The Inflation Reduction Act (IRA) offers many transformational supports to facilitate a rapid clean energy transition. For renewable energy developers, the IRA offers bonus tax credits for projects located in "energy communities," broadly defined as areas that will be disproportionately affected by reducing or eliminating fossil fuel activity. Last month, the IRS released Notice 2023-29, which provides guidance on what constitutes an energy community and how to determine whether existing projects are located in a qualifying area. This article introduces the energy communities “adder” and discusses expected benefits and challenges for clean energy investors and developers as the program progresses.
What Are Energy Communities?
The IRA’s energy community provisions aim to revitalize communities that have historically hosted oil, coal, and gas facilities, and create new career opportunities in a waning fossil fuel economy. There are three major energy community categories: census tract coal closures, statistical areas, and brownfield sites. Let’s examine each:
Coal closures: Eligible properties include census tracts hosting coal mines retired after December 31, 1999, or coal-fired electric generating units retired after December 31, 2009. Census tracts directly adjoining an aforementioned census tract are also included. Recent research estimates that around 15 percent of U.S. land will qualify, particularly tracts in the Western Interconnection (WECC), PJM Interconnection, and Midcontinent (MISO) energy areas.
Statistical areas: This category pertains to fossil fuel employment in “metropolitan statistical areas (MSAs)” and non-MSAs. MSAs comprise of grouped counties or county-equivalents and are determined by Office of Management and Budget (OMB) standards. Non-MSAs are defined by the Bureau of Labor Statistics (BLS).
To qualify, MSA and non-MSA communities must meet two criteria: having at least 0.17 percent of direct employment or at least 25 percent of tax revenues related to fossil fuel extraction, processing, transport, or storage after December 31, 2009; and, having an unemployment rate at or above the national average unemployment rate for the prior year. This category opens an estimated 26 to 54 percent of U.S. land area to energy communities largely within PJM, Electric Reliability Council of Texas (ERCOT), and southern MISO regions.
Brownfields: The brownfield category, although likely comprising the smallest segment of qualified U.S. land, currently offers the clearest guidance among the three energy community options. The IRA defines brownfield properties as those which may encounter difficulties with redevelopment, expansion, or reuse due to the presence or potential presence of hazardous substances, pollutants, or contaminants, including certain mine-scarred lands. Superfund sites and sites excluded by the IRA's full brownfield definition do not qualify. To be eligible for the Energy Community Tax Credit bonus, a state, federal, territory, or tribal resource group must have previously assessed the site, or the site must undergo an environmental site assessment and adhere to IRA brownfield criteria.
The Energy Community Tax Credit Bonus
The IRA made waves in the clean energy sector by extending the investment tax credit (ITC) and production tax credit (PTC), adding tax credit transferability, bonus adders, and expanding the ITC to include battery storage and other clean technologies. ITC-qualified projects may receive a base tax credit of up to 30 percent, while PTC-qualified projects may be eligible for up to $0.0275 per kilowatt-hour (kWh) through at least 2025.
Qualifying energy community projects will receive an (up to) 10 percent ITC bonus or a 10 percent multiplier on the project’s PTC value. To receive the full ITC value and energy community bonus, ITC projects must meet the IRA’s prevailing wage and apprenticeship labor standards. Noncompliant PTC projects, however, will still receive the full 10 percent multiplier, but with a reduced, PTC noncompliance rate.
Developers and investors may view these new incentives as a way to lower barriers to new project opportunities, boost competition for purchasing agreements, and increase internal rates of return. Certain projects only qualify for a particular tax credit option (i.e., storage with the ITC). Developers with both ITC- and PTC-eligible projects, however, must choose which option best suits their needs. Case studies show varied ITC vs. PTC performance based on regional capacity and capital cost differences across the U.S. These values may change completely with the addition of the energy community adder. Developers should calculate their choices to ensure they receive the best credit for their project.
Equitable Development and Energy Communities
Justice, Equity, Diversity, and Inclusion (JEDI) are IRA priorities, as well as priorities for Leyline and for many other businesses in the renewable energy space. For years, low-income areas and Black, Indigenous, People of Color (BIPOC) communities have borne the disproportionate burdens of fossil fuel extraction and generation facilities, resulting in acute pollutant exposure and related health outcomes. In addition, having historically relied on volatile job markets and dangerous working conditions, these regions suffer from significant economic instability and distress. The Energy Communities adder presents an opportunity to improve environmental, economic, and overall well-being in historically disadvantaged communities through new, stable jobs, reduced electricity costs, and cleaner air and water. It ensures that those most impacted by climate change and economic injustices participate and receive benefits from the clean energy transition.
The energy communities adder offers industry players numerous potential benefits. It can reduce costs and increase federal support, boosting confidence in renewable energy investments, facilitating access to new markets, enhancing project viability, and enabling community and peer collaboration. The tax credits also create opportunities to prioritize social responsibilities, ensuring workforce growth and equitable access in communities of greatest need. To maximize project impact and comply with regulation, developers and investors must carefully plan new initiatives and conduct due diligence.
The energy communities guidance still requires further clarification. Notice 2023-29 provided welcome updates on what constitutes an “energy community,” determining whether facilities are located or placed in service in a qualified area, ownership structures, and other details. But certain definitions, checks for data consistency and completeness, methodologies, and other factors require federal attention. The adder will significantly improve industry success and community improvement, but comprehensive, understandable final guidance is necessary to achieve its full, positive impact. Leyline eagerly awaits these possibilities and looks forward to engaging with the energy communities program as it moves forward.