The just-passed landmark Inflation Reduction Act (the Act) provides numerous opportunities for local governments to cost-effectively meet their sustainability goals and significantly lower their energy costs, through the ability to implement much more cost-effective renewable energy, energy efficiency, electric vehicle and EV charging projects. The combination of several clean energy tax credits, important new options for local governments to directly receive most of these credits, and billions of dollars in new or expanded grant opportunities can allow local governments to dramatically lower the cost of meeting their sustainability goals and implementing energy efficiency and clean energy improvements, thereby also significantly lowering their operating costs.
Below is a list of some of the key opportunities the Act provides:
- Significant extension of investment and production tax credits. The Act extends the time period for tax credits available to both wind and solar, as well as other technologies such as geothermal, biomass, and waste-to-energy facilities. This is critical since many of the clean energy tax credits either had expired or were on schedule to significantly decrease. Also, as described below local governments are now for the first time able to take direct advantage of these key tax incentives.
- Tax credits for additional technologies. The Act also adds several technologies as eligible for tax credits, including energy storage technologies, microgrid controllers, qualified biogas property, alternative fueling property, clean hydrogen production, zero emission nuclear power production, carbon sequestration, sustainable transportation fuel (including enhanced credits for aviation fuel) production, and clean energy production facilities.
- Need to consider prevailing wages and apprenticeship requirements. While the Act extends the time period for claiming tax credits and increases the value of certain tax credits, the full amount of certain credits may be claimed only if energy projects are either exempt from or meet prevailing wage and apprenticeship requirements. Otherwise, the potential tax credits may be reduced by 80% if these requirements are not met. This requirement may be consistent with a governmental entity's priorities and allow it to be uniquely suited to maximizing these credits.
- Opportunities to receive enhanced tax credits based on project location and use of American-made materials. The Act also provides opportunities to significantly increase tax credits. If a project meets domestic-content requirements, production and investment tax, credits could increase by 10 percent. Also, projects that are built in "energy communities," which includes, among other things, brownfields and areas with closed coal plants, can also receive a 10% increase in tax credits. Likewise, subject to allocation caps, small wind or solar projects up to 5 megawatts in size built in low-income areas could potentially receive a 10% increase in tax credits and projects serving low-income housing could potentially receive a 20% increase. Many of these opportunities apply to challenging areas within which municipalities are already targeting for redevelopment
- Tax credits for qualified commercial clean energy vehicles. The Act provides tax credits for electric vehicles, subject to certain made in America or made in North America requirements. The amount of a credit for a qualified commercial vehicle is a lesser of 30% of the basis of the qualified electrified vehicle or the amount equal to the excess of the purchase price over the price of a comparable conventional vehicle. The credit availability is further limited for such qualified commercial vehicles in the following manner: $7,500 for vehicles having a gross weight of less than 14,000 pounds and $40,000 for other commercial vehicles. Governmental entities will be interested in this topic and the next for for the development of clean fleet purchases and fueling systems for those vehicles.
- Tax credits for alternative fueling. The Act extends the existing 30% credit for electric vehicle charging stations, provided prevailing wage and apprenticeship requirements are met. It also increases the 30% credit limit to $100,000 for such qualified charging stations and includes, for the first time, a bi-directional charging equipment for these tax benefits. Bi-directional is capable of charging the battery of the electrified vehicle and allows discharge from that battery to loads external to the battery. Moreover, this tax credit is in addition to the $7.5 billion in funding for alternative fueling provided under the Infrastructure Act, including very significant funding designated for community projects, under which local governments will be able to directly apply for grants up to $15 million.
- Opportunities for governmental and tax-exempt entities to directly receive benefits of tax credits. The Act allows states, political subdivisions of states, Indian tribes, tax-exempt organizations and rural energy co-ops to receive most of the above tax credits by treating them as having paid taxes in the amount of the applicable credits, subject to their meeting certain applicable requirements. Importantly, they can receive the tax credits for renewable energy and storage projects, qualified clean commercial vehicles, and alternative vehicle refueling projects. This is a "game-changer" for governmental entities. Now, governmental entities will be able to access the benefits of such tax grants for the first time for qualified energy projects they are developing.
- Opportunities for others to transfer tax credits. The Act provides that entities that are not allowed to directly receive tax credits as discussed in Item 8 to transfer many of the tax credits to those that can use them, subject to meeting certain requirements regarding transfer. This transferability, combined with the ability of governmental, rural energy co-op and tax-exempt entities to directly receive the benefits of tax credits, should greatly expand the beneficial options for developing and structuring clean energy projects for all types of entities.
- Significantly increased funding and grant opportunities under USDA REAP program. The Act provides $2 billion in additional funding for the U.S. Department of Agriculture "Rural Energy for America" grants and loan guarantees for renewable energy and energy efficiency projects and increases the potential size of REAP grants from 25% to 50% of project costs. These benefits are especially important for municipalities located in rural areas when considering developingqualified energy projects.
- Very Significant Funding for Greenhouse Gas Reduction Fund. The Act makes a total of $27 billion available to eligible entities to use to provide funding and financing for zero-emission projects and certain other projects, activities and technologies that reduce or avoid greenhouse gas emissions and other forms of air pollution or assist communities in reducing or avoiding greenhouse gas emissions and other forms of air pollution. This fund, as well as the next area of grants listed below, will be important to consider in any transportation as well as green energy planning undertaken by a governmental entity.
- Climate Pollution Reduction Grants. The Act provides $5 billion in funding for planning and implementation grants for States, municipalities, and tribes to plan and implement programs, policies, measures, and projects that will achieve or facilitate the reduction of greenhouse gas air pollution.
- Environmental and Climate Justice Block Grants. The Act provides $2.8 billion in funding for grants to community-based organizations or partnerships of those organizations with municipalities to benefit disadvantaged communities. The block grants can be used for community-led air and other pollution monitoring, prevention and remediation, and investments in low- and zero-emission and resilient technologies; mitigating climate and health risks from urban heat islands, extreme heat, wood heater emissions, and wildfire events; climate resiliency and adaptation; reducing indoor toxics and indoor air pollution; or facilitating engagement of disadvantaged communities in State and Federal public processes.
- Partially forgivable loans for rural electric generation. The Act provides $1 billion for electric loans under the Rural Electrification Act of 1936 for electric generation (including energy storage) from renewable energy resources for resale to rural and nonrural residents. These loans are potentially forgivable up to 50% and are at rates equal to the average tax-exempt municipal bond rate of similar maturities.
- Significant increase 179D tax deduction for building energy efficiency. The Act significantly increases the current maximum of $1.88 per square foot deduction to $5.00 per square foot to incentivize energy efficient construction and rehabilitation of commercial buildings and multifamily buildings that are four stories or taller. Also, locals governments, will be able to allocate 179D tax deductions to architects, engineers, and designers responsible for designing a building's energy efficient systems.
To discuss the above and other opportunities, please contact John Clancy or Art Harrington. Because of the length and complexity of the Act and the numerous underlying requirements that apply to it, whether the above programs are applicable to your local government and your projects is based on a number of factors in addition to those outlined in this summary update. Therefore, it is important to make sure that all relevant factors are considered as you proceed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.