37. ITC ADDERS IN THE INFLATION REDUCTION ACT: INVESTING FOR IMPACT AND MAXIMIZING RETURNS
Solar installers on top of one of our portfolio projects for the New York City Housing Authority (NYCHA).
Over the last few months, Sunwealth has been providing coverage of the Inflation Reduction Act (IRA), what it means for the community solar market, and the opportunities it holds for our community bank partners. As our team of project developers, financiers, and investment experts navigate implementation of the IRA, we want to discuss other significant provisions of the law: investment tax credit (ITC) adders.
In addition to the increase and extension of the clean energy ITC to 30% through the next ten years, the IRA also introduces new adders to further incentivize investing in community-based solar projects that benefit low to moderate-income communities. Projects that are eligible for one or more adders have the potential to receive a maximum credit of 60-70% depending on the size of the project.
Below, we highlight key elements of the solar ITC adders in the new law and how they serve to maximize returns on investments.
THE ADDERS
1. Energy Communities
Projects developed in areas that are considered to be energy communities are eligible for an additional 10% adder to the total ITC. There are three types of communities included in the energy community definition:
a. Brownfield Sites – defined by the U.S. Environmental Protection Agency (EPA) as “a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.”
b. Census tracts and adjacent census tracts where a coal mine closed after 1999 or a coal-fired power plant was retired after 2009.
c. A metropolitan or non-metropolitan statistical area with unemployment rates from the previous year at or above the national average AND with at least 0.17% of employment or 25% of local tax revenues related to extraction, processing, transport, storage of coal, oil, or natural gas at any time since 2010.
Developing projects in energy communities seeks not only to provide meaningful energy savings, carbon emissions, and green jobs, but also contributes to the revitalization of communities and the local economy.
2. Low-Income Communities
Projects developed in low-income communities as defined by the New Market Tax Credit or on Indian Land qualify for a 10% adder to the ITC. These communities are defined as a community located within a census tract with either:
a. A poverty rate of 20% and/or;
b. The median family income (MFI) is 80% or less of the state MFI
Low-income communities have often been overlooked when it comes to clean energy investments, but they are integral pieces to ensuring we equitably achieve economy-wide decarbonization. These communities stand to benefit greatly from the energy savings and green jobs delivered by community-based solar projects that give them meaningful stake in a better clean energy future.
3. Low-Income Residential Building or Low-Income Benefit Project
Clean energy projects that are situated on a low-income residential building or where more than half of the electricity is delivered to LMI communities are eligible for a 20% ITC adder.
A qualified low-income residential building is defined as rental buildings that are part of a housing program under the Violence Against Women Act, Title V of Housing Act of 1949, tribally designated housing entity, or other HUD affordable housing definitions. A low-income economic benefit project would qualify for the 20% adder if over 50% of the power generated from the solar project supplies electricity for low-income households.
Low-income community shared solar (LICSS) projects help expand who has access to clean energy and enables residents who are not homeowners to take advantage of clean energy. LICSS projects bridge the clean energy gap by supplying affordable electricity and economic opportunity to historically underserved communities and individuals who might otherwise be left behind in the energy transition.
There has never been a more important time to be engaged in equitable clean energy solutions. Tailwinds from the IRA will undoubtedly usher in a new era for the solar and clean energy industry, and Sunwealth is well-positioned to capitalize on the projected growth of the community-based solar market. With a weighted pipeline of $165 million worth of community-based projects and $40 million under construction, we can help you put capital to work in truly impactful solar projects and take advantage of the incentives laid out in the IRA.
Reach out to learn more about partnering with Sunwealth.
Christian Morris is Sunwealth’s Marketing and Investor Development Associate. Prior to joining Sunwealth, he led communications for a Boston-based research and advocacy nonprofit focused on climate policy.