Advanced Search
September 9, 2022
Among the many funding measures included in the Inflation Reduction Act (IRA) (P.L. 117-169) that are geared toward combating climate change is the inclusion of $30 billion in clean energy tax credits for resources such as solar and wind energy and battery storage. These measures will save American families more than $1,000 per year on utility bills, helping many people reduce high energy burdens, and will help the United States cut its carbon emissions by 40 percent by 2030 and reach its clean energy goals. According to the U.S. Department of Energy, the clean energy credits found in the IRA and those in the Infrastructure Investment and Jobs Act (P.L.117-58) will reduce carbon emissions by 1,000 million metric tons in 2030.
The IRA modifies and expands the Production Tax Credit (PTC) and Investment Tax Credit (ITC) for 10 years and creates a new “direct pay” option (applicable to both). The PTC is a tax credit primarily provided for the production of wind energy at a qualified facility for its first 10 years in operation. The ITC is a lump sum tax credit claimed by a solar producer or homeowner when a solar array becomes operational. Both credits are currently worth 26 percent of the total installation cost.
Before the IRA, only homeowners and commercial entities with some tax liability could claim the tax credits when installing solar panels, wind turbines, or other eligible technologies on a property or eligible facility. Now, the “direct pay” option means non-taxable entities can also benefit from these credits. And the credits are now also available for other zero-emission technologies, such as geothermal, nuclear power production, carbon dioxide sequestration, and clean hydrogen production.
The PTC and ITC were created by Congress more than 40 years ago and set to decrease to 22 percent for homeowners in the next few years. Instead, the IRA restores the full value of both tax credits to 30 percent through 2033, which homeowners with tax liabilities can claim immediately. Clean energy tax credits remain available for commercial entities through 2025. After 2025, solar and wind developers will need to meet prevailing wage requirements to claim the full tax credit value.
The IRA also creates a new tax credit (also at 30 percent and convertible to a point-of-sale rebate) for standalone battery storage with more than three kilowatt-hours of storage capacity in residential units. Storage devices with less than one-megawatt capacity are also eligible for the clean electricity tax credit. This new battery tax credit could radically transform the solar and clean energy industry by providing a significant incentive for installing distributed battery storage to bolster the power grid.
Following the extension of the ITC and PTC, solar capacity is forecasted to quadruple and wind capacity is expected to nearly double by the end of the decade. With higher penetration of intermittent renewable energy, means there is a bigger need to provide short- and medium-term energy storage to support the grid. And the new battery storage tax credit can help with the scale-up of distributed standalone batteries. The expansion of the clean energy tax credits could not have come at a better time. Faced with higher electricity prices, homeowners are also turning to solar to reduce their overall energy consumption from the grid. As a result, residential panel installations are expected to jump to a record 5.6 gigawatts in 2022, which is enough to power more than 1 million average U.S. homes annually.
The IRA allows tax-exempt entities, such as nonprofits like houses of worship, rural electric cooperatives, municipalities, tribal governments, and municipal utilities, to monetize the full value of the ITC or PTC and receive a payment from the Treasury Department in lieu of claiming the credit on their taxes. This “direct pay” option is a game-changer because it will give nonprofits access to the same financial incentives that for-profit companies receive when investing in renewable energy. The ability to claim a 30 percent rebate on an on-site solar and community solar project will allow nonprofits to offer cheaper, cleaner electricity options to communities, which is especially important for communities that historically have suffered from air pollution and other health and environmental burdens. Nonprofits can use the 30 percent point-of-sale rebate to install rooftop solar panels and battery storage devices, as battery packs will also be eligible next year for the point-of-sale ITC credit.
Previously, tax-exempt organizations could not access the 26 percent federal solar tax credit or the corresponding wind tax credit because they did not have the tax liability to use them. Instead, they had to rely on financial structures, such as power purchasing agreements (PPAs), the Commercial Property Assessed Clean Energy Program, or solar lease-purchase agreements. Through these programs or agreements, nonprofits could partner with private companies with the necessary tax liability to claim the credits, opening the door for nonprofits to fund renewable energy projects—usually solar. Essentially, the solar panels are owned by a third party, not the nonprofit. These third-party ownership programs are not legal in every state. For example, PPAs are only available in 29 states plus the District of Columbia and Puerto Rico. These financial workarounds add complexity and time, and require financial knowledge that not every nonprofit may have. This put nonprofits at a disadvantage versus well-capitalized companies and prevents them from investing in clean energy.
Importantly, to benefit from the full value of the tax credit, clean energy projects put into service after December 31, 2022, will need to be 1 megawatt or smaller. Otherwise, they will have to comply with a series of prevailing wage and apprenticeship requirements to claim the full value of the tax credit. If these requirements are not met, the developer will only be able to claim a six percent tax credit rather than a 30 percent credit. Additionally, there are bonus tax credits for clean energy projects that meet domestic content and workforce requirements and those located in environmental justice communities (i.e., the communities that are most impacted by environmental harms) and “energy communities” (i.e., communities that have historically been very dependent on fossil fuel industries or with above-average unemployment rates).
Under the IRA, the direct pay option for solar and battery storage is only available for tax-exempt organizations, not for households. This wrinkle in the law continues to make it difficult for households with no tax liability—often low-income households—to access solar credits and rebates. Nevertheless, the direct pay option, which nonprofits have long been clamoring for, is welcome. It presents an opportunity for nonprofits to install solar panels and share the benefits with their communities. For example, places of worship are increasingly installing solar panels and battery storage to increase resilience so that they can withstand power outages due to severe weather events and provide refuge for those who lose power.
Many of the details of the new law, including the monetization of tax credits for tax-exempt entities, must still be worked out by the agencies charged with its implementation. In the next few months, the Treasury Department will have to provide guidelines on how these organizations can claim the point-of-sale rebate in lieu of the tax credits.
The direct pay option for the federal clean energy tax credit is also a big win for rural electric cooperatives (co-ops), which are nonprofit organizations owned by the people they serve. There are more than 860 rural electric co-ops nationwide, providing power to more than 40 million Americans and covering about two-thirds of the country’s landmass. For the last decade, co-ops have been increasingly investing in renewable energy to replace fossil fuel infrastructure as prices for clean energy have dropped. Still, about 50 percent of the energy delivered by co-ops to homes and businesses comes from fossil fuel plants. Only 22 percent of co-op generated energy comes from renewable energy sources.
One bright spot in co-op renewable energy production is community solar or small-scale solar, moderately-sized solar projects that are jointly owned or subscribed to by several individuals or organizations. Historically, co-ops, due to their tax-exempt nature, lacked access to the federal clean energy tax credit. Despite this obstacle, co-ops, in the last decade, have been adept at building community solar arrays for their members. Since 2010, co-ops have built hundreds of megawatts of community solar nationwide, which is more than what larger utilities have developed in utility-owned distributed energy. With a direct pay option for federal credits, co-ops can invest in more community solar arrays, spurring economic development in rural areas and creating good jobs.
The Inflation Reduction Act allocates $9.7 billion in loans and grants through September 2031 towards energy investments “for the long-term resiliency, reliability, and affordability of rural electric systems.” Eligible investments include renewable energy systems, energy efficiency measures, and other zero-emission generation intended to reduce greenhouse gas emissions. This major down payment on rural energy deployment comes with a few caveats. First, only up to 10 percent of the total funds (or $970 million) can be used on a single project. And second, IRA funds can only cover up to 25 percent of an eligible energy project’s costs.
Consider, for example, the Cooperativa Hidroeléctrica de la Montaña, which is helping residential customers and small businesses install solar panels and battery devices in rural Puerto Rico to increase resilience and reduce energy insecurity. With the aim of deploying five megawatts of solar panels and battery storage across multiple regions of Puerto Rico, the Cooperativa recently turned on a solar microgrid in the community of Castañer. This microgrid will help people keep the lights on when the power goes out due to extreme weather events, just like what happened a few years ago with Hurricane Maria.
Under the IRA, investing in environmental justice communities could add bonus percentage points to the base ITC and PTC tax credits. Nonprofit organizations located in and serving these communities will be able to claim these credits through the direct pay option when installing renewable energy systems. Solar and wind projects built in low-income, tribal nations, or environmental justice communities can claim up to 20 bonus percentage points, which are added to the 30 percent tax credit. Clean energy projects sited in these communities in 2023 and 2024 can apply for these bonus ITC tax credits, provided they fit within the annual generation capacity of 1.8 gigawatts available each year for the entire nation. Additionally, these projects need to be five megawatts or less and have to be placed into service in four years or less after the allocation of project funds.
The law also provides bonus tax credit points to clean energy investments in “energy communities,” which are places that 1) have had high levels of employment related to the fossil fuel industry since December 31, 2009; 2) had a coal mine close after December 31, 1999; 3) had an unemployment rate at or above the national unemployment rate for the prior year, or 4) had a coal-fired electric generating unit retire after December 31, 2009. Projects built in these communities and in brownfield sites can claim a 10 percent bonus clean energy credit, provided they meet workforce and domestic content requirements and that the projects are smaller than one megawatt in generation capacity. Offering bonus incentives through the IRA for solar and wind energy investments in places that used to be hubs of the fossil fuel industry is critical for helping these communities move towards a clean energy economy.
Author: Miguel Yañez-Barnuevo
We'll deliver a dose of the latest in environmental policy and climate change solutions straight to your inbox every 2 weeks!
Sign up for our newsletter, Climate Change Solutions, here.
Top-Rated Climate Nonprofit – 4-Star Charity