The Inflation Reduction Act: A New Era for Clean Energy
The Inflation Reduction Act (IRA) is a monumental piece of legislation meant to curb inflation, provide key funding for clean energy investment, and implement measures to advance environmental justice and build climate resilience at the community level. Signed into law by President Joe Biden in August 2022, it earmarks $369 billion for energy and climate change spending and is the largest investment in climate action the nation has ever made. It provides ten years of stable and predictable policy to accelerate and de-risk investment in a more equitable clean energy future. Taken together, the IRA’s climate provisions provide the solar industry with the strongest tailwinds it’s seen in years.
These tailwinds are so strong, in fact, argue researchers from global research firm Wood Mackenzie and the Solar Energy Industries Association (SEIA), that with the help of the IRA, the national solar market will grow by 40 percent. According to the organizations’ U.S. Solar Market Insight Q3 2022 report, by 2027, “cumulative solar installations across all market segments will nearly triple in size.”
“This is a monumental moment, not only for clean energy, but for meaningful action on the climate crisis. The IRA will provide a decade of stable policy support for our industry, and Sunwealth is growing the supply of investable, impactful and community-based solar that is bolstered by this legislation.”
We’re entering a period of great opportunity for solar and clean energy – opportunities that can make a significant impact on climate change and inequality.
Here are some of the clean energy provisions included in the IRA that pertain to Sunwealth and partners’ work to develop equitable community-based solar projects across the U.S.:
Tax Credits
The IRA increases the Investment Tax Credit (ITC) to a 30% credit based on the total cost of a solar project or pool of projects. The 30% tax credit is now in effect for all projects that have been operational since the start of 2022 through the end of 2033. All tax credits received from a solar investment are realized within the same year the investment is made once the solar project becomes operational. These tax benefits can now be carried back three years to cover tax liability or carried forward to up to 20 years to reduce future tax liability. This extension will provide a decade of stable policy for our industry and works to de-risk investment in community-based solar projects.
Adders
In addition to the increase and extension of the clean energy ITC to 30% through 2033, 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 potential credit of 60-70% depending on project size.
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 can not only provide meaningful energy savings, carbon emissions, and green jobs in those communities; it may also help strengthen and revitalize the local economy.
Low-Income Communities
Projects developed in low-income communities as defined by the New Market Tax Credit eligibility areas or located on Indian Land qualify for a 10% adder to the ITC. These communities are defined as a community located within a census tract with:
a. A poverty rate of 20%, and/or
b. A median family income (MFI) equal to 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 to ensuring we equitably achieve economy-wide decarbonization. The clean energy, potential energy savings, and green jobs that can be delivered by community-based solar projects help provide low-income people and communities with a meaningful stake in a better clean energy future.
Low-Income Residential Building or Low-Income Benefit Project
Clean energy projects that are situated on low-income residential buildings, or where more than half of the electricity is delivered to LMI communities, are eligible for a 20% ITC adder.
Qualified low-income residential buildings are 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 entities, 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 enable 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.
Energy Storage
Storage projects aim to build local resiliency and are important elements to achieving a decarbonized future where our communities have on-demand access to clean power. The IRA includes provisions that enable both solar-plus-storage and standalone storage projects to qualify for the ITC.
Direct Pay
Under the IRA, nonprofits and other non-taxable organizations can now receive a direct payment in lieu of tax credits for clean energy. This enables tax-exempt entities to receive the benefits of clean energy ITCs, increasing the affordability and incentive for these organizations to consider going solar.
There has never been a more important time to be engaged in equitable clean energy solutions. Tailwinds from the IRA will usher in a new era for the solar and clean energy industry. Sunwealth is well-positioned to capitalize on the projected growth of the community-based solar market that is bolstered by the IRA. With a weighted pipeline of $165 million worth of community-based solar projects and $40 million under construction, we are working diligently to put capital to work in truly impactful solar projects that take advantage of the incentives laid out in the IRA to generate significant impact and deliver stable and meaningful financial returns to all project stakeholders.
Reach out to learn more about partnering with Sunwealth.