A Comprehensive Guide to Corporate Sustainability & Tax Credits
Get quick wins by pairing measurable impact with an economic incentive.
Corporates are now one of the most prolific forces on the planet for meaningful climate action. Who saw that coming 10 years ago!? A leading benchmark group, Science Based Targets initiative (SBTi), now counts nearly 5,000 companies taking action, with 2,600+ companies setting formal science-based targets and 1,800 companies with net zero goals.
A key decarbonization activity has been to offset electricity-related emissions (also known as “Scope 2” emissions) by purchasing electricity from renewable energy generation–often via a corporate power purchase agreement, or PPA.
While PPAs have been a great tool to drive new renewables build-out, not every corporate has the financial strength, risk appetite, or ability to sign up for long-term PPA contracts, which typically run for 10 to 20 years. Fortunately, following the passage of the Inflation Reduction Act (IRA), sustainability leaders now have even more ways to tackle their Scope 2 emissions targets.
Tax credits – why do they matter?
A central feature of the IRA was the expanded tax credit regime. Now, renewable energy and sustainable infrastructure projects can qualify for 10+ years of tax credits which can be monetized as part of the project financing process.
These tax credits have drawn a lot of attention for driving top line growth projections for renewables. For example, Wood Mackenzie estimates that solar, wind, and battery storage alone could produce as much as $90B of tax credits per year:
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As the chart below shows, the IRA tax credit incentives will help drive significant deployment of new wind, solar and other sustainable technologies. .
Less attention has been paid to where this capital comes from. Because the vast majority of clean energy funding in the IRA came in the form of tax credits, the unspoken assumption is that corporate taxpayers will simply monetize these credits for project developers as they did with pre-IRA tax credits. But going from a tax credit market that was traditionally in the $18B-$20B range pre-IRA to one that is 2-3x larger or more post-IRA will necessitate a large number of new corporate taxpayers to enter the market and trade tax capacity in the form of cash for tax credits.
What does this have to do with corporate sustainability?
As corporates look for energy-related sustainability tools beyond the PPA, investing capital directly into projects via tax equity or its new post-IRA cousin, transferability, is an appealing option. Some companies like Starbucks, Facebook, and Nestlé, have invested in tax credits with great effect already.
With the IRA’s new transferability provision, the process is more straightforward than tax equity; companies with tax liability (which they have to pay anyway), can instead purchase tax credits at a discount. For example, paying $0.90 for $1.00 of tax credits on $50M of tax liability would net an immediate $5M savings.
Investing in transferable tax credits has a sustainability story, and it drives meaningful clean energy impact. But there’s a catch–the investment activity of monetizing tax credits on behalf of a specific renewable energy project doesn’t “count” towards Scope 2 emissions reduction targets. The corporate, despite putting tens or hundreds of millions of dollars into a project, would also need to buy the energy attribute certificates (EACs) or renewable energy certificates (RECs) to make a formal “green” claim.
Fortunately for sustainability leaders, the savings generated by purchasing tax credits–$5M in our example above–could be redirected to offset the cost of REC procurement. This approach helps bring sustainability activity more directly into alignment with the financial incentives of the business.
“From a CFO’s perspective, an interesting feature of the green-energy credits is a provision in the law that makes the credits transferable one time”
Deloitte, “For CFOs, the full impact of the Inflation Reduction Act is still coming into focus”
Corporate sustainability leaders can be internal champions for tax credit purchases
Corporate sustainability leaders should champion tax credit purchases inside their company for three reasons:
- It drives real impact – as noted above, tax credit monetization is a real, measurable, and impactful way to put steel-in-the-ground. Without tax credit financing, projects don’t get built. Any company putting $20M, $50M or $100M+ of tax capacity to work financing projects is directly accelerating the energy transition.
- It fills an enormous funding gap for clean energy – also noted above is the gap between today’s tax credit investment market (~$20B annually) and the very near future of ~$60 to $90B in annual demand for tax credits. . Only taxpaying corporates can effectively monetize these credits to enable projects. Without them, the promises of the IRA and much of the decarbonization effort falls short.
- It provides an economic benefit for action on sustainability – unlike RECs and PPAs which are often a net cost to the corporation, tax credits are a net benefit, saving 7-10% annually on tax liabilities that the company is already responsible for. These savings can be reinvested in REC purchases or other activities to secure the desired environmental attributes.
Conclusion – sustainability teams can “do well and do good” with tax credits
Given the deep necessity of more corporates putting their tax liability to work in monetizing tax credits for renewable energy project developers, sustainability teams are a natural place to start for leading this effort.
The alignment of doing well, by improving the bottom line via tax savings, and doing good, by sending already spoken for capital directly into renewable energy projects, should have any sustainability leader excited to pick up the phone and call their corporate finance team to get started.
Related Articles
The latest energy community guidance, which meaningfully expanded the number of qualifying areas, placed the 10% adder back in the spotlight for the transferable tax credit marketplace. At the same time, Reunion has observed a marked increase in the number of projects in our marketplace claiming the energy community bonus.
While our transferable tax credit handbook goes deep on energy communities, we wanted to share a comprehensive (and refreshed) look at the adder.
Our guide begins with the basics, so we invite you to jump ahead.
- Background and scope
- Credit and project eligibility
- Diligence
- Guidance
- Annual updates to areas qualifying as energy communities
- Resources
The Inflation Reduction Act created three bonus credits, or "adders"
The Inflation Reduction Act (IRA) created three "bonus" credits that can increase the value of a clean energy project's transferable tax credits:
- Domestic content: 10% bonus
- Energy community: 10% bonus
- Low-income community: 10% or 20% bonus
The energy community adder provides a 10% bonus credit
The energy community bonus provides a 10% increase to a project's credit value if the underlying project is located in an energy community (and meets prevailing wage and apprenticeship requirements).
A utility-scale solar project, for instance, that meets PWA requirements would receive tax credits worth 30% of its eligible cost basis. If the same project is located in an energy community, it would receive tax credits worth 40% of its eligible basis.
The IRA defines three types of energy communities
To qualify for the energy community bonus, a project must be located in at least one of three energy community "categories."
Category 1: Brownfield
A brownfield site is defined in 42 U.S.C. § 9601(39)(A) as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant" (as defined under 42 U.S.C. § 9601), and includes certain "mine-scarred land" (as defined in 42 U.S.C. § 9601(39)(D)(ii)(III)). A Brownfield site does not include the categories of property described in 42 U.S.C. § 9601(39)(B).
Three types of sites qualify as a brownfield under a safe harbor:
- Existing brownfield: Brownfields that are already tracked by a federal, state, territorial, or federally-recognized Indian tribal brownfields program. Many states, like Idaho and New York, have their own brownfields programs with supporting maps. A valid brownfield site could be tracked by a state program but not a federal program, and vice versa
- Phase II assessment: A Phase II Assessment has been completed with respect to the site and such Phase II Assessment confirms the presence on the site of a hazardous substance as defined under 42 U.S.C. § 9601(14), or a pollutant or contaminant as defined under 42 U.S.C. § 9601(33)
- Phase 1 assessment (for projects with a nameplate capacity of not greater than 5MWac): A Phase I Assessment has been completed with respect to the site and such Phase I Assessment identifies the presence or potential presence on the site of a hazardous substance, or a pollutant or contaminant.
Category 2: Coal closure
A census tract (or directly adjoining census tract):
- in which a coal mine has closed after 1999; or
- in which a coal-fired electric generating unit has been retired after 2009
Category 3: Statistical area
A "metropolitan statistical area" (MSA) or "non-metropolitan statistical area" (non-MSA) that has (or had at any time after 2009):
- 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and
- has an unemployment rate or above the national average unemployment rate for the previous year
The scope of "direct employment" is determined by ten NAICS codes.
No double bonus for multiple energy communities
If a clean energy project is located in two energy communities – a brownfield site within a coal community, for instance – the bonus remains 10%. Developers cannot double up.
Bonus credits cannot be sold in stand-alone tranches
Bonus credits are not treated differently from base credits for the purpose of transferability. Treasury guidance released in June 2023 specified that all transferable credits must be sold as “vertical slices” and be pari passu to one another, as opposed to “horizontally” bifurcating bonus credits from base credits.
Four IRA credits are eligible for the energy community bonus
The IRA created 11 transferable tax credits, four of which are eligible for the energy community bonus:
- §45 PTC: Electricity produced from certain renewable resources
- §45Y PTC: Clean electricity production credit
- §48 ITC: Energy credit
- §48E ITC: Clean electricity investment credit
§48 and §48E ITC eligibility determined on placed-in-service date
For projects that claim an investment tax credit under §48 or §48E, eligibility for the energy community bonus credit is determined on the date that the project is placed in service (PIS) and is not tested again.
Because eligibility is determined on a PIS date that is subject to potential delays, developers should think carefully about how to incorporate the statistical area category into their financial assumptions.
The statistical area category is determined annually, based on the prior year's unemploment rate. As the IRS FAQs state, "Because an MSA's or non-MSA's status as an energy community depends on its unemployment rate for the previous year, an MSA or non-MSA that qualifies as an energy community in one period might not qualify as an energy community in a later period if its unemployment rate for the previous year falls below the national average."
§45 and §45Y PTC eligibility determined annually with a beginning-of-construction safe harbor
For projects that claim a production tax credit under §45 or §45Y, eligibility for the energy community bonus credit must be determined every year during the ten-year PTC period. Theoretically, a wind project could qualify one year under the statistical area category but not qualify the following year because of a change in employment rates.
However, the IRS created a safe harbor for PTC projects with beginning-of-construction dates on or after January 1, 2023. If the project owner determines that the project is eligible for the energy community bonus credit on the date construction is considered to have started for tax purposes, then the project will qualify for the bonus credit for the entire ten-year PTC period and is not tested again.
"Legacy" §45 PTCs are not eligible for energy community bonus
Projects that generate §45 PTCs that were placed in service before December 31, 2022 are not eligible for the energy community bonus, even if the project happens to be located in an energy community and is within its ten-year period of credit generation.
The December 31, 2022 date is set in the IRA itself (H.R.5376).
50% of a project's nameplate capacity (or square footage) must be in an energy community
A project qualifies for the energy community bonus if at least half (50%) of its nameplate capacity is in an energy community. According to the IRS, nameplate capacity is the DC capacity that a project is capable of producing on a steady-state basis during continuous operation under standard conditions.
For battery storage projects, at least half (50%) of the storage capacity, as measured in megawatt hours, should be in an energy community.
Lastly, for projects that do not generate nor store energy, like biogas, the 50% threshold is measured on a square footage basis.
When performing due diligence on the energy community bonus, it's helpful to approach the process based on the credit type and energy community category.
Credit type
ITCs
Tax credit buyers should request documentation that demonstrates when and where the project was placed in service. Then, buyers and their advisors should crosswalk that location to an appropriate energy community siting resource, like one of the IRS's appendices. (We provide links to these appendices in the guidance section of this post.)
When validating a project's location, it's important to keep the "50%" rule in mind.
PTCs
Due diligencing the energy community bonus for PTCs is effectively the same as ITCs, although buyers will want to validate when and where the project began construction (versus when and where the project was placed in service). Once again, it's important to keep the "50%" rule in mind.
Energy community category
As far as each category is concerned, the statistical area and coal closure categories are relatively straightforward from a due diligence standpoint: the IRS has published lists of areas that qualify for each. The brownfield category, however, may present a slightly more nuanced due diligence process.
Statistical area
It's important to recall that the statistical area category changes every year, based on the prior year's unemployment rate. As we'll discuss below, the IRS is obligated to publish updates to this category every year, generally in May.
Coal closure
Unlike the statistical area category, the coal closure category cannot shrink – that is, once an area qualifies as a coal closure, it remains as such for the duration of the energy community bonus.
However, the coal closure category can expand, and we fully expect it to do so. According to a 2022 analysis by the Energy Information Agency (EIA), nearly a quarter of the operating U.S. coal-fired fleet is scheduled to retire by 2029. Every closure will add more census tracts to the list of areas eligible for the energy community bonus.
Brownfield
The IRS has not published – and, as far as we know, has no plans to publish – a consolidated list of areas that qualify as brownfields for purposes of the energy community bonus. In fact, the DOE energy community map doesn't even include federally-recognized brownfield sites. (The EPA, however, maintains a list of federally-recognized brownfields in its cleanups in my community map.)
We doubt the IRS or any federal agency will publish a definitive list of brownfields. There are simply too many moving parts across federal, state, local, and tribal brownfields programs.
So, an opinion from an environmental attorney may be warranted, and the scope of the opinion will vary based on which of the three brownfields safe harbors a project is claiming.
Latest guidance expands the number of areas that are eligible for the energy community bonus
The most recent IRS guidance, Notice 2024-30, broadened eligibility for the energy community bonus through two key changes:
- Expansion of the "nameplate capacity attribution rule"
- Inclusion of two additional NAICS codes – which are in our list above – for determining the fossil fuel employment rate for a statistical area category
Expansion of the nameplate capacity attribution rule
The "nameplate capacity attribution rule" pertains to projects with offshore generation – namely, offshore wind – that have a nameplate capacity but are not located within a census tract, an MSA, or a non-MSA. The rule, essentially, allows developers to allocate their offshore nameplate capacity onshore for purposes of qualifying for the energy community bonus.
Prior to Notice 2024-30, the attribution rule generally allowed offshore wind projects to qualify for the energy community bonus if their power-conditioning equipment closest to the point of interconnection was in an energy community.
Notice 2024-30 expanded the nameplate capacity attribution rule to include not only power-conditioning equipment, but also supervisory control and data acquisition (SCADA) equipment.
SCADA equipment must be owned by the developer and located in an "energy community project port." To qualify as an energy community project port, a port must:
- Be used "either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance" of the project
- Have a "significant long-term relationship" with the project, meaning the developer owns or leases all or part of the port for a minimum term of ten years
- Be the location at which staff employed by, or working as independent contractors for, the project are based and perform functions essential to the project's operations. Essential functions include "management of marine operations, inventory andhandling of spare parts and consumables, and berthing and dispatch of operationand maintenance vessels and associated crews and technicians"
Inclusion of two additional NAICS codes
Notice 2024-30 added two additional NAICS codes for determining the fossil fuel employment rate for a statistical area category:
- 2212: Natural gas distribution
- 23712: Oil and gas and pipeline and related structures construction
These NAICS codes cover workers in local gas distribution companies and construction workers on oil and gas pipelines.
According to Norton Rose Fulbright, "The biggest additions to the list of potentially eligible counties are in six Midwestern states: Minnesota (57), Missouri (57), Illinois (28), North Dakota (23), Wisconsin (23) and Indiana (20)."
The IRS has released five pieces of energy community guidance, with regulations to come soon
Energy community regulations should arrive by June 30, 2024
As Notice 2024-30 notes, proposed regulations are forthcoming. Until then, "taxpayers may rely on the rules described in sections 3 through 6 of Notice 2023-29, as previously clarified by Notice 2023-45 and modified by section 3 [of] this notice, for taxable years ending after April 4, 2023."
Based on the Q2 update to the IRS 2023-2024 Priority Guidance Plan, energy community regulations should arrive before the end of the current "plan year," which concludes on June 30, 2024.
Where to find the latest guidance
The IRS and Treasury maintain lists of IRA-related guidance, including guidance specific to the energy community adder. Although the lists generally overlap, there may be differences based on when each website was last updated.
Below is a close look at all the guidance that's been released through March 2024.
Notice 2022-51: Request for Comments on Prevailing Wage, Apprenticeship, Domestic Content, and Energy Communities Requirements under the Inflation Reduction Act of 2022
- Date: October 5, 2022
- News release: IRS
- Companion documents: N/A
Notice 2023-29: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: April 4, 2023
- News release: IRS
- Companion documents: Appendix A, Appendix B, Appendix C
Notice 2023-45: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
Notice 2023-47: Energy Community Bonus Credit Amounts or Rates (Annual Statistical Area Category Update and Coal Closure Category Update)
- Date: June 15, 2023
- News release: IRS
- Companion documents: Appendix 1, Appendix 2, Appendix 3
Notice 2024-30: Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022
- Date: March 22, 2024
- News release: IRS
- Companion documents: Appendix 1, Appendix 2
Expect energy community eligibility updates every May, beginning in 2024
According to Notice 2023-29, "The Treasury Department and the IRS intend to update the listing of the Statistical Area Category based on Fossil Fuel Employment annually. These updates generally will be issued annually in May."
The first update should arrive in May 2024 – that is, next month.
DOE, EPA, and IRS have provided energy community eligibility and project siting resources
U.S. federal agencies who are responsible for administering or managing parts of the energy community bonus credit have published several key resources that are valuable to buyers, sellers, and their advisors:
- Department of Energy (DOE): Energy community map
- IRS: Frequently asked questions
- DOE National Energy Technology Laboratory (NETL): Frequently asked questions
- Environmental Protection Agency (EPA): RE-powering America's land initiative
- EPA: Cleanups in my community
- Interagency working group: Energy community tax credit bonus
To learn more, you can download our 100-page transferable tax credit handbook or start a conversation with our transactions team.
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Publicly announced IRA clean energy tax credit transfers
Since the passage of the IRA in 2022, tax credit transfers have accelerated across a variety of technologies, credits, and deal sizes. To track the evolution of the market, Reunion is maintaining a list of publicly announced tax credit transactions.
A deal's amount represents the total, lifetime value of the transaction. When a range is provided – for instance, Broadwind's estimate of $12M to $14M per year – we use the lower bound. Undisclosed data is flagged as "UD."
Submit a transaction
If you know of a tax credit transfer that is not on our list, please contact us. We want to keep our list up-to-date.
In December 2023, the IRS issued Notice 2024-9, which details how "applicable entities" can satisfy the Inflation Reduction Act's domestic content requirements when using elective pay (which is often called "direct pay"). In particular, projects beginning construction on or after January 1, 2024 may have the value of their tax credit reduced if domestic content requirements are not met.
The IRS refers to the time-based credit reductions as the "statutory elective payment phaseouts."
Applicable credits
The required use of domestic content under elective pay applies to the following credits:
- §45: Electricity produced from certain renewable sources
- §45Y: Clean electricity production credit (technology-neutral PTC)
- §48: Energy credit
- §48E: Clean electricity investment credit (technology-neutral ITC)
Details for each credit can be found in our overview of IRA tax credits.
Applicable entities
Applicable entities subject to the statutory elective payment phaseouts include:
- Organizations exempt from income tax
- Any state or political subdivision thereof
- The Tennessee Valley Authority
- An Indian tribal government
- Rural energy cooperatives
- Alaska Native corporations
Credit reduction
The percentage of credit available to an applicable entity making a direct pay election is determined by multiplying the credit value by an "applicable percentage." Applicable percentages are as follows:
- 100%: Project meets domestic content requirements and/or has a net output of less than one megawatt (alternating current)
- 90%: Project begins construction on or after January 1, 2024 and doesn't meet either of the "100%" requirements
- 85%: Project begins construction on or after January 1, 2025 and doesn't meet either of the "100%" requirements
- 0%: Project begins construction on or after January 1, 2026 and doesn't meet either of the "100%" requirements
Exceptions
The IRS provided two exceptions to the domestic content requirement. If either exception applies, the applicable percentage is 100%.
- Increased cost exception: The inclusion of steel, iron, or manufactured products that are produced in the U.S. increases the project's overall costs of construction by more than 25%
- Non-availability exception: The relevant steel, iron, or manufactured products are not produced in the U.S. in sufficient and reasonably available quantities or of satisfactory quality
Attestation
Applicable entities can claim one of the above exceptions from the phaseout by attaching an attestation to the relevant tax form claiming the credit – form 8835 or form 3468.
The attestation must:
- Be signed by an individual with the power to bind the applicable entity in federal tax matters
- Be made under the penalties of perjury
- State that the entity has reviewed the requirements for each exception and has made a good faith determination that one or both apply
On January 19, the IRS released key guidance for the §30C alternative fuel vehicle refueling property credit. The guidance included two appendices that identify eligible census tracts depending on a project's placed-in-service date. Alongside the guidance, the IRS issued a press release and an FAQ.
Takeaways
- The Inflation Reduction Act extended and meaningfully modified the §30C ITC
- 99% of U.S. territory is included in eligible census tracts
- Eligible locations will vary depending on when a project is placed in service
- DOE published a mapping tool that shows eligible areas with placed-in-service filter
- Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor
- Further guidance is coming
TAKEAWAY 1
The Inflation Reduction Act extended and meaningfully modified the §30C ITC
The §30C ITC existed prior to the Inflation Reduction Act (IRA), and the guidance reminds us of the ways in which the IRA modified the credit.
Added prevailing wage and apprenticeship requirements
The §30C is subject to the IRA's prevailing wage and apprenticeship (PWA) requirements. If a developer meets PWA requirements, the §30C credit value increases from 6% to 30% of eligible costs. Considering the economics, virtually all developers will meet PWA requirements.
Increased credit maximum
The IRA increased the maximum credit value that an eligible property can receive. For businesses, the cap is $100,000 per "item of property."
Modified eligibility scope
The IRA modified the scope of the §30C ITC "so that it no longer applies per location and instead applies per single item." Notably, although the guidance provides several definitions, it does not define what constitutes a "single item." We'll comment on this below.
Narrowed applicability to non-urban areas, low-income communities, and, with this guidance, U.S. territories
The IRA requires a §30C-eligible property to be placed in service in an eligible census tract – that is, any population census tract that is a low-income community, a non-urban area, or a U.S. territory.
TAKEAWAY 2
99% of U.S. territory is included in eligible census tracts
According to the guidance, three broad areas are eligible for the credit:
- Non-urban areas: For purposes of the §30C credit, the IRS defines a non-urban area as "any population census tract in which at least 10 percent of the census blocks are not designated as urban areas.” Many market participants have been referring to non-urban areas as "rural areas."
- Low-Income communities: The IRA defined a qualifying census tract as one described in Section 45D(e), which defines a low-income community for purposes of the new markets tax credit (NMTC). The guidance, however, notes that NMTC data was recently updated and provides a transition rule under which developers can rely on designations using the older or more recent data.
- U.S. territories: The guidance allows refueling properties located in U.S. territories to qualify for the credit. However, the property must be owned by a U.S. citizen, U.S. corporation, or a U.S. territory corporation. (Inhabited U.S. territories are American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.)
According to the Electrification Coalition, an industry group, the areas in which eligible property can be installed "will include approximately 99% of U.S. land territory and 62% of the population."
This is particularly good news for expanding electric vehicle adoption because, without the §30C tax credit, installing EV charging infrastructure can be prohibitively expensive in rural areas where there are fewer vehicles in the first place.
TAKEAWAY 3
Eligibility of a census tract depends on when a project is placed in service
The guidance also provided two appendices that list qualified census tracts depending on when a project is placed in service (PIS):
- PIS after 12/31/22 and before 1/1/25: Appendix A or Appendix B
- PIS after 12/31/24 and before 1/1/30: Appendix B
TAKEAWAY 4
DOE published a mapping tool to streamline siting analyses
To strengthen implementation efforts, Argonne National Laboratory within the Department of Energy (DOE) published a §30C Tax Credit Eligibility Locator mapping tool and an FAQ.
To help developers select the appropriate census tract for their project's placed-in-service date, Argonne accompanied the map with a decision tree.
The mapping tool, however, is for informational purposes only and "may not be relied upon by taxpayers to substantiate a tax return position and will not be used by the IRS for examination purposes."
TAKEAWAY 5
Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor
The guidance did not fully clarify what equipment constitutes a "single item" with respect to credit qualification. As Canary Media notes, electric vehicle "charging sites also have a lot of 'shared equipment' such as power conduits, switchgear, transformers and enclosures," and there are "still questions of whether [the credit] will cover just the charger, or additional factors to installation like upgrading power infrastructure."
The definitional ambiguity presents financial challenges for developers who want to transfer their tax credits because they don't yet know what their credits will be worth.
TAKEAWAY 6
Proposed regulations still to come from the IRS and Treasury
Fortunately, the guidance states that further guidance is forthcoming. Reunion believes this additional guidance will likely address the definition of a "single item," given the gating nature of its ambiguity.
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