From solar pros to CEOs, the passage of the Inflation Reduction Act (IRA) has been roundly applauded and rightly so. The IRA solidifies a cleaner energy future for the United States and provides certainty for the solar and energy storage industries (and wider spread electrification), with the 10-year extension of the 30 percent investment tax credit (ITC) being the crown jewel.
The bill is also getting praise for incentives that prioritize clean energy projects in lower income communities. In the year-end edition of The Buzz, we want to explore that a bit more. How will the IRA deliver on a more equitable path forward? And how can your business help walk that path?
Residential solar is poised to grow under the IRA, but the lack of a direct-pay option for low-income earners to take advantage of the ITC fails to really expand the customer set for residential installers. According to the Rocky Mountain Institute, “Around 7 in 10 American tax filers would not have enough annual tax liability to receive the full ITC 25D benefit, according to 2018 data from the IRS. And the more than 4 in 10 Americans who do not have any federal income tax liability at all would see zero benefit.”
“What we’re talking about is the residential ITC — there is not equal access to the credit when it’s tied to our tax liability,” stated Aurora Solar CEO Christopher Hopper and CRO Samuel Adeyemo in an email to Solar Builder. “We believe that the direct pay function, which applies to non-profit and government organizations in the bill, should apply to all households and would level the playing field to provide more equitable opportunities to go solar.”
For homeowners who can’t take advantage of the ITC, maybe the extension could bring a boost to third-party ownership deals? David Dunlap with BayWa r.e. said he thinks it is possible in the “State of the Solar Industry Heading into 2023” episode of Power Forward!
Analysts at Wood Mackenzie were not so sure when we asked them back in September.
“We don’t expect to see residential solar TPO systems trend up again following the passage of the IRA,” says Zoe Gaston, principal analyst, U.S. Distributed Solar, at Wood Mackenzie. “Loans currently make up the majority share of the market, and we expect them to remain attractive to customers, especially as retail rates continue to rise and customers receive more of a discount to their utility bills.”
TPO systems had a slight advantage in their forecast before the passage of the IRA, but this is no longer the case.
“Although the IRA excludes direct pay for residential customers, we do not expect this to limit solar lending growth, even for LMI customers, if there is savings compared to their utility bill,” Gaston says. “Based on our recent conversations with financiers and installers, the annual tax liability of customers isn’t limiting their sales growth as of now. We expect that market penetration must be significantly higher before tapping into LMI customers becomes a barrier.”
Recent data from the Lawrence Berkley Lab does back this up. The median income of solar adopters is trending down, “dropping from $129k in 2010 to $110k in 2021, as adoption becomes more proportionately distributed across the population and has started to broaden into low- and middle-income states since 2016.” More notably, LMI adopters’ share is growing overall with “22 percent of all 2021 adopters earning less than 80 percent of area median income, and an additional 21 percent between 80 and 120 percent of area median income.”
Encouraging stats, but given the lack of more direct incentives, the low end of that LMI scale will likely be more reliant on developer, utility and corporate interests to connect them with renewable energy.
This is where the IRA really comes into play. In addition to the 30 percent ITC, solar companies have these added incentives to target projects in low-income and disadvantaged areas.
Eric O’Shaughnessy with the Lawrence Berkeley National Lab analyzed data from two state-level LMI PV incentive programs in a paper published by the Energy Journal to test whether incentives still drive PV adoption among LMI households.
The good news is that they do: “The analysis suggests that incentives drove adoption that would not otherwise have happened in about 80% of cases,” the author states. “To the extent that policymakers prioritize PV adoption equity as part of the emerging energy justice policy agenda, the results suggest that ongoing incentive support for LMI adoption may be merited.”
The California Single-Family Affordable Solar Homes program, for instance, set aside 10 percent of its funds for LMI incentives under the California Solar Initiative. These are upfront incentives for income-qualifying homes and, to date, has installed 8,305 systems.
“The analysis suggests that most distributed LMI incentives in these case studies drove adoptions that would not have otherwise occurred, providing evidence that incentives remain a key factor in supporting LMI adoption,” the author states, noting that over time this can help spur that well-know spillover /peer-influence effect, increasing PV adoption (and solar installer marketing attention) among LMI households that do not actually receive incentives themselves.
“I find evidence that LMI incentive programs generate spillover impacts by increasing adoption among households that do not receive incentives,” O’Shaughnessy posits. “Though the effects are statistically insignificant — partly due to low statistical power — the spillover hypothesis is strongly supported by a robust literature on the key role of social influence in solar adoption. The implication for policymakers is that the impacts of LMI incentives on LMI adoption may be under-appreciated. Further, incentive programs could potentially be designed to leverage these spillover effects, such as by targeting incentives in LMI areas rather than setting eligibility based on household income.”
- 10 percent ITC adder for a project located in a low-income community or on tribal land. A “low-income community” is defined as a Census tract with a poverty rate of at least 20 percent, as well as a Census tract where the median family income (MFI) is 80 percent or less of statewide MFI.
- 20 percent ITC adder if the project is part of a qualified low-income residential building project or a qualified low-income economic benefit project. This means the project must be installed on a residential rental building that is part of a housing program under the Violence Against Women Act, Title V of the Housing Act of 1949, a tribally designated housing entity, or other programs determined by HUD. The project must have a maximum net output of less than 5 MWac.
- 10 percent ITC adder for a project in an energy community (only eligible in low-income communities), which are brownfields, coal communities and a third (somewhat weird) category defined as a metropolitan or non-metropolitan statistical area where “0.17 percent or greater direct employment or at least 25 percent of local tax revenues [are] related to extraction, processing, transport or storage of coal, oil or natural gas,” and unemployment is at or above the national average in the previous year.
- 30C tax credit for EV infrastructure, renewed specifically for disadvantaged and rural communities.
Will all these tax credits add up enough to help low-income communities?
PPAs for the people
“The fact that there are now direct financial incentives tethered to the way that you go about building a project is a tremendous step forward for trying to incorporate these environmental justice initiatives within traditional development,” posits Grace Morrissey, renewables advisory manager at Edison Energy, which works with different developers in the space that have been getting a read on how they’re going to take advantage of the goodies in the IRA.
“One of the questions that comes to mind is, how can folks who hold a lot of the reins of power change the story and the structure of our energy system in a way that’s more equitable?” Morrissey adds. “Because it’s going to cost money, it’s going to take time, and it’s not a clear path — specifically the path for my clients and corporates more broadly to support these EJ [environmental justice] initiatives.”
Many solar projects, obviously, tend to be economics first, which isn’t the most direct path to achieving equity and environmental justice. Morrissey is specifically interested in how to incorporate equity, or some level of justice, in a structural way without it having to be philanthropic.
“There is an inherent power structure [with philanthropy], where a corporation could just immediately pull that funding at any time, for any reason, and completely leave a community that they were supporting in the lurch,” she says. “That may be for a bunch of different reasons; there are a lot of external and dynamic elements that impact philanthropy. If you incorporate it, though, in a megawatt hour, or you incorporate it within annual budgeting processes, that then becomes a part of that product that you’re buying. And the value is inherent in that transaction as opposed to just throwing money at a problem.”
So how can developers and large energy buyers get creative to aid LMI and disadvantaged communities?
- ESG goals are integral for corporations going forward. If you’re a top company in an industry, and interested in pursuing renewables, “you better include some element of community justice to some degree, because that’s going to be commonplace, I would argue in the next three years, if not earlier,” Morrissey says.
- Some developers now have funds that are set up in order to support local initiatives, or that go directly to a 501 C3, that works within the community to figure out where to best use funding. Volt Energy, for example, has an environmental justice PPA that helps its corporate partners, “jointly make community investments that will focus on delivering affordable solar energy to historically underserved urban and rural communities, and providing workforce training for clean energy and sustainability careers with an emphasis on Historically Black Colleges and University (HBCUs) students.”
- Maybe we veer away from virtual power purchase agreements and look to a structure that global fashion brand Chanel deployed in California with the help of Sunrun. In this setup, Chanel was the sole stakeholder of a community solar portfolio that would financially and electrically benefit a low-income neighborhood. Chanel subsidized the project ($35 million) and is the anchor offtaker for the RECs. Thirty thousand low-income homeowners receive a bill credit as if they were a community solar subscriber. As a result, Chanel gets to promote its renewable energy build out and community outreach, and residents save money (but cannot claim they have solar energy).
“They found a way to receive the RECs, which is rare for community solar anchor offtakers, but then they pass all the financial savings along to those residential folks who have, frankly, always been marginalized in energy and infrastructure decisions,” Morrissey says.
Adding to the community
These federal tax credits are often bound by layers of state rules. This is especially true in community solar, which is a leading candidate to drive low-income project development. The Department of Energy thinks so at least, setting a goal of 26 GW of community solar by 2025 even before the IRA hit the scene.
Community solar developers have considerable opportunities to serve low-income communities thanks to incentives in the IRA. The ITC could be 50 percent or more after tallying adders (including the 10 percent domestic content adder, which I did not include earlier).
Community solar has its shortcomings, of course. The biggie is it’s still only legal in 22 states. The most recent forecast from Wood Mackenzie and the Coalition for Community Solar Access (CCSA) expects at least 7 GWdc of community solar to come online in existing markets between 2022-2027 — an increase of 477 MWdc from previous forecasts because of new community solar markets (New Mexico and Delaware), and adjustments to existing state forecasts as state-level programs.
Nice, but nowhere near that DOE goal.
There’s also a disconnect between community solar and the ESG scoring criteria. As Shaun Keegan, CEO of Solar Landscape, noted during our Project of the Year Award interview, community solar deals could be no-brainers for companies looking to meet ESG goals, but the unique aspects of community solar are not solidified within the ESG rubric. Basically, if you install extra panels on your warehouse roof to benefit the surrounding community, you very likely will not get any ESG points for that.
“We hear it all the time, ‘how will this impact my ESG score?’” says Keegan. “We’re trying to talk to those scoring entities and telling them the benefit of doing solar on the rest of the roof because it’s an inherently wasted opportunity if you only put solar on a little section of the roof.”
All community solar programs are not created equal either. One sticking point, at least in terms of creativity in developing projects that benefit both corporate entities and low-income communities, is the ability to transfer RECs, notes renewable energy attorney Tanya Larrabee of Boston law firm Sherin and Lodgen. “Now that we have more incentives for these projects being built, more RECs are being generated. If companies are valuing them with corporate PPAs, how are those handled across state lines?”
Unfortunately, in a community solar deal, corporate offtakers rarely get the RECs associated (Massachusetts and New York being two examples where this is possible). Remember that Chanel example from earlier? Not possible without a REC transfer.
Drilling down into communities further, how do municipalities zone solar? Will that match up with the low-income community or EJ incentives in the IRA? “Those are great things, but sometimes it comes down to local cities and towns and how they want to move forward,” Larrabee says. New York, which is notoriously hard to build in, actually has a really great definition of disadvantaged communities and is going to draw more interest in investment as a result.
Many of these low-income communities will not be easy wins either. Some citizens might be (rightfully) leery of any energy industry swooping in to use land, given the historic disenfranchisement other energy industries have wrought the last century. Low-income areas in red counties might oppose solar in their backyard just because. This is happening more and more.
Low-income vs. high barriers
The revamped ITC under the IRA does allow projects under 5 MWac to wrap in interconnection costs, but grid infrastructure in low-income communities is often equally disadvantaged and will likely require more investment.
As an example, We the People Michigan and Soulardarity authored a policy brief with evidence showing utility DTE has generally disinvested in low-income and minority neighborhoods when compared to whiter, wealthier areas. No one should be shocked to find similar situations in other states and other utilities. Thus, many areas will be building these larger scale solar and storage plants while simultaneously upgrading outdated grid infrastructure. Can it be done without adding costs to ratepayers that essentially cancels out the 10 or 20 percent electric bill relief community solar might provide?
“That can be a struggle, but a docket in Massachusetts would allow for a review of aggregating these costs across developers, ratepayers and utilities,” Larrabee says. “The infrastructure is old and not necessarily meant to move large GWs of power between states. To really get efficient with the different energies available across the nation, there’s a need for states, federal government and FERC to get creative because it’s not sustainable for developers to pay for all of these upgrades and costs while trying to build the infrastructure.”
My two cents per kWh
I didn’t write this to be a downer amid IRA excitement. Opportunities abound like never before for solar developers, especially in lower income communities. But these projects will still require work, regulatory help, community education and an improvement of industry installation and sustainable development best practices to truly realize the promise of clean energy equity and EJ goals — especially with larger scale projects clearly being the priority of this decade-defining piece of legislation.
Chris Crowell is the Editor-in-Chief of Solar Builder.