Inflation Reduction Act Boosts Local Solar — Episode 164 of Local Energy Rules

John Farrell:

This bonus episode of Local Energy Rules features my ILSR colleague, Senior Researcher Katie Kienbaum discussing the recently adopted federal Inflation Reduction Act. Katie compared the legislation to the ambitious 30 Million Solar Homes agenda to see how it might measure up. She provides a guesstimate of how many solar homes this new policy could create, the new tools it deploys, and how it addresses some long standing barriers to more local solar access. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a biweekly podcast sharing powerful stories about local, renewable energy.

Katie, welcome to local energy rules.

Katie Kienbaum:

Thanks for having me, glad to be back.

John Farrell:

Well I’m super excited about this bill as are many people, because something’s actually happening. I was listening to another podcast. They were essentially saying two weeks ago, we were all turning our heads toward what can we do at the state level? We’ve given up that federal climate policy or federal energy policy is gonna happen? Now we have something, I’m sure there’s gonna be a lot of hot takes on this, but I think what would be most interesting to do is to talk about how this is going to intersect with opportunities for local solar, not just what is this gonna do in terms of emissions, but how is it gonna help individuals, communities, businesses, install solar, and, you know, compare it honestly to, ILSR’s broader coalition effort, what we called 30 million solar homes.

We did this analysis back in 2021. We looked at kind of what was the possibility, what are the opportunities for the federal government to support kind of widespread access to solar? And how could we get to 30 million solar homes? And, yeah. Why don’t you just start by, you know, you’ve had a little bit of time to look at the legislation, the different components, if nothing else, and in a very broad brush or the back of the envelope way, how far do you think this legislation could get us toward the ultimate goal of having one in four households have access to solar, or 30 million solar homes?

Katie Kienbaum:

Yeah, I have had some time to look at it. So we based on that, just an initial look at the legislation, we have a preliminary estimate that this could potentially mean as much as like meeting about a third of that goal. Maybe more, maybe closer to a half. So that would mean something like in the range of 10 million homes solar homes, homes or businesses powered by rooftop solar or community solar installations located locally. So that’s, that’s not nothing, that’s not all the way. That’s not 30 million solar homes. That’s not one in four households, but that is a big chunk out of that apple.

John Farrell:

Well, I know most of our listeners like to get into weeds, so let’s invite them to walk through some weeds with us. Could you talk about some of the major components of the inflation reduction act that specifically target local solar, local energy production and how they’re gonna help?

Katie Kienbaum:

I think the big one that everyone’s pretty familiar with are the tax credits. And we can talk some more about that. So I’ll just say that the existing tax credits for solar and other technologies have been extended and in some cases reworked a little bit. So that’s, that’s a huge deal. That’s been one of the biggest drivers of solar growth in this country. And, like I said, I’m sure we’ll dive into more of that and more of the details there that’s that, but that’s probably like top of the heap when it comes to local solar, the things that you know, are gonna jump out to you in this legislation. Another big thing is, there’s about 27 billion for a greenhouse gas reduction fund, AKA basically a national green bank. This, also, in addition to other things, it can go towards funding local solar.

And there is specifically a 7 billion portion of that set aside for funding zero emissions technology in low income and disadvantaged communities. So that’s another big piece of the puzzle here. There’s also funding for the rural energy for America program, or REAP as we like to shorten it to, which can be used by businesses in rural areas and agricultural producers to fund renewable energy and energy efficiency upgrades at their locations. That has a big chunk of funding too.

And then there’s also some funding, grants and loans to help federally supported, affordable housing make energy, renewable energy, energy efficiency, upgrades, and upgrades to water systems, sustainability upgrades to improve air quality, a whole lot of things to improve, you know, just the quality of those buildings which is a really important thing, you know, not only for the residents, but it’s also gonna contribute to our larger goals of transitioning everyone in this country to clean energy and to reducing emissions and pollution, and cleaning up the, the air that we all breathe.

And then there is also some funding to help put zero missions energy systems – So things like rooftop solar, energy storage – in tribal homes, both ones that are already electrified and are ones that are not electrified yet. That’s another piece that we had been advocating for as part of 30 million solar homes. Those are some of the main portions of the inflation reduction act that overlap with the different policies and programs that we promoted as part of 30 million solar homes. There’s also in the inflation reduction act a climate justice and environmental justice block grant program that I think can conceivably be used for, for things like rooftop solar and community solar, that is just, I think something we support <laugh> But it’s not something that we had originally included in our proposals.

And I’ll say in addition to that, there are a bunch of other things that were included in, for example, the bipartisan infrastructure law that passed last year or, there’s been some executive actions out of the Biden Harris administration that also goes towards pushing some of these priorities that the 30 million solar homes initiative has and had, but that’s, that’s kind of a general look into the entire bag of goodies that the inflation reduction act is gonna give us in terms of local solar.

John Farrell:

So I know one of the things that we’d really hoped for in was a kind of flagship of the 30 million solar homes effort, there were a lot of other groups that were also pushing for this when it came to the incentives for solar was this idea of direct pay, which is to say, instead of having people have to apply at tax time to get money back for the money they’d spent on a solar roof, you know, either be able to access that money if they didn’t have a big tax bill or, or even better to get paid or reimbursed immediately, as opposed to waiting for tax time. We have a lovely graphic on our website somewhere that helps to explain the difference between this sort of standard tax credit and refundability, and this idea of direct pay. Where did we land in terms of the tax credits? Maybe we’ll start with the one for homes, and then we can talk about businesses second. Where did we land in terms of direct pay or, or just in terms of the credit in general, what did we get, what is in this policy that the Senate has passed? And, and how does it relate to the ask for direct pay and, and other ways to make access to that incentive more accessible?

Katie Kienbaum:

In terms of homes, if you wanted to put solar on your rooftop, for example, it’s a big fat raspberry in terms of whether we got direct pay. We did not, there’s no refundability included in this legislation. It’s a big disappointment and it will definitely limit the effectiveness of this and who is able to actually access the credit and able to use that. In some of our other publications we’ve put out on this issue, we’ve explained how, and others have explained how the way that it’s structured as a tax credit or as a tax break means that if you do not, if you do not make enough money, if you do not owe the government enough money in taxes, that means you can’t take advantage of this credit. And that means that we’re basically,  you know, making folks who have lower incomes, for example they have to pay full price for solar if they wanna access it, they just don’t get this benefit. So that’s a big disappointment. That’s something that is still missing in this bill.

John Farrell:

If I could add to just sort of, in terms of like, why we care about this, you know, one is that in the area of wanting the federal government to incentivize us to install clean energy, to avoid dirtier energy production, that has negative health benefits, negative environmental benefits, what have you. It doesn’t make much sense as an industrial policy to say only certain people can do this, cuz really the more people that go solar in general that we would incentivize to do so the better. And then of course the second one is that it’s very inequitable. We have, you know, the kinds of, the folks that are gonna be least able to access this tax credit both historically and now going forward are gonna continue to be those who have historically not had access before. You know, you can draw a line right from red lining in the 1920s and thirties, to racial covenants, to lack of access to home ownership and wealth in the black community in particular, but in other communities. And so obviously this is gonna have a detrimental impact on those communities having access to solar.

Katie Kienbaum:

Yes. And we know that rooftop solar ownership is skewed towards higher incomes currently. It’s becoming less so, but it, there is, we know that there are inequities here and you know, this, this doesn’t do a whole lot to fix that.

John Farrell:

But the credit was extended at least. So for those who are able to afford it, what is the tax credit gonna mean for people who are able to take advantage of it? And, and how has it changed from what we had previously?

Katie Kienbaum:

Yeah, so it’s not changed a whole lot if you’re familiar with what it’s been. But it is restored to a full 30% credit off the value of the energy property, for example, the solar panels, and that is available through the end of 2032. And it is stepped down after that, the percentage decreases before phasing out. Perhaps if you bought solar in the last year, you know that we are currently at a smaller version of the credit that’s 26%. But it will be restored to that full 30% value. And we are locking it in for 10 years, which I think folks in the solar industry would say is a big deal. It gives consumers a lot more stability, but also installers and sellers as well. Another thing to pull out is that standalone energy storage is also now eligible for the credit. So that’s another big change that I think a lot of folks will be taking advantage of the coming 10 years.

John Farrell:

So the residential solar one credit extension was relatively straightforward if a little disappointing on the direct pay side. I don’t know how you want to try to tackle the commercial tax credit cuz holy buckets, there is a lot of different stuff in here, so I’ll just toss it to you, run us through what it is that they did with the extension of the commercial solar tax credit or commercial tax credit for clean energy and, how they’re gonna tweak how that works.

Katie Kienbaum:

Just to, to be a little more specific here, we’re talking about, for, you know, solar it’s specifically the section 48 credit, so it’s used for, for example, larger solar installation, solar farms, community solar projects and the like versus a homeowner putting panels on their rooftop. So that is a bigger story, like you said. So that is extended as well. The way that they did it though, is that they extended the current set of tax credits and tax incentives through 2024. But after that, it shifts to a technology neutral tax credit for zero emissions technologies. So that obviously includes solar. It’s not only solar. I think the incentive there and the idea is there is to encourage innovation and to enable innovation. So you’re not locking in one technology. I don’t know what we’re gonna come up with in the next like six years. <laugh> that’s gonna, you know, maybe take the place of, for example, solar, but, that’s, I believe a lot of the thought behind it is to not be prescriptive in that way, not pick winners and losers as folks like to say.

That’s one of the big changes. Once it shifts to this new technology-neutral credit, clean energy credit, it is also at 30% if you meet some conditions. So if something like a community solar farm for example, is under one megawatt, or if it meets certain labor standards and prevailing wage standards. So there is, they do reduce the base credit to 6%. But the expanded full 30% credit is available for projects that meet one of those two standards or both.

It also adds some bonus credits amounts. I believe it’s 10% for each, if you build the energy installation, the clean energy installation, the solar panels, in an energy community. So that would be, you know, places that have had a lot of energy production in the past. So think coal communities, things like that. So that’s one way to get a bonus credit. There’s also a bonus credit available for projects that include a certain amount of domestic content and then in addition to that, <laugh>, there’s a separate program for, I think up to another 20% bonus credit for projects that are located in or benefiting low income communities, or that are located on tribal land. This program is however restricted in size to 1.8 gigawatts per year. And they will have to develop a program to allocate that capacity.

So there are quite a lot of changes. There are some more changes, but I think I’m gonna pause in case there is a follow up question before I get into more of the, even more into the weeds.

John Farrell:

Not a follow up question, but I will just emphasize that we’ll include this in like some bullet points on the show page for the podcast. So you don’t have to remember everything that Katie is taking us through right here.

John Farrell:

We’re going to take a short break. When we come back, we wrap up with a discussion of direct pay and refundability, two provisions intended to make the tax credit more accessible to non-taxable project owners from schools to rural electric cooperatives. This is a Local Energy Rules podcast discussion with ILSR’s Katie Kienbaum, who was comparing the provisions in the recently adopted federal Inflation Reduction Act and the 30 Million Solar Homes proposal.

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John Farrell:

Why don’t you go ahead and finish summarizing the rest of the changes to the ITC?

Katie Kienbaum:

Similar to the tax credits for residential properties, this also makes a change to include energy storage as an eligible technology, but also micro grid controllers and perhaps more controversially, biogas. And it also allows taxpayers to include the costs of interconnection as part of that basis for the tax credit. And that’s, that’s important because, depending on the size of your installation, the inter and the local grid that you’re hooking up into, the interconnection costs can be somewhat substantial. So this kind of helps projects along, expands the portions of the entire project costs that you’re able to take the credit on.

And then the part that is perhaps most interesting to talk about is that unlike the residential solar tax credit, there is direct pay available for tax exempt entities that are taking this commercial credit, or what’s known as the section 48 ITC.

So this is something that’s been a problem since the credit has existed, basically, if you aren’t a taxpayer, if you’re a school, if you’re a nonprofit, if you’re a rural electric cooperative, you don’t have any tax liability. That means you don’t have a way to use the current ITC. And that means you have to work with some type of tax equity partner to try and monetize and take advantage of this tax credit. This provision will alleviate that and allow these entities to actually use the credit and not have to kind of bring in another partner unnecessarily just to claim the credit. So that can be, I think for, for entities that qualify for this, this is a real relief and can be really enabling and, enabling some of the projects that also we like to see at ILSR: community led projects, projects led by nonprofits. That will be, that will be a help there.

It’s the extent, as John was suggesting, it’s not the extent of direct pay that we were hoping for, and that would really, you know, supercharge this policy and this program, but it is a start. And in addition to the direct pay aspect, there is also a new transferability mechanism included in the inflation reduction act for these commercial tax credits. So that will allow groups that don’t necessarily have that tax appetite to capture the full value of the credit to more easily monetize the credit and basically sell it off to a partner. Currently, as I understand it, if, for example, a community solar developer wants to build a community solar farm, but doesn’t have that tax liability, to actually use and benefit from the credit. They actually have to find a partner who is going to invest and become an equity partner in the project, which is just a lot more complicated when you’re just trying to offload this credit, you don’t necessarily need that kind of financing partner always. So as I understand it, it makes it a little easier to pass along the value of that credit. And we’ll open up, make sure that there’s maybe more of a market for that kind of offering versus having to be more of a full partner in the actual project financing.

John Farrell:

And one other thing I think I saw in the direct pay provision was that consumer owned utilities, which is to say like rural electric cooperatives or city utilities, municipal utilities are also getting access here. So it’s kinda leveling the playing field for the different kinds of utilities, cuz before you had private investor owned utilities could take the tax credit and these not for profit utilities couldn’t.

Katie Kienbaum:

Definitely, and I think especially for rural electric cooperatives, it’s really important because a lot of them are much more heavily based on dirty energy, and coal and other fossil fuels, compared to some of the, not across the board, but compared to some of the investor-owned utilities or even municipal utilities. So just creating more ability for rural electric cooperatives to invest in clean energy can also, I think, go a long way towards trying to move some of our dirtiest energy sources out of use.

John Farrell:

Just one more weedy question on the transferability, and then I want to ask you something else about the bill at large. One of the things that strikes me as sort of interesting about this… So the idea is now in order to access the tax credit, instead of having to partner with a wall street bank and, and them having to put in money into the project in order to access the tax credit, you could conceivably just sort of sell the tax credit to someone for a fee. But I, what incentive does that other entity have? Let’s just say it’s a bank, maybe it’s another business that just wants a lower tax bill. What incentive do they have to like, not charge you a fee to be able to get a portion of this? You know, why right now, you know, anywhere from like 15 to 30% of the value of that tax credit is taken by this middle man that provides some project equity, why would they be willing to take any less given that they know that you’re sort of over a barrel, if you are an entity that can’t take the tax credit?

Katie Kienbaum:

I’m not sure that there is much of an incentive. I think, if this provision does expand the range of folks who are willing to provide that kind of service or are interested in, let’s say purchasing the, the value of the credit, you know, maybe there’s some competitive forces that, you know, will encourage it to be more affordable or to be more cost effective for the folks who are actually developing the solar projects and doing all the hard work. That being said, I mean, they <laugh>, they’re trying to just make money. That’s, that’s kind of how I understand the financial services, whole world works, wall street is trying to make money and I think they’re gonna still try to squeeze as much money out of this as they can.

John Farrell:

Who knows, maybe there’ll be some sort of mission oriented companies or investors who might see this as, you know, this is good for PR or something, and we’re willing to take less of a return, but I will remain skeptical until we see some good examples. Let me just ask you, you already talked about this a little bit when you mentioned that there’s this provision in the bill, these block grants around climate justice, can you just talk broadly, like, 30 million solar homes, our initiative had a really ambitious goal of, I think it was somewhere between two thirds and three quarters of the benefit go to historically marginalized communities. The Biden Harris administration has the Justice 40 provision, which is our same similar goal, but a lower fraction of the benefits. How does this measure up, do you see this as being effective at addressing environmental and climate justice, energy justice?

Katie Kienbaum:

The figure that the Senate Democrats have put out is that 60 billion of the dollars in the bill would go towards environmental justice priorities. That’s out of nearly 370 billion already that are going towards climate and climate and energy provisions. So that’s, that’s already, that’s not a huge proportion, of just in terms of the, the numbers, right? Uh, and that’s, if you think that 60 billion number is correct, some groups have, you know, done their own accounting, gone through the numbers and are arguing that actually all of these programs totaled up things that are actually guaranteed to go towards, conceivably go towards environmental justice priorities or communities. It’s a lower number than that even. The way I see it, it’s falling short of those. You know, it’s definitely not at the 30 million solar homes level and it’s, potentially even falling short of justice 40 goals unless it is implemented to prioritize and to actually deliver real benefits to those communities.

John Farrell:

Well, thanks, Katie, it’s a little disappointing to hear that, given how much and how many of the organizations that were really involved in advocacy around climate and energy policy had made that such a high priority and with the Biden Harris administration also having a similarly ambitious goal, but, the truth of the matter is when things have to run through Joe Manchin, you’re just not gonna get everything that you want.

Katie Kienbaum:

You’re gonna get a haircut and it’s gonna be a little lopsided. Yeah. But I mean, that all being said, I think there’s still, like, there’s still a lot of room for some of this funding to be directed in a way that is prioritizing perhaps environmental justice communities or trying to prioritize access for low income households like this isn’t the end of the line for any of this funding or any of these programs. They’re, you know, gonna go out into the world and it’s gonna rely on the administration, but also, community advocates and, you know, organizations like ILSR doing their best to try to shape the implementation of this act overall into something that is going to deliver real benefits to real people.

John Farrell:

Well, and we’ll also be following up too. I’m very interested in having some conversations with folks who have been doing renewable energy project development, specifically targeting low and moderate income communities, especially community owned projects. I’d be interested in getting their take in a future podcast about the ways in which this bill, especially some of those provisions, you know, on direct pay transferability, bonus credits, and the commercial tax credit can maybe be more useful than we anticipate at this point to serving some of those communities that have been underserved. We can hope at least.

Katie Kienbaum:

Fingers crossed.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules, where my colleague Katie Kienbaum and I discuss her review of the new federal Inflation Reduction Act. On the show page, look for links to ILSR’s 30 Million Solar Homes partnership and a comparison of the Inflation Reduction Act to this proposal as well as links to ILSR’s earlier critiques of federal renewable energy policy.

Local Energy Rules is produced by myself and Maria McCoy, with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local, and thanks for listening.