How the Inflation Reduction Act Makes it Easier to Go Solar — and Where it Falls Short

  • Sep 5, 2022
  • Katie Kienbaum
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  • Article
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    At a glance, the Inflation Reduction Act:

    • Can help about 10-15 million households go solar with rooftop panels and community solar farms.
    • Expands existing solar tax breaks for homeowners and businesses.
    • Incentivizes smaller, more equitable solar projects and enables nonprofits, cooperatives, and local governments to use the tax credits.
    • Creates the first ever national green bank to finance clean energy, particularly in disadvantaged communities.
    • Despite improvements, doesn’t do enough to make solar accessible to many low-income households and people of color most impacted by climate change and dirty energy.

     

    Of the $369 billion the Inflation Reduction Act sets aside for climate and energy initiatives, incentives for energy efficiency upgrades, electric vehicles, and clean energy manufacturing are getting many of the headlines. Equally important is the new law’s substantial support for local solar deployment, such as rooftop solar panels and shared community solar farms. As the government implements the Inflation Reduction Act, directing available funding to equitable local solar projects will help maximize the law’s benefits for households and put power back in the hands of people, instead of monopoly energy utilities.

    Notably, the law expands existing tax breaks to help lower the cost for people, organizations, and governments that go solar. It also creates the first-ever national green bank to help finance the clean energy transition. Other new grants and loans will help low-income households, rural businesses, affordable housing owners, and Tribal communities pay for solar installations.

    ILSR advocated for some of these programs and policies as part of the 30 Million Solar Homes initiative. We estimate that these investments in the Inflation Reduction Act get us nearly halfway to our goal of one in four American households powered by rooftop or community solar — putting money directly in people’s pockets, slashing pollution, creating green jobs, and building local power. However, by not doing enough to prioritize environmental justice communities (of the total energy spending, just 13 percent is earmarked for disadvantaged communities, compared to the Biden-Harris administration’s 40 percent goal) and including harmful giveaways to the fossil fuel industry, the law marks only partial progress in bringing the benefits of local solar to all communities.

    Expanded Tax Breaks Boost Local Solar

    In a win for solar supporters, the Inflation Reduction Act restores and extends federal tax incentives for solar and other clean energy sources. Despite their flaws, these tax breaks — including the solar tax credit for homeowners (the Section 25D credit) and the solar Investment Tax Credit for commercial property (the Section 48 credit) — have been some of the most consequential federal policies for the United States solar industry. The new law resets the full value of both credits to 30 percent of project cost for systems installed in 2022 and makes the credits available for another ten years, before reducing their value and eventually eliminating the credits.

    But the Inflation Reduction Act doesn’t just reinstate the existing solar tax credits as is. Other key changes in the law should help expand their impact in low-income communities and make them more accessible to nonprofit organizations, local governments, and rural electric cooperatives. The tables below highlight some of these key changes and discuss whether those changes increase solar access for more communities.

     

    Residential Solar Tax Credit (Section 25D)
    What’s New?

    • Renames it the “Clean Energy Credit”
    • Restores to 30%, starting for systems installed in 2022.
    • Extends through 2032, with reduced credits in 2033-34.
    • Makes standalone energy storage eligible for the first time.
    Who’s Eligible?

    • Households
    Is it Equitable?

    • NO: No option for direct pay or credit refundability limits benefits to households with higher tax liability and perpetuates racial and income inequities in rooftop solar adoption.

     

    For homeowners, the solar tax credit will remain largely the same as it is now, though restored to the full 30 percent value. (Before the Act passed, it was at a reduced rate of 26 percent and in the process of phasing out.) In addition, the new law makes standalone energy storage eligible for the credit for the first time. This is going to be critical for residents in places like California or Hawai’i, where rooftop solar is already very common and regulators are considering cutting compensation for solar owners selling energy back to the grid.

    Unfortunately, the Inflation Reduction Act fails to make changes that would make the residential solar tax breaks more accessible, perpetuating existing disparities in solar adoption. According to estimates from RMI, about three in ten households don’t have enough tax liability to use the full value of the solar tax credit in the first year after they install solar panels. An additional four in ten households can’t benefit from the credit at all. 30 Million Solar Homes, Residential Renewables 4 All, and other coalitions advocated for a direct pay option that would allow these taxpayers to receive the credit value as a single payment, instead of just offsetting taxes owed. This provision did not make it into the new law, a huge blow for anyone who wants to increase equitable access to solar energy.

    For more on the differences between direct pay, refundability, and the existing solar tax credit, check out this infographic.

    The Inflation Reduction Act institutes many more changes to the solar Investment Tax Credit for commercial projects. This tax credit covers both local solar, in the form of community solar farms and rooftop solar panels installed by businesses, organizations, and other entities, as well as utility-scale solar installations. The table below covers some of the details, focusing on the ones that impact solar projects.

     

    Commercial Solar Investment Tax Credit (Sections 48 and 48E)
    What’s New?

    • Extends the existing credit (Section 48) through 2024.
    • Replaces with a technology-neutral “Clean Electricity Investment Credit” (new Section 48E), which is available until the later of 2032 OR the year greenhouse gas emissions from electricity generation are 75% lower than 2022, at which point the credits begin to phase out.
    • Adjusts base credit value:
      • Before the Treasury Department develops guidelines, all solar projects are eligible for the 30% base credit.
      • After the Treasury Department develops guidelines, 30% base credit is available only for solar projects that are under 1 MW or that meet prevailing wage and apprenticeship requirements. All projects above 1 MW that fail to meet labor requirements receive a 6% base credit.
    • Creates various credit adders:
      • Up to 10% bonus credit for solar projects that meet domestic content requirements.
      • Up to 10% bonus credit for solar projects that are located in energy communities (defined as brownfield sites, communities with high fossil fuel employment and high unemployment, and/or communities with closed coal mines or coal-fired power plants).
      • Up to 10% bonus credit for solar projects under 5 MW located in low-income communities or on Indian land. (Application required — along with bonus credit below, total capacity limited to 1.8 GW per year.)
      • Up to 20% bonus credit for solar projects under 5 MW built as part of an affordable housing project or to benefit low-income households. (Application required — along with bonus credit above, total capacity limited to 1.8 GW per year.)
    • Makes standalone energy storage and microgrid controllers, as well as interconnection property, eligible.
    • Allows direct pay option for tax-exempt entities, such as schools, nonprofits, local governments, and electric cooperatives.
    • Makes it easier to transfer credits to partners with greater tax liability in exchange for a cash payment.
    • Allows solar projects to opt for a Production Tax Credit instead.
    Who’s Eligible?

    • Businesses, organizations, institutions, and other entities.
    • Community solar projects.
    • Utility-scale (large, non-local) solar installations.
    Is it Equitable?

    • YES: Higher base credits for projects under 1 MW and bonus credits for projects in low-income communities, Tribal lands, and energy communities could incentivize smaller and more equitable solar installations.
    • YES: A direct pay option for tax-exempt entities allows cooperatives and community-based organizations to benefit from the solar tax credit like for-profit developers already do.

     

    The solar Investment Tax Credit now has a more elaborate system of credit levels, bonus credits, and requirements under the new law. In particular, changes to the base tax credit values ensure that rooftop solar for businesses and community solar projects under one megawatt will be able to access the full 30 percent credit, while larger utility-scale projects will have to meet additional standards. Plus, the new bonus credits should incentivize the development of more equitable solar projects that benefit local communities. If a small community solar farm meets the domestic content and siting requirements for various bonus credits, it could potentially receive a total tax credit worth up to 70 percent of project costs, which is a big lure for equitable community solar developers.

    Importantly, the Inflation Reduction Act lets nonprofits, schools, local governments, cooperatives, and other tax-exempt entities access the solar Investment Tax Credit through a direct pay option. Because of this change, a school that installs rooftop solar panels or a rural electric co-op that invests in a solar farm can receive the financial incentive, without losing part of the credit value to a tax equity partner.

    For commercial solar projects not eligible for the new direct pay option, the Inflation Reduction Act’s new “transferability” mechanism makes it easier to transfer or sell the tax credit to an entity with more tax appetite. This will hopefully expand the size of the market and reduce the credit value that Wall Street eats up, keeping more of the benefits for community solar developers and other businesses.

    As the Treasury Department implements these changes to the commercial solar Investment Tax Credit — particularly as it establishes certain eligibility requirements and develops a program to allocate limited capacity bonus credits — it should work to prioritize local solar access for low-income and other disadvantaged communities, while ensuring bonus credits reward solar projects that create real benefits for local residents.

    New Solar Funding Grows Access

    In addition to the revamped tax credits, the Inflation Reduction Act includes grants and loan funding for clean energy projects, including local solar, in communities across the country. Many of these programs are new. Some funnel funding to particular groups that face barriers to local solar access, including low-income communities, environmental justice communities, rural areas, affordable housing owners, and Tribal communities.

    The tables below include details on selected programs from the new law that community organizations and public officials can use to support local solar.

     

    Greenhouse Gas Reduction Fund
    What’s New?

    • Establishes a new Greenhouse Gas Reduction Fund (i.e., a national green bank) at the EPA.
    • Provides $27 billion in total funding to the EPA to issue grants to governments and green banks, including:
      • $7 billion for financing and technical assistance for disadvantaged communities to deploy zero emissions technologies and conduct other greenhouse gas-reducing activities.
      • $11.97 billion for general assistance.
      • $8 billion for assistance in disadvantaged communities.
    Who’s Eligible?

    • State, local, and Tribal governments.
    • Green banks.
    • Public or nonprofit entities that provide financing assistance, such as community lenders.
    Is it Equitable?

    • YES: $15 billion total is reserved for disadvantaged communities.
    • YES: Financing for distributed rooftop technologies (e.g., rooftop solar) is explicitly an eligible use of funds.
    • YES: Green banks are able to offer lower-cost and more accessible financing to solar developers and households that want to go solar, making local solar more financially viable in low-income and low-wealth communities.

     

    Rural Energy for America Program (REAP)
    What’s New?

    • Provides just over $2 billion in extra funding to REAP to provide grants and loan guarantees to rural businesses and agricultural producers for renewable energy and energy efficiency upgrades. Almost half of the funding is allocated to the program starting in 2022.
    • Allows grants to cover 50% of project costs (currently 25%).
    Who’s Eligible?

    • Rural businesses, farms, and agricultural producers.
    Is it Equitable?

    • YES: Historically, much of the program funding has been used for local rooftop and ground-mount solar.
    • NO: The new law does not include any carveouts or incentives to award grants and loan guarantees to projects in disadvantaged communities or to underrepresented farmers, for example.

     

    Energy Efficiency, Water Efficiency, and Climate Resilience for Affordable Housing
    What’s New?

    • Provides $1 billion to the Department of Housing and Urban Development for a new program to fund affordable housing upgrades, including:
      • $837.5 million for grants and loans (loan principal not to exceed $4 billion) to projects that improve energy or water efficiency, indoor air quality or sustainability; provide zero-emission electricity generation, energy storage, or building electrification; or address climate resilience.
    Who’s Eligible?

    • Owners of federally assisted affordable housing.
    Is it Equitable?

    • MAYBE: The new funding can be used to put solar on affordable housing, but there aren’t currently guarantees that it must directly benefit residents.

     

    Tribal Electrification Program
    What’s New?

    • Provides $150 million for a new Tribal electrification program to fund zero-emissions systems for unelectrified and electrified tribal homes and associated home repairs.
    Who’s Eligible?

    • Tribal residents.
    Is it Equitable?

    • YES: The new program can fund potentially both rooftop solar and community solar for Tribal residents. Tribal homes make up the majority of unelectrified homes in the United States, with up to 15,000 homes without electricity in Navajo Nation alone.

     

    Environmental and Climate Justice Block Grants
    What’s New?

    • Creates a new $3 billion block grant program at the EPA, with $2.8 billion reserved for grants.
    • Eligible projects benefit disadvantaged communities and include efforts that:
      • Address air pollution or greenhouse gas emissions;
      • Invest in zero-emissions technology;
      • Mitigate climate and health risks from extreme heat, urban heat islands, and wildfires;
      • Increase climate resiliency and adaptation;
      • And/or facilitate community engagement in public proceedings.
    Who’s Eligible?

    • Community-based nonprofits.
    • Tribal or local governments, or an institution of higher education, in partnership with a community-based nonprofit.
    Is it Equitable?

    • MAYBE: The new block grants can be used to fund various forms of local solar to benefit disadvantaged communities, but the EPA’s implementation of the program and the projects that communities choose to pursue will affect how much the program expands equitable access to solar.

     

    In particular, the Greenhouse Gas Reduction Fund promises a massive opportunity to expand local solar access. This is because of two main reasons: the program’s sheer size and the ability of green banks to leverage additional private investments. But how federal agencies decide to implement these new financing programs, like the Greenhouse Gas Reduction Fund, will determine the extent to which investments in solar energy actually benefit low-income communities, environmental justice communities, and communities of color.

    Maximizing Impact Through Equitable, Local Solar

    Passing the Inflation Reduction Act gets us part of the way to 30 Million Solar Homes’ goal of powering one in four American homes with equitable rooftop and community solar. But it’s just the start of what’s needed to bring local solar to all Americans, no matter where they live, what they look like, or how much money they make.

    The federal government must do more to expand access to solar power and to guarantee that at least 40 percent of clean energy investments benefit disadvantaged communities (which President Biden committed to doing under the Justice40 Initiative). Furthermore, we must work to limit the harm of Inflation Reduction Act provisions enabling fossil fuel leasing on public lands that are opposed by frontline environmental justice groups.

    However, we still have time to make sure that the Inflation Reduction Act maximizes the deployment of equitable, local solar, bringing affordable energy, good jobs, and clean air to more Americans. As federal agencies begin to develop the clean energy programs and policies in the new law, solar advocates and community leaders have opportunities to shape implementation. For instance, they can push for agencies to prioritize solar projects that enable local ownership or that create direct energy cost savings for low-income households when awarding grants or tax credits, or to define rooftop and community solar as eligible uses of funds, to the extent allowed under the law.

    The Inflation Reduction Act is a game-changer for the United States’ efforts to fight climate change and transition to clean energy. Including equitable, local solar in that transition will make sure it’s a game-changer for the pocketbooks of everyday Americans too, not just big energy monopolies.

    Editor’s note 9/19/2022: This article has been updated to add missing links and citations and to clarify the estimated number of households that are unable to access solar tax credits.

    This article was originally posted at ilsr.org. For timely updates, follow John Farrell on Twitter or get the Energy Democracy weekly update.

    Featured photo credit: Shiloh Temple Solar Array, John Farrell

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