulemaking will happen in the future) for construction projects and possibly ongoing operation of the infrastructure will also achieve maximum tax credits. The operative language in the IRA states the company, “shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of any qualified alternative fuel vehicle refueling property which is part of such project shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such project is located as most recently determined…” see SEC. 13404(d)(A). This section creates a fact-intensive question of whether an entity has actually complied and will pose a high risk of compromising the realization of credits late in any investment process. Similar to wage-hour law, companies will want to avoid noncompliance found after the fact.

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