How to Successfully Leverage the IRA for Renewable Energy Tax Credits
A Collaboration between KPMG and LandGate
Navigating the financial landscape of renewable energy can be challenging, but it is essential for developers to leverage available tax incentives at both state and federal levels. These incentives are designed to support and accelerate the growth of clean energy projects, making it more feasible and attractive for developers to invest in renewable technologies.
Whether you're working on solar, wind, or other renewable projects, understanding the various tax benefits can significantly enhance your project's financial viability and overall success.
You can also click here to contact KPMG + LandGate directly.
IRA and Federal Developer Tax Credits
The Inflation Reduction Act (IRA), ratified by the national government in 2022, functions as a key tool in the battle against inflation and the support of domestic energy production.
The contributes a minimum of $4 billion through the Advanced Energy Project Credit, a designated credit of up to 30% for forward-thinking energy projects. This generous financial motivation has driven significant investment and sparked creativity in the solar industry.
The IRA represents the most significant climate investment in the history of the United States. It aims to propel industries towards adopting cleaner and more ecologically sound energy sources while developing projects within defined energy communities.
Energy Communities
IRA Energy Communities are areas designated under the Inflation Reduction Act that are eligible for specific funding and incentives related to energy.
An energy community can also be defined as one where fossil fuels provide about 25% of the tax revenue locally. Nationwide, fossil fuels contribute about 138 billion USD in revenue to all of the following governments: tribal, federal, local and state.
Brownfields
A Brownfield Community is a term used to describe properties that are presumed or confirmed to have environmental contamination from past activities, which can hinder growth or redevelopment. These properties are identified by the US Environmental Protection Agency (EPA), making them qualified for financial assistance to support redevelopment and cleanup initiatives. As the areas these properties occupy are generally smaller, they are often ideal for developers of community solar and BESS.
Notice 2023-29 created a “safe harbor” for accepting Brownfield sites that meet at least one of the following conditions:
The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the definition of a Brownfield
Sites on the Brownfields Properties list on EPA’s “Cleanups in My Community” webpage or on similar webpages
A Phase II Assessment has been completed and confirmed the presence of hazardous substances, pollutants, or contaminants
For projects less than or equal to 5MW (AC), a Phase I Assessment has been completed
Statistical Areas
The Statistical Areas energy community designation applies to renewable energy projects located in MSAs (Metropolitan Statistical Areas) or non-MSAs that have, at any time since 2009, met both of the following two criteria:
“0.17 percent or greater direct employment or at least 25 percent of local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas”.
Unemployment rate is equal to or above the previous year’s national average.
Coal Closures
The Coal Closure category includes any census tracts, or adjoining tracts, where either a coal power plant closed after December 31, 2009, or a coal mine closed after December 31, 1999. While the definition of these tracts did not change, the IRS did provide information to help confirm whether a project may be in a qualifying Coal Closure tract.
The tract outlines used will be from the 2020 Decennial Census and will be updated every 10 years. It was also stated that census tracts are considered adjoining if their boundaries meet at a single point (ex. If 4 square-shaped census tracts all met at one corner, they would all be considered adjoining tracts). The IRS provided a table of tracts that they believe qualify.
The qualifying coal closure tracts are quite large and make up about 15% of the overall area in the United States. This makes them attractive targets for large-scale solar and wind project developers.
Low-Income Communities
“Low-Income Communities” are defined as residential buildings that participate in one of several programs listed in the IRA and as part of a low-income economic benefit project if at least 50% of the financial benefits of the electricity produced are provided to households with income of less than 200% of the poverty line or less than 80% of area median income.
The IRA would provide an enhanced ITC for wind and solar projects that are located in a low-income community and have a nameplate capacity of 5 MW(ac) or less, and for which the Secretary makes an allocation of environmental justice solar capacity limitation.
Indian Land
Projects located on Indian Land are eligible for the enhanced Investment Tax Credit (ITC) when they meet specific criteria outlined in the IRA. This provision aims to empower tribal communities by promoting renewable energy development within their territories. By supporting solar and wind projects in these areas, the IRA helps to enhance energy sovereignty and provide economic opportunities, while also addressing the unique challenges faced by Indigenous populations in accessing clean energy resources.
Category 3: Low-Income Residential Properties
Category 3: Low-Income Residential Properties includes residential buildings that participate in federal programs designed to assist low-income households. By targeting these properties, the IRA facilitates investments in renewable energy systems that can significantly reduce energy costs for residents. This approach not only improves access to clean energy but also fosters energy resilience in communities that often experience higher energy burdens. Additionally, it helps to ensure that the financial benefits of clean energy advancements are equitably distributed among those most in need
Category 4: Low-Income Economic Benefit Project
Category 4: Low-Income Economic Benefit Projects encompasses initiatives where at least 50% of the financial benefits from electricity production are directed to households with incomes below 200% of the poverty line or less than 80% of the area median income. This category emphasizes the importance of creating sustainable energy solutions that prioritize economic equity. By incentivizing projects that focus on low-income communities, the IRA not only fosters social responsibility but also helps stimulate local economies, creating jobs and promoting investment in renewable technologies.
Domestic Content Bonus Credit
The Domestic Content Bonus Credit further enhances the incentives for renewable energy projects by encouraging the use of domestically sourced materials and equipment. This provision aims to strengthen U.S. manufacturing and supply chains, promoting economic growth while reducing reliance on imported components. By qualifying for this bonus credit, developers can enhance the economic viability of their projects, contributing to local job creation and fostering a more resilient energy infrastructure. This aligns with broader objectives of promoting sustainability and energy independence within the framework of the IRA.
State Specific Incentives
Many states have implemented a variety of incentives to promote the development and adoption of clean energy sources. These incentives can take the form of tax credits, grants, rebates, and renewable energy credit (REC) programs, each designed to encourage investments in solar, wind, and other renewable technologies.
California Tax Incentives for Renewable Development
California offers a robust set of incentives for renewable energy, including the California Renewable Portfolio Standard (RPS), which mandates that a significant percentage of the state’s energy must come from renewable sources. Additionally, California's Cap-and-Trade Program allows entities to purchase and trade carbon credits, which can benefit renewable energy projects.
New York Tax Incentives for Renewable Development
New York's Clean Energy Standard requires that 70% of the state's electricity come from renewable sources by 2030. The state also has a Renewable Energy Credit (REC) program, allowing projects to earn RECs for each megawatt-hour of renewable energy generated. These credits can be sold to utilities to help them meet their renewable energy goals. Additionally, New York City actively supports utility-scale renewable projects through the NYC Clean Energy program, which streamlines the approval process and offers financial incentives for large installations. This includes tax incentives for renewable energy projects that contribute to the city's clean energy goals.
Texas Tax Incentives for Renewable Development
Texas has a unique approach to renewable energy credits, primarily through its Competitive Renewable Energy Zones (CREZ) initiative, which promotes wind and solar development. While the state lacks a formal REC program, its deregulated electricity market enables renewable energy producers to sell power directly, capitalizing on the growing demand for clean energy and often achieving favorable pricing for their projects. In San Antonio, CPS Energy supports utility-scale solar initiatives through various contracts and local incentives, including property tax abatements for renewable energy developments. These efforts contribute to a supportive environment for large projects while enhancing the city’s renewable energy portfolio.
Utility Scale Incentives
Under the Inflation Reduction Act, utility-scale solar energy is eligible for the production tax credit (PTC) again, which has been a key tax credit for stimulating the growth of wind resources over the past decade. Solar developers now have the choice of either qualifying for the Alternative Investment Tax Credit (ITC), or receiving a percentage back in tax credits based on the amount of capital spent on tangible equipment or the PTC, which is based on the total energy generated over the first 10 years multiplied by the PTC base rate ($/MWh) and any bonuses received.
The Investment Tax Credit (ITC) has been set to 30% and extended through 2035 before tapering off to 26% in 2033 and 22% in 2034. Previous to the IRA, the ITC had already begun its first phasedown from 30% in 2021 to 2026% in 2022.
Community Solar Incentives
A community solar farm is a shared solar power installation that lets many people benefit from one solar array. A community solar farm is a shared solar power installation that enables multiple participants to benefit from a single solar array. This model is designed to provide access to solar energy for individuals and businesses that may not have the means or suitable property to install solar panels on their own. In a community solar farm, a large-scale solar photovoltaic (PV) system is typically installed in a centralized location, such as an open field, rooftop, or dedicated facility. Unlike utility-scale solar projects, which are large installations generating power primarily for the grid and are usually owned by utilities or large companies, community solar projects allow participants to invest in or subscribe to a portion of the energy produced, making solar energy more accessible without the need for personal installations.
For instance, Minnesota's Community Solar Garden program offers various incentives, including a Solar Rewards program that provides financial benefits to developers of community solar projects. Subscribers receive credits on their utility bills based on the energy produced by the solar garden, enhancing financial accessibility for participants. Similarly, Colorado has enacted the Community Solar Gardens Act, which allows customers to subscribe to community solar projects and receive utility bill credits. This program also offers financial incentives for developers, such as the ability to earn Renewable Energy Credits (RECs) and grants from the Colorado Energy Office specifically for low-income community solar initiatives. Together, these programs illustrate how community solar farms can broaden access to renewable energy and foster local engagement.
