The Inflation Reduction Act (IRA) will deliver a much-needed boost to developers of solar, wind, energy storage and other clean energy technologies over the next 10 years as existing tax credits are expanded and new credits are added. Though the clean energy industry will be directly in line for substantial benefits, the spinoff effects could also benefit disadvantaged communities, the construction trades and domestic U.S. manufacturing.
The IRA will modify the U.S. tax code to sweeten the rules for tax credits as a means to incentivize developers to build renewable generation or other clean energy facilities in areas that may have been too challenging to consider before. Subtitle D, the part of the IRA that focuses on energy security, is estimated to cost approximately $68 billion over the next 10 years. According to simulation models produced by some climate policy think tanks, the incentives available under the IRA will result in projects that reduce CO2 emissions between 37% and 43% below 2005 levels by 2030. This compares with a projected 25% reduction in CO2 over the same time period without the benefit of the new IRA tax benefits.
Though it enhances investment tax credits (ITCs), production tax credits (PTCs) and direct pay benefits available for renewable energy projects, the ITC provisions are gaining particular attention. A base ITC of 6% is available for projects that begin prior to Jan. 1, 2025, but now projects may earn up to 50% in ITCs if they:
Challenges and Opportunities
Many rules for tax credits are now being defined and clarified — along with the criteria developers and utilities must meet to qualify for them. The result will benefit many regions of the country that were once in decline, as they could gain special designation as energy communities and thus eligible to receive an economic booster shot. Under Section D, an energy community is defined as the census tract where a closed coal-fired power plant or coal mine was once located, plus the census tracts adjacent to that primary tract.
On April 4, 2023, the U.S. Treasury Department and Internal Revenue Service (IRS) released updated guidance detailing how the 10% energy community bonus may be received in addition to the ITC and PTC credits. More details are expected to be released later in 2023 by the IRS, including an updated energy community map based on more recent census data. This guidance is expected to further clarify rules for obtaining the energy community tax credit bonus.
Developments on brownfield sites and in energy communities will receive similar tax advantages for renewable or clean energy projects. Brownfield sites — generally defined as tracts of land where development may be complicated by the presence of hazardous substances, pollutants or contaminants — are often where fossil-fueled power plants or mines once operated.
All this comes with the caveat that the U.S. Treasury Department will have the final say on whether benefits will be available for a brownfield site. The U.S. EPA provides geospatial data resources that can help pinpoint features and locations of brownfield sites. There are some exclusions to the brownfield site option, such as whether it has been classified as a federal Superfund site and included on the national priorities list for cleanup of hazardous materials. Ash ponds at retired coal power plants that have been properly closed and meet current regulations for site controls are eligible for development, but ash ponds that are still in the process of being closed or have faced issues in the past are excluded. An accurate understanding of these hurdles is crucial, because the extra scoop of tax benefits may be the thing that makes a project economically viable.
Developments at brownfield sites may face additional challenges of working around abandoned underground utilities or buried materials. This could make it problematic to install solar piles or other equipment that requires some subsurface installation. Unless an alternative solution is engineered, conventional installation around landfills and closed ash ponds could risk puncturing liner materials that keep ash deposits from migrating into area groundwater.
In addition, many of these sites do not yield the ideal acreage needed for utility-scale solar installations. Unless the utility or other owner of the land has additional acreage available nearby, the economics of some of these projects could be difficult. It is clear that the tax benefits available under the IRA for brownfield site development must outweigh the costs in order to attract solar, wind, battery storage or other clean energy projects.
Direct Pay Benefits for Nontaxable Entities
The IRA enables a wide range of nontaxable entities to receive direct pay benefits. These include relatively large entities as well as rural electric cooperatives and municipal utilities who are often the utility service providers for smaller communities and rural regions. Tax credits for renewables, storage, carbon capture and other clean energy projects are now available to these nonprofit entities on the same basis as they have been available for taxable, investor-owned utilities. What’s more, the benefits extend to smaller projects that are more likely to be in the wheelhouse of smaller utilities.
At the heart of the benefit is the potential for nontaxable entities to receive direct payments for the portion of a renewable or clean energy project that would qualify for a tax credit. That means a co-op, municipal utility or other nontaxable entity would receive a direct rebate from the IRS for the tax credit they qualify for, allowing them to potentially defray some of cost of the renewables project. This is a significant step that creates parity with for-profit utilities that have long benefited from availability of tax credits to develop wind, solar and other renewable energy projects.
Opportunities to Move Past Challenges
With the tax benefits that are now available equally to investor-owned and publicly owned utilities, the economics of developing projects on some brownfield sites may now become more economically feasible and able to accommodate the additional expense of engineered solutions such as ballasted piles for solar installations and above-ground cabling.
In addition, brownfield sites and/or energy communities often are located in sparsely populated rural areas that create opportunities to look at larger qualifying census tracts for renewables projects. These census tracts may also provide advantages in locating in closer proximity to power transmission infrastructure for the required interconnections. Though the costs of building transmission infrastructure are not eligible for tax benefits under the IRA, finding transmission interconnection points on underutilized transmission facilities could help a project application gain expedited consideration by regional transmission authorities or independent system operators. Keeping interconnection costs at reasonable levels could help the overall project turn profitable once tax advantages are gained.
Despite its complexities, it seems certain that further clarification is coming soon and that a new era of federal incentives under the IRA could make a whole new range of renewable and clean energy projects economically viable where they weren’t before.
Engineer-procure-construct project delivery can help renewable project developers deal with the complexities they may encounter.
Editor’s note: This post was originally published Nov. 2, 2022. It has been updated to reflect new guidance issued by the federal government on qualifying for certain provisions under the IRA.