With Eric Hurlocker
In August of last year, an unexpected Congress passed the The Inflation Reduction Act (IRA), after Sen. Joe Manchin, D-West Virginia, came on board with a watered-down version of “Build Back Better,” a bill he opposed in its original form because of its size.
Although named the Inflation Reduction Act, it is in fact a green energy bill aimed at driving investment in renewable energy projects.
The IRA is significant for many reasons, not the least of which is that it opens up investment and development opportunities driven by tax credits for tax-exempt organisations, such as local governments, higher education institutions and hospitals, which do not was previously available.
The pre-IRA renewable energy investment landscape
Renewable energy, such as solar and wind energy, is clean energy that has the potential to significantly reduce air pollution and limit global warming by reducing greenhouse gas emissions from fossil fuels. More renewable energy will also diversify the United States’ energy supply, making the country less dependent on foreign energy sources. It is also a growing industry that encourages more jobs and economic development.
For these reasons, the federal government, as well as state and local governments, have created incentives to encourage investment in renewable energy sources. Incentives are generally in the form of tax credits to subsidize investment and renewable energy production.
These incentives are the result of significant growth in renewable energy projects in the United States. According to data from Statistics, investment in clean energy grew from $10 billion in 2004 to $105 billion in 2021. Most of this investment came from the private sector, rather than public sector entities, however, for one significant reason: In general, there was no by tax credits only in respect of such entities. as for-profit corporations that had taxable income to offset. Since entities like local governments and most institutions of higher education are tax exempt, the pre-IRA federal tax incentive structure left renewable energy in the cold.
The IRA solves that problem with a new approach to tax credit incentives that are a game changer for tax-exempt entities.
The new ‘direct pay’ IRA model
The IRA, which established tax incentives that could range from 30% to more than 50% for renewable energy projects, includes a new “direct pay” provision that allows tax-exempt entities to cash in on applicable tax credits. Local governments and institutions of higher education, as well as other exempt organizations, can now treat tax credits they have earned as “overpayment of taxes” and receive a direct payment from the US Treasury as a tax refund.
The IRA also expands the scope of the types of tax incentives now available, including production tax credits and investment tax credits for wind, solar, geothermal, combined heat and power and other technologies; investment tax credits for electric charging stations; production tax credits for nuclear power facilities with zero emissions; and incentives for carbon capture, clean hydrogen, and investments in certain manufacturing facilities, among other things.
In practical terms, this means that renewable energy projects are now much more viable for tax-exempt entities. Without access to federal tax credits, a project such as developing a new solar grid could have a payback period — the time it takes to recoup an investment — of 15 to 20 years. With the incentives available under the IRA, which can cover around 50% of the cost of building renewable energy production, the payback period can be shortened to eight to 10 years.
One of the most significant implications we expect from these new incentives is the increased development of the micro-grid by local municipalities, higher education institutions and hospitals in Virginia and throughout the United States.
Micro-grids are self-sufficient energy systems that serve a specific geographic footprint through one or more forms of energy production (such as solar panels, wind turbines and generators) and produce power for a grid independent of the larger centralized grid. This allows the generation and supply of power within a micro-grid when there is an outage on the centralized grid. As you might imagine, large-scale projects of this nature require a significant financial investment, which makes the IRA more feasible for tax-exempt organizations to pursue.
But it is not only on large renewable energy projects such as micro-grids that we will begin to expand. Smaller-scale initiatives, such as an increase in electric vehicle charging stations at hospitals, college campuses and in city building parking lots, are likely to become much more widespread.
Renewable energy has the potential to impact our climate, economy and energy independence in extremely positive ways. Now that the IRA has made investments in renewable energy more feasible for a significant new group of tax-exempt investors and developers in Virginia and across the country, the potential has taken a big step forward towards achieving that.
Eric Hurlocker is a co-founder GreeneHurlocker, PLC, a Richmond based firm specializing in business, energy and regulatory law. He has more than 30 years of experience in the energy business and represents developers, owners and users of renewable energy across the country.
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