Energy community bonus credit guidance
The Internal Revenue Service filled in missing details on April 4 that were making it hard for renewable energy developers to feel confident about which projects qualify for a new 10% bonus tax credit for projects in "energy communities."
The new details are in Notice 2023-29.
Early indications are that it will allow tax equity investors who were reluctant to size their investments based on qualification for an energy community bonus credit now to move forward on that basis.
The guidance will allow offshore wind projects to qualify for the bonus credit if the onshore substation is in an energy community.
The IRS issued three tables, and the Department of Energy released a map, to help developers identify areas that the government believes satisfy some of the tests to qualify.
A project on which an investment tax credit will be claimed must be in an energy community on the date the project is placed in service. It is tested only once.
A project on which production tax credits are claimed on the electricity output must be tested every year during the 10-year period such credits are claimed. This will make it hard to get the tax equity market to take a bonus credit on PTC projects into account past the first year when sizing tax equity investments, unless the project relies on a "safe harbor."
The "safe harbor" allows a developer to determine whether the project site is an energy community on the date construction is considered to have started for tax purposes. If the project qualifies on that date, then it will be considered to qualify through the entire 10-year PTC period.
This will bring renewed attention to strategies for starting construction. There are two main ways to start construction. A project is considered under construction when at least 5% of the total project cost has been "incurred" or when "physical work of a significant nature" starts at the project site or at a factory on custom-made equipment for the project. For more details, see "IRS Issues Solar Construction-Start Guidance: Notice 2018-59."
The IRS requires construction to be completed within four, five, six or 10 years, depending on the year construction started and the project location. A developer can buy more time by proving there were continuous efforts after construction started to advance the project. For more information, see "IRS Allows More Time to Finish Construction" and "IRS Grants Relief for Offshore Wind Projects and Projects on Federal Land."
The safe harbor can only be used by projects that started construction in 2023 or later.
10% Bonus Credit
The Inflation Reduction Act allows a 10% bonus tax credit to be claimed on projects in three locations. It can only be claimed on projects that are put in service in 2023 or later.
The tax credit is an additional 10% investment tax credit, meaning that a project that otherwise qualifies for a base ITC of 30% would qualify for a 40% ITC. (The ITC can reach 50% by also using enough domestic content.)
The energy community bonus is an additional 10% increment on top of the production tax credit that can be claimed on the electricity output. Thus, a project qualifying for PTCs of $27.50 a megawatt hour would qualify for another $2.75 per MWh.
The bonus credit is available for wind, solar, geothermal and other renewable power projects, energy storage facilities, pumped-storage hydroelectric projects, possibly green hydrogen plants on which ITCs (rather than PTCs) will be claimed, biogas projects and dynamic windows.
The projects must be on the US mainland or Puerto Rico, the US Virgin Islands, Guam, American Samoa or the Northern Mariana Islands.
Three types of locations qualify as energy communities.
A "brownfield site" is a site that may be difficult to develop because of the potential presence of pollution or mine-scarred land, meaning not only the area above a mine but also an area with mine tailings or where hard rock residues might have washed. However, if the site has already been put on a Superfund or other government list for cleanup, it requires more analysis as it may not qualify.
The IRS said three types of sites qualify automatically as brownfield sites under a "safe harbor" as long as they are not already on a government cleanup list.
One is a site that is already viewed as a brownfield site under federal, state, territorial or federally-recognized Indian tribal programs based on potential pollution. Such sites may be found on the US Environmental Protection Agency website "Cleanups in My Community" or on similar webpages maintained by states, territories or tribes.
Another safe-harbor site is a site where a phase II environmental site assessment concluded that a hazardous substance, pollutant or contaminant is present. Petroleum or crude oil pollution may or may not count.
The last safe-harbor site is for small projects under five megawatts AC. A phase I environmental site assessment must have been completed under the most recent standard for such site assessments, ASTM E1527-21. Although the IRS notice does not say it must have found pollution, environmental counsel reads that as implied.
Another location that qualifies is a census tract or directly adjoining tract where a surface or underground coal mine closed after 1999 or a coal-fired generating unit was retired after 2009.
The list of census tracts and directly adjoining tracts that the IRS believes qualify can be found here.
The US Mine Safety and Health Administration assigns one of seven classifications to US coal mines: new mine, active, intermittent, non-producing, temporarily idled, abandoned or abandoned and sealed. Only the last two qualify as closed.
The IRS said a coal mine qualifies as closed if "it has ever had for any period of time, since December 31, 1999, a mine status of abandoned or abandoned and sealed."
Some mines do not appear in the MSHA records due to "irregular location information." For example, it can be hard to find the actual location of underground mines on Google Earth because different points of entry may be dug to gain access to coal seams or a surface mine may shift location. A developer can present evidence to MSHA that such a mine has closed and, if MSHA agrees, the IRS will update its table in an "annual ministerial notice."
Information about retired coal-fired generating units can be found in the electric generator inventory maintained by the US Energy Information Administration. The EIA has a spreadsheet that can be downloaded with links to the locations of retired generating units on a map. For 2010 through 2013 data, the focus is on plants listed as retired under the following fuel types: anthracite coal, bituminous coal, lignite coal, refined coal, coal-derived synthetic gas, subbituminous coal and waste or other coal. For 2014 through 2022 data, the focus is on power plants listed by EIA as retired "conventional steam coal" or "coal integrated gasification combined cycle."
Some power plants may not show up in the EIA data as retired due to "irregular location information." In such cases, developers can try to persuade EIA to fix its listings.
Two census tracts are "directly adjoining" if they touch at "any single point."
Most questions around what qualifies as an energy community have been about projects in the third category: metropolitan or non-metropolitan statistical areas with at least 0.17% direct employment or at least 25% local tax collections "related to the extraction, processing, transport, or storage of coal, oil, or natural gas" at any time after 2009 and with local unemployment rates at least equal to or higher than the national average unemployment rate "for the previous year."
The boundaries around what to count as non-metropolitan areas and at which year to look to compare unemployment rates "for the previous year" were unclear.
The IRS addressed both issues.
It published a 121-page table showing in which metropolitan or non-metropolitan statistical area each county falls. The table can be found here.
It published a separate 59-page table showing which counties had at least 0.17% direct employment tied to oil, gas or coal at any time after 2009. That table can be found here.
The metropolitan statistical areas are determined by the Office of Management and Budget and are based on 2010 census data. It is unclear whether the IRS plans to update them in the future to reflect the 2020 census.
For non-metropolitan areas, the IRS will rely on May 2021 boundaries drawn by the US Bureau of Labor Statistics.
In the six New England states, each county is its own statistical area: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
For the remaining US states, some statistical areas are a single county. Some combine counties, including in more than one state. For example, the Memphis metropolitan statistical area straddles Tennessee, Mississippi and Arkansas.
For Guam, American Samoa, the US Virgin Islands and Northern Mariana Islands, the entire island is a single statistical area.
Puerto Rico is divided into 78 municipalities and has multiple metropolitan and non-metropolitan statistical areas.
The direct employment in oil, gas and coal is determined by adding up employees in the statistical area under eight NAICS codes, which are categories that the Bureau of Labor Statistics uses to classify workers. The industry had hoped that employment in 14 NAICS codes would qualify.
The IRS will update the table showing statistical areas that have at least 0.17% direct employment to show what areas qualify as energy communities on the basis of both direct employment and a high enough unemployment rate after the Bureau of Labor Statistics publishes the 2022 annual employment rate later this month. It will then update that new table annually each May based on the unemployment data for the previous year.
The comparison of the local unemployment rate with the national average rate should be done the year before an ITC project is placed in service or the year before each annual PTC determination. In cases where a developer uses the date construction started as an alternate test, it compares unemployment figures for the year before construction started.
The IRS said that information on local tax collections is hard to find. It asked for suggestions by May 4.
Some projects are only partly in an energy community.
The IRS said that projects that have a generating capacity qualify if at least half the nameplate capacity is in an energy community. The nameplate capacity is the DC capacity that a project is capable of producing on a steady-state basis during continuous operation under standard conditions as determined by the manufacturer.
For energy storage, at least half the storage capacity in megawatt hours should be in the energy community.
For projects that have no generating capacity—an example is a biogas project or dynamic windows—then at least half the square footage must be in an energy community.
This will raise questions what is the "project" and will require engineers in projects that straddle energy communities to take into account energy community boundaries when deciding where to place wind turbines, for example.
The IRS adopted a bootstrap principle for offshore wind farms. They qualify as entirely in an energy community if the onshore substation is in an energy community.
Project owners will have to keep records to prove qualification to the IRS if challenged on audit.
The IRS said more formal proposed regulations on energy communities will follow, possibly late in the year.