Initial IRA low-income bonus credit plans may sideline small solar projects The program structure will make it difficult for smaller residential and commercial projects to win out, but changes are expected for 2024.

The Inflation Reduction Act (IRA) included some substantial tax credit add-ons for solar projects sited in low-income communities, but the industry didn’t receive further detail on those credits until mid-February.

While solar and environmental justice advocates said they appreciate the government incentivizing solar projects for underserved populations, the Dept. of the Treasury’s initial guidance left many confused and concerned about the program structure.

“First of all, we’re thrilled with the program inclusion in the IRA, and Treasury and DOE’s efforts to implement it in equitable ways,” said Andie Wyatt, policy and regulatory manager at GRID Alternatives, a nonprofit solar training and installation organization. “Like other environmental justice advocates, we want the most community-led and community-benefitting projects to be at the front of the line for this capacity from the outset.”

Wyatt said the current setup for 2023 does not hit those marks for a number of reasons.

Placed-in-service requirements

The biggest issue GRID sees pertains to the placed-in-service guidelines — any projects placed in service prior to being awarded an allocation of capacity are not eligible for the credit.

“Placed in service” in this context means either the date when property depreciation begins or when the project is placed in a “state of readiness” and “availability for a specially assigned function,” whichever happens first.

The placed-in-service structure may be less of a problem for large projects with a long time period between project planning and operation, but timelines are shorter for smaller residential and commercial projects and can’t be paused while the owner secures a credit.

“It’s just incompatible with the days or weeks or months at most timelines for residential clean energy projects,” Wyatt said. “By slipping this sentence in the guidance and making it structured in this way, it’s really limiting its value as a tax credit to shift the solar at every scale into the communities that bonus credits are supposed to be targeting.”

The current application process only adds to the struggle for the residential and small commercial market to clinch these incentives. DOE will accept applications during a 60-day window starting in Q3 2023, prioritizing low-income residential building and economic benefit projects first, with applications for other projects to follow. Only the facility owner may apply for an allocation, and that applicant can only apply in one category for the calendar year. If they don’t receive an allocation, they will be eligible to apply again the following year.

“Treasury’s guidance basically ensures that it’s mainly big developers and big, already-in-the-pipeline, 5-MW projects that will be able to actually use the credits in 2023,” Wyatt said.

But even larger community solar developers have concerns about this placed-in-service restriction and Q3 application process.

“Now everyone’s saying, ‘Do I just delay all my projects?’” said Georgina Arreola, VP of policy at community solar subscription company Perch Energy. “We’ve gone from, ‘All right, early in the year, we’re going to get something and we’re going to push forward and get as many projects out the door [as possible],’ to, ‘Maybe I don’t do anything this year.’”

Moving forward from this tough interim year, GRID and other advocates are pushing for a switch to a rolling application process to give smaller, deserving low-income projects a shot at the credits.

“We need to have clarity in our contracts upfront about the benefits that we can pass through to our rooftop clients,” Wyatt said. “We can’t make them take that gamble and have that kind of a weight. It’s just fundamentally incompatible with the business model and timelines.”

Credit allocation issues

The IRA statute capped the low-income incentive program at 1.8 GW, but did not outline how those credits should be allocated. In Treasury’s initial guidance, the allocation is based on the four different credit categories:

700 MW for facilities in low-income communities
200 MW for facilities located on Tribal lands
200 MW for facilities serving affordable housing facilities
700 MW for facilities where at least 50% of the financial benefits of the electricity produced go to households with incomes below 200% of the poverty line or below 80% of area median gross income

Solar industry officials who were part of discussions with Treasury said this differs from the best practices expressed in those meetings. Instead, they were looking for the incentives to be allocated based on solar sector to ensure everyone gets a fair share.

“SEIA, Vote Solar and a bunch of other people got together and said what would be fair so that no industry cannibalizes the other one,” said Perch Energy’s Arreola. “[They] made a lot of recommendations about apportioning a certain percentage to community solar, a certain percentage to rooftop solar, commercial, what have you, and [Treasury] didn’t follow that guidance, unfortunately.”

Other unclear areas of the guidance are the issues of oversubscribed categories, waitlists and yearly rollover. As of now, Treasury and the IRS have discretion to reallocate excess capacity to oversubscribed categories, and any unallocated 2023 capacity will roll over to the following calendar year. The methods for reallocating are not yet described, and there is no waitlist established in the guidance.

The need for further clarity on the many facets of this program also impacts some state-level low-income solar policies, where officials were waiting on federal guidance before setting forth their own complementary programs.

“A number of states like New York said, ‘As soon as the guidance comes out, we’re going to give you clarity on all these adders that we’ve been holding back on releasing.’ Now, that clock is sort of reset without a firm date as to when that additional guidance is coming,” Arreola said. “It arguably introduces more uncertainty and potential for slower growth than we had anticipated.”

Looking ahead

While 2023 will be a work in progress, there is plenty of hope that a lot of these issues can be mitigated by the time 2024 rolls around. The Dept. of Energy has been tapped to be the administrator of the Low-Income Communities Bonus Credit Program.

“The Dept. of Energy’s been really great with all the work they’re doing with NCSP (National Community Solar Partnership), and they’ve been really open to learning and figuring out what works and what doesn’t,” she said. “So it was nice to see that DOE is going to be leading the administrative effort, because I think there’s a lot of good knowledge transfer that’s been going on there.”

Treasury has also been clear that this is only the beginning of guidance for this credit subset. Future notices will outline specific application procedures, additional criteria, definitions and other helpful information. The guidance also noted that Treasury and the IRS will be monitoring the program rollout and assessing whether modifications are needed in 2024.

Solar industry representatives from groups like the Coalition for Community Solar Access (CCSA) and Vote Solar are continuing to meet with government leaders to push for more alignment with best practices for low-income solar growth at all levels.

“While there is still work to be done to ensure the program deploys solar projects that will provide meaningful benefits to low- and moderate-income communities, we are strongly encouraged that the administration is actively engaging with industry and other key partners to make the program a success,” said Mike Judge, VP of policy at CCSA, in an email. “Developers and other contractors should be aware that the 2023 guidance is still not final and may differ from how the program operates in 2024 and beyond. We’re working with Treasury so that we can start delivering bill savings to low-income families that need help now.”