With the passage of the Inflation Reduction Act (IRA) of 2022, the federal government has signed up for an unprecedented, long-term investment in the clean energy sector here in the USA. The high-level objectives of the IRA are to: cut inflation, create jobs and spur domestic manufacturing–all while investing in the much-needed renewal of public infrastructure. Investments in electrification and clean energy production–plus the funding to motivate public entities to act–are noteworthy given the political stalemate in Congress for the past few years.
Public sector entities (cities, counties, schools, colleges, universities and water districts, to name a few) now have access to significant federal funding (30% to 60%+) to help offset the costs of eligible clean energy and electrification projects. Funding via other grants, such as Energy Efficiency Conservation Block Grants (EECBG), adds to the pool of monies available to fund these investments, and ultimately, address failing or inefficient infrastructure.
Long-Term, Direct Tax Credits for the Public Sector
As is typical with the federal government’s grant and funding programs, the devil is in the details. In this case, the Department of Energy, the Treasury Department (yes, the IRS), the Transportation Administration and others, have a hand in creating the programs and regulations that disperse IRA funds. More importantly, as non-tax payers, local governments, schools and special districts historically have not benefited from the traditional Investment Tax Credits (ITC) of 30%. In the past, public entities had to rely on private investors with tax equity to fund these projects using complex third-party power purchase agreements (PPAs). That changes now.
From 2024 through 2033, the IRA authorizes direct-pay, investment tax credits to public entities who build long-term clean energy assets, such as solar photovoltaic and energy storage systems; small wind systems; geothermal-powered heating and cooling systems; electric vehicle charging stations; and related infrastructure. Even though you don’t pay taxes, you now receive these tax incentives as a direct payment in the form of a rebate towards your energy project.
Cash Payments to Offset 30% or More of Installation Costs
The IRA provides tax credit funds for an unlimited number of qualifying energy projects across the U.S. over the next 10 years.
The base tax credit under the IRA starts at 30% of eligible system costs. For typical systems under 1 Megawatt (MW) in size (per tax year), it may increase with entitlements of 10% for designated low-income areas, 10% for labor compliance requirements, 10% for community solar projects, plus up to 20% for systems located in designated Energy Communities. Systems exceeding 1 MW in size must comply with strict labor compliance and domestic content regulations to receive the tax credit subsidies.
Keep in mind that federal tax credit will be reduced by 15% if tax-exempt funds (e.g. municipal leases, tax-exempt bonds, etc.) are combined to pay for eligible systems.
Tax Forms and Filings are Required to Receive Payment
Since fiscal public officials will be required to review, approve and file tax forms, you’re strongly recommended to consult your municipal financial advisor or tax professional regarding your IRA application strategy.
A public entity must first pay the cost of installing the eligible system, place the system into service, file a pre-registration form with the IRS and then wait for the IRS to respond with a system registration number. Once the public entity has the registration number, the special tax forms for your tax credit application are filed with your annual tax filing.
Start Now or You Will Lose Out on a Tremendous Federal Subsidy
As the saying goes, “Rome wasn’t built in a day.” The federal government has set aside a huge amount of funding for eligible public sector entities, and you may only capitalize on these funds if you take ACTION.
Form a working group of stakeholders, create a realistic energy modernization plan, then issue an RFP to procure an experienced, full-service energy services firm. After the project is developed, implemented and placed in service, your municipal financial advisor will work with your energy services company to maximize the federal tax credit subsidies for your particular community. Not to mention, the program as a whole will allow you to check major boxes for your Climate Action Plan (CAP) and meet State mandates for greenhouse gas emission reductions before 2030.
California ratepayers saw utility expenditures double in the last 5 years as public utilities posed double-digit year-over-year rate increases. These trends are expected to continue. Many public agencies are finding traditional, piecemeal approaches fall short in today’s construction economy due to staff bandwidth constraints, cost escalations, labor shortages and supply chain disturbances. As operating and capital budgets tighten across the board, it’s incumbent upon public sector leaders to get smart on streamlined project delivery methods and creative funding solutions. With more funding available than ever before, now is the time to implement your climate action initiatives if you haven’t already.
Authored by Thomas Jackson, Corporate Vice President Major Projects, Climatec LLC, a Robert BOSCH Company and Bruce Dickinson, President, Eagle Energy Solutions, LLC