State government officials and nonprofit leaders are ratcheting up concerns that the Biden administration is making it too difficult to qualify for a new Inflation Reduction Act program considered key to boost renewables and low-carbon projects.
The tax program, known as direct pay, allows the Treasury Department to cut checks covering 30 percent of the cost of clean energy projects — such as solar farms and electric vehicle fleets — that are developed and owned by nonprofits. The program could send billions of dollars in rebates to tax-exempt organizations such as state and local governments, schools, tribes and power cooperatives.
But those organizations have little or no tax experience, and experts say they will need to spend precious financial resources to beef up staff to navigate the new rules. Nonprofit officials say that requirements that projects be made with domestic materials — and Treasury Department restrictions on financial partnerships — are major hurdles to qualify for direct pay.
“This is a new muscle that cities are going to have to flex,” Mike Gleeson, legislative director of Finance, Administration and Intergovernmental Relations at the National League of Cities, told E&E News in an interview. “This needs to be made simple for the 19,000 cities, towns and villages [in the United States]. Otherwise, you’re not going to see the uptake that the administration is seeking.”
The program — at least in theory — makes clean energy projects more attractive for nonprofits like cities, schools and tribes, which often strike complex power purchase agreements with companies that build clean energy projects on nonprofit property using incentives in the tax code.
In a shift, the program allows tax-exempt organizations to directly access tax incentives for clean energy, rather than relying on the PPAs for cheap power.
But some tax experts say Treasury Department preliminary guidance on direct pay issued in June restricts financial partnerships with other organizations far more than the Inflation Reduction requires, threatening to unnecessarily limit use of the program.
Co-ownership partnerships — potentially with for-profit groups — can help facilitate low-carbon projects because the partners bring clean energy experience, tax expertise and more capital to invest.
“The proposed regulations on direct pay kind of threw a whole bunch of cold water on [non-profit pension] funds and tax-exempts,” said Casey August, an attorney with Morgan, Lewis & Bockius. “It’s pretty much an absolute prohibition on partnerships.”
The proposed rules are particularly unworkable for nonprofits like pension funds that don’t own much physical property to actually build clean energy projects, August said. Instead, funds tend to prefer passive investments, where they invest in clean energy and get returns from the projects.
“It’s not part of the mission of the pension fund to own and operate energy facilities,” he said. “They would have to go it alone and own these facilities outright. And that’s just not something that they’re typically set up to do.”
On top of those restrictions, Treasury must trim the direct pay rebate for nonprofits that use bond financing to build qualifying projects. That cut could be as large as 15 percent of the total potential rebate, according to the Inflation Reduction Act.
A Treasury Department spokesperson said the agency is continuing to review comments on the partnership proposal.
‘We do plan to pursue it’
Despite the challenges, many local officials eyeing clean energy projects say they are intrigued by direct pay.
“It’s a great opportunity for local governments. And yes, we do plan to pursue it,” said Dory Estrada, sustainability manager for Takoma Park, Maryland, a suburb of Washington. “For which projects we will utilize that is still being discussed internally.”
Estrada pointed to Takoma Park’s plans to purchase EV fleets and put rooftop solar on a local library. Projects like those are planned or taking place across the country. Schools nationwide are also penciling out renewable projects and efficiency retrofits, while energy cooperatives and tribes are regularly building out energy infrastructure that has the potential to slash emissions in rural America.
Others say the partnership restrictions may be a minor hurdle.
“It would be ideal if partnerships of non-profit entities were eligible to claim direct pay,” said Amy Turner, the director of the Cities Climate Law Initiative at the Sabin Center for Climate Change Law at Columbia Law School. “But this isn’t going to drastically inhibit the uptake of direct pay.”
Many of the state and local governments that now qualify for direct pay were key drivers of U.S. climate action during the Trump administration, which withdrew from the Paris Agreement and cut regulations on fossil fuels.
The Biden administration and its Democratic allies are hoping direct pay cuts carbon emissions nationwide. A recent report from Princeton University’s REPEAT Project suggests the Inflation Reduction Act and the infrastructure law are poised to slash U.S. emissions 37 to 41 percent below 2005 levels by 2030 — short of the Biden administration’s Paris Agreement commitment of at least a 50 percent cut to U.S. emissions by that date.
Before the IRA, “[tax exempt entities] were paying more than, you know, a private homeowner who was looking to do the same [clean energy project],” said Trevor Higgins, senior vice president of the Energy and Environment department at the Center for American Progress. “The opportunity for direct pay allows every kind of entity, including nonprofits or local governments or your school district, to benefit from the federal support for energy deployment.”
Democrats and climate change advocates say the Inflation Reduction Act is sparking a surge in U.S. energy manufacturing that’s producing tens of thousands of jobs, particularly in some of the hardest-hit areas of the country. In total, the IRA includes roughly $270 billion for clean energy tax credits like the Section 48 investment tax credit and the Section 45 production tax credit, both of which are codified for a decade.
“These credits make it cheaper for companies to invest in new clean energy technologies,” Treasury Secretary Janet Yellen said at a lithium plant in North Carolina last month. “And the long-term timeframe over which they’ll be available means producers will benefit from not just lower costs but also from increased stability.”
Made-in-America chilling effect
By the end of the year, Treasury “expects” to launch a preregistration portal to ward off direct pay fraud and abuse, according to Treasury spokesperson Ashley Schapitl.
Schapitl said the department initiated a “controlled launch” of the online tool with select “taxpayers who intend to receive a direct payment.”
“The agency will gradually bring users on board to fully test the functionality before making a formal launch announcement later this year,” Schapitl said.
Meanwhile, another major threat looms over the program: the strict statutory mandates to use American-made materials in clean energy projects that qualify for direct pay. Nonprofits looking to use direct pay are obligated to meet those domestic requirements for most projects above one megawatt that qualify for investment and production tax credits.
If they fail to comply with the rules for projects beginning construction in 2024, a slight reduction in most direct pay rebates will take effect. For projects beginning construction after 2025, direct pay is largely no longer available if the requirements are not met.
“There’s a ton of unanswered questions on domestic content still,” said Marc Nickel, a tax attorney with McGuireWoods who previously worked at Pacific Gas and Electric Co. and at Sunrun, the largest rooftop solar installer in the United States. “If the situation is you have to build this with enough domestic content, otherwise your opportunity is at zero, that could be a potentially huge chilling effect if you don’t know exactly what the domestic content parameters are.”
At the same time, he said challenges facing the program may be surmountable.
“I do think eventually it will be quite straightforward. I just think it’s not quite straightforward yet,” said Nickel.
Schapitl said Treasury also expects to release domestic content guidance for direct pay by the end of the year.
For-profit organizations are typically not obligated to meet domestic content rules to get underlying IRA energy credits. Treasury doesn’t have much room to maneuver on domestic content for nonprofits because the law codified the strict rules for direct pay.
The administration has championed domestic content rules, saying they will create well-paying, middle class jobs.
“Certain manufacturing investments, such as in clean energy technologies, can drive production and innovation to meet the pressing global challenges of our time,” Yellen said in her speech.
