Red States Stand to Benefit From a ‘Layer Cake’ of Tax Breaks From Inflation Reduction Act

Imagine a 1-megawatt solar array on about eight acres of land in West Virginia. To make the math simple, let’s say it costs $1 million.

Under the Inflation Reduction Act, the landmark federal climate and clean energy law, this project would qualify for the “investment tax credit,” which is worth 30 percent of the project’s cost.

But that’s just the beginning of a series of stackable credits, like a layer cake, that can add up to huge benefits.

The IRA includes a bonus credit of up to 10 percent for projects in “energy communities.”  The law defines energy communities as places with shuttered coal mines and coal-fired power plants, and places with a history of employment in fossil fuel industries and higher unemployment than the U.S. average. Most of West Virginia is an energy community, as is most of Texas and parts of the Midwest, Mountain West and South—a designation that includes some of the reddest parts of red states.

The law also includes a bonus credit of up to 10 percent for projects that use equipment manufactured in the United States.

To receive the energy communities and domestic manufacturing bonuses, a project must meet labor standards, which means paying certain wage levels and having an apprenticeship program to train workers entering the field. (If a project doesn’t meet the labor standards, the 10 percent bonuses shrink to 2 percent bonuses.)

If our $1 million solar array has the investment tax credit, the energy communities bonus and the domestic manufacturing bonus, that’s a 50 percent credit, or $500,000.

But we’re not done.

If this project is going to use its electricity to provide a direct benefit to people with low incomes, it may be eligible for an additional 20 percent credit. For example, the solar array could be set up by a church or nonprofit to reduce the electricity bills of low-income households in the local area.

This $1 million solar array would now have tax credits worth 70 percent, or $700,000, and  the project would be creating jobs and job training in the community, along with product sales for a U.S.-based solar panel manufacturer.

Some fine print about low-income programs: Unlike most of the tax incentives in the IRA, the low-income credits have an annual cap of 1.8 gigawatts per year of project capacity. Developers that want this credit need to be mindful of getting in under the cap.

I ran these numbers by Patrick Augustine, vice president of the energy practice at Charles River Associates, a consulting firm that has written extensively about IRA tax credits.

“Overall, the 70 percent (tax credit) is technically possible, but it’s important to remember that this will be limited to projects meeting very specific criteria,” he said.

He said the most common scenario would likely be that a project receives a 40 percent credit, which is the base credit plus the energy community bonus.

The bonus for U.S.-made materials may not be utilized much, at least for a few years, because most solar panels are made in other countries, he said.

One of the goals of the law is to encourage clean energy manufacturers to set up shop in this country, and they are doing so, but that takes time. For now, a developer may find that buying foreign-made equipment has cost advantages that outweigh the extra tax credit.

The Biden administration is still finalizing rules for aspects of the tax credits. For example, it’s not clear how the government will determine if a product has enough U.S.-made content to qualify for the bonus. Also, it’s not clear whether power plants that converted from running on coal to running on natural gas will count in the energy communities designation.

I am focusing today on the investment tax credit and its add-ons, but it’s important to note that there are other major credits and programs in the law. The people at RMI, the clean energy think tank and advocacy group, have been among the leaders in explaining what’s in the law, and they helped me to verify some of the details in this story.

Much, if not most, of the manufacturing investment tied to the IRA is going to be in places that didn’t vote for President Joe Biden. We can see this already based on the announcements of new solar panel plants in Alabama and Texas, among others.

And, the designation of energy communities is a big benefit for a lot of places that didn’t vote for Biden.

If there was a political calculus, it’s not clear to me. The idea is that U.S. policy needs to take special steps to help communities that are being disrupted by the shift away from fossil fuels, and it just so happens that the main beneficiaries are people who didn’t vote for the president in 2020 and probably still won’t in 2024.

Now it’s up to leaders in those places to follow through. Just about anybody can do a project and qualify for tax credits, including utility companies, local governments, charities and developers.

If I was a nonprofit leader or a township trustee in a West Virginia town, I’d be looking at this as the opportunity of a lifetime.

Other stories about the energy transition to take note of this week:

Why Texas, a Clean Energy Powerhouse, Is About to Hit the Brakes: Texas lawmakers are pushing a series of bills that would undermine renewable energy development and harm the state’s status as a clean energy leader, as Anna Phillips reports for The Washington Post. The justification for these measures is a belief by some that wind and solar power are ugly and unreliable. Texas has a history of proposing legislation that would harm renewables and then stopping just short of passing it. But it’s alarming to see such short-sighted reasoning in a place that prides itself on free markets and being a global leader in energy.

FERC Commissioners Tell Senators of Grid Reliability Challenges, with Some Blaming Markets: The U.S. electricity grid faces major challenges, according to Federal Energy Regulatory Commission members who testified last week before a Senate panel, as Ethan Howland reports for Utility Dive. The problems include an increase in extreme weather and balancing the retirements of fossil fuel power plants and the growth of wind and solar plants. One point that only partially comes through in hearings like this is that climate change contributes to the increase in extreme weather, and that a rapid transition to clean energy should help us to reduce the risk of even greater extremes in the future.

Frustrated by Outdated Grids, Consumers Are Lobbying for Control of Their Electricity: From Clyde, Ohio, to Augusta, Maine, consumers and local governments are exploring ways to gain control of how they get electricity, as Emma Foehringer Merchant reports for ICN. There are a variety of ways to gain control, including through local government ownership of utilities. A common thread is local frustration with the way utilities are managing the reliability of their systems and the pace with which they are moving toward a transition to clean energy. I wouldn’t say the push for local control is yet a major trend, but it’s definitely something to watch.

U.S. Launches $4 Billion Effort to Electrify Ports, Cut Emissions: The Biden administration says it is spending $3 billion to electrify operations at ports and $1 billion to reduce emissions from heavy trucks at ports, part of an effort to address pollution in nearby communities, as David Shepardson reports for Reuters. This is welcome news for environmental justice advocates who have often been frustrated by the administration for not moving quickly enough to help vulnerable communities, but it will take time for this announcement to translate into actual pollution reduction.

Income-Based Electric Bills Are the Newest Utility Fight in California: A plan calling for California utility bills to be based largely on household income could help to drive adoption of EVs and heat pumps, while hurting rooftop solar, as Jeff St. John reports for Canary Media. The shift would help EVs and heat pumps by reducing electricity bills for low-income customers, but it would hurt rooftop solar because the new bills would have a large fixed charge which would be paid even by customers who self-generate most of their power. The rooftop solar industry is wary of the proposal, which they see as the latest salvo in a long campaign by utilities to reduce the financial benefits of solar. But the idea of income-based billing has benefits in a state with high energy costs and income inequality, like California. I’m still figuring out how I feel about this one.

Inside Clean Energy is ICN’s weekly bulletin of news and analysis about the energy transition. Send news tips and questions to [email protected].