Inflation Reduction Act + MinnPACE = Fast Track to a Positive ROI for Solar in 2023
In 2022, Congress passed the $369 billion Inflation Reduction Act (IRA). As a result, building owners and developers have access to stable, long-term financial resources to help pay for efficiency and clean energy projects. Perhaps most important is the solar investment tax credit, which returns to 30% of the project cost. Previously, Congress had reduced the tax credit with the intent to eliminate in 2024.
Solar projects in federally designated disadvantaged neighborhoods receive another 10% credit. Building owners with domestically made panels can add an additional 10% to the 30% tax credit using a provision Congress hopes will spur solar manufacturing investment in the United States.
Word on the Street
To get a sense of the opportunity, we reached out to energy finance experts to discuss the IRA’s potential impact for 2023 and beyond. Not surprisingly, most believe the legislation is good for business and puts our nation on the fast track to a cleaner energy economy.
According to Bali Kumar, chief operating officer of PACE Loan Group, the IRA will “help people build better buildings and incorporate renewable energy in their projects.” He specifically points to the fact that developers will be better positioned to install solar instead of just making sites “solar-ready.”
Tricia Baker, senior vice president of strategy and impact at PACE Equity in Milwaukee, thinks the big winners will come from the solar industry, multifamily developments, and industrial sites that consume enormous amounts of energy.
New Tax Benefits
Jeremy Kalin, Minneapolis attorney and clean energy financing specialist, believe the IRA could bring more solar and efficiency options to historically disadvantaged neighborhoods, city buildings, nonprofits, and other entities. The IRA also allows the first time ever nonprofits to use the tax credit to help pay for solar projects without having to use investor partnerships.
Under the IRA, communities can put together a portfolio of projects that fall under a 1-megawatt limitation and work with investors to see them completed.
Kalin said the adders for using domestically produced panels and for projects in historically disadvantaged communities will appeal to investors and reduce energy costs for the least advantaged Americans. “Everyone and their uncle, and their aunt, are looking at investing in projects that benefit more than just putting cleaner electricity on the grid,” he said.
The act incents the use of energy saving designs, materials, and equipment, allowing developers to potentially buy more expensive technology that, with the tax credits, costs the same or less than more conventional products, Kalin said. Storage now has the same tax credit as a solar, a step forward from how the IRS currently views the technology.
Nonprofits also benefit through the legislation. Since they have no taxable income, they had no way to easily use clean energy tax credits. That status required nonprofits to use complex partnerships involving private investors who could use the tax credits and a power purchase agreement with a lender or solar developer.
Now nonprofits will receive direct payment for 30% of the project’s cost after taxes have been filed, removing an enormous amount of legal and financial work once needed to make the deals work.
Working Out the Details
Other parts of the law are a touch more obscure and will need additional clarification but offer building owners and builders more reasons to build sustainably. The 179D Energy Efficient Commercial Building Deduction (179D) allows commercial building owners to take a $1.88 per square foot deduction for constructing energy efficient structures.
The IRA increases that to $5 per square foot and allows building owners to transfer the deduction engineers, architects, and design contractors. To qualify the buildings must reduce energy through heating and cooling technology, lighting, hot water systems and building envelopes.
The devil is in the details, and there is more to worked out. Yet to Kumar the bill represents a path forward to reducing carbon emissions and creating healthier and more efficient buildings. “It’s helping the clean energy economy, the economy the future,” he said. “Anything we can do to stimulate that market as the nation prepares for that transition to clean energy is a net positive.”