Inflation Reduction Act Delivers Energy Justice through Tax Incentives for Renewable Energy Infrastructure in Low-Income Communities
Ellison Hersch
The United States is struggling with failing infrastructure and shifting towards fulfilling climate change goals, while still being reliant on fossil fuels. The shift in policy to mitigate the effects of climate change has included a shift in the funding and incentives for building green infrastructure. President Biden’s 2022 Inflation Reduction Act (IRA), which includes a Low-Income Communities Bonus Credit Program, has been part of a push toward these goals. Evidence suggests that developers, local governments, and private corporations are excited about the Low-Income Communities Bonus Credit Program.[1] On December 4, 2023, officials from the U.S. Treasury Department announced that they had been overwhelmed with applications for the program’s clean energy tax credits, surpassing the targeted allocation by more than four times.[2]
The Low-Income Communities Bonus Credit Program promotes energy justice by using tax incentives to prioritize renewable energy development in previously overlooked communities and by interacting with spaces not typically used for renewable energy, like rooftops of low-income housing. If implemented correctly, these tax incentives can create a stable renewable energy market that prioritizes under-resourced areas and promotes green infrastructure in disadvantaged communities in a more efficient and effective way.
How the Low-Income Communities Bonus Credit Program Works
The Low-Income Communities Bonus Credit Program incentivizes certain types of renewable energy development through tax credits. It provides a ten or twenty percentage point boost to the investment tax credit for qualified solar or wind facilities in low-income communities. The program will provide tax credits for up to 1.8 gigawatts of new electricity generation capacity split between four categories of qualified solar or wind facilities, capped at five megawatts of output per facility.[3] The majority of the gigawatts will be allocated to facilities located in low-income communities and facilities where at least fifty percent of the financial benefits of the electricity go to households with incomes below 200 percent of the poverty line or below eighty percent of area median gross income.[4] The rest of the tax credit allocations are designated for facilities located on Indian lands and facilities that are a part of federally-subsidized residential buildings.[5] The facilities in low-income communities and on Indian lands are eligible for a ten percent bonus and the other two types are eligible for the twenty percent bonus.[6] Due to the distribution of the megawatts into the four categories and the amount of applications submitted thus far, the Treasury Department announced they will prioritize projects based on ownership and location. Non-profits, local or tribal governments, and worker cooperatives will be prioritized.[7] There has not been any specification about what locations will be prioritized.
The requirement that facilities produce a maximum output of five megawatts to receive the tax credit is a strict requirement and limits the physical scale of qualifying projects. A project producing five megawatts of solar energy would require twenty to thirty acres of solar panels.[8] A wind project could consist of a few smaller wind turbines or one fifty-foot wind turbine to produce five megawatts of energy.[9] This maximum output and low-income community requirement limit the type of projects that can receive the bonus credit. There are costs and benefits to restricting the credit. The credit makes sense for many low-income communities in urban areas and will be a great way to incentivize new market participants to build renewable energy projects. However, this bonus may not be as useful for rural areas that have the capacity to have larger clean energy facilities.
Energy Justice and the Low-Income Communities Bonus Credit Program
Energy justice is a framework that must be discussed when considering how to create sustainable and equitable projects that bring the United States toward its climate goals while addressing significant disparities in environmental hazard exposure in disadvantaged communities.[10] Energy justice asks us to consider the equitable distribution of environmental burdens and benefits and transparency in decision making to allow for participation of everyone affected, especially those who have historically been marginalized or excluded from decision-making processes.[11]
The adoption of rooftop solar, for example, has continued to be unequal between low and moderate-income (LMI) households and higher income households.[12] This adoption inequity is has persisted even though solar systems have become more affordable. There is now an ingrained pattern of adoption that funnels solar systems into high-income areas.[13] Research has shown that adoption equity increases with the implementation of solar financing business models that specifically target LMI households.[14] Furthermore, low-income housing associations and buildings are good places to build rooftop solar to quickly provide renewable energy to more LMI households.[15] The Low-Income Communities Bonus Credit Program utilizes these findings by promoting renewable energy projects connected to low-income residential buildings.
It is important to recognize that there is a step between providing increased potential investment for renewable energy and ensuring that the work being done promotes energy justice. The IRA’s bonus program for solar and wind energy in low-income communities is seemingly working towards that step. The program not only targets disadvantaged communities, but also prioritizes special types of projects to fill the designated capacity.
Since the program is still in its infancy, many questions remain unanswered. Data has not yet been released on who submitted the applications or how large their projects are. The Department of Energy and Department of Treasury should consider community engagement in their selection criteria. Energy projects, similar to most infrastructure projects, benefit from community input and knowledge sharing to ensure that those affected by the project are understanding the project.[16] Nonprofit organizations providing renewable energy infrastructure using this tax credit will hopefully be working with the communities they serve or residents whose buildings are being impacted. While the change in energy will not require anything from residents, the benefits of the projects should be communicated to residents to promote clean energy.[17] Energy justice requires that both the federal agencies administering the incentives and the organizations applying remain transparent and communicative to allow for participation by all affected.
From the initial excitement seen in the flood of applications and text of the program guidelines compared to previous programs, it is expected that this program will benefit the renewable energy market and low-income communities. Adding the bonusses to the investment tax credit for qualified projects provides developers with between forty and fifty percent of the total qualifying project cost basis. This large amount can entice investors who previously shied away from becoming involved in the renewable energy market in low-income and disadvantaged communities. As the bonus program continues, analysis can and should be done on whether the project fulfils energy justice goals, creates new jobs, lowers energy costs, and spurs sustainable economic growth in disadvantaged communities.
[1] David Lawder, US Treasury swamped by demand for bonus wind, solar tax credits in low-income areas, Reuters (Dec. 4, 2023, 5:37 PM), https://www.reuters.com/sustainability/climate-energy/us-treasury-swamped-by-demand-bonus-wind-solar-tax-credits-low-income-areas-2023-12-04/.
[2] Id.
[3] Id.
[4] Press Release, U.S. Department of Treasury, U.S. Department of the Treasury, IRS, and Department of Energy Announce Remarkable Demand for Solar and Wind Energy in Low-Income Communities Thanks to Groundbreaking Inflation Reduction Act Program (Dec. 4, 2023), https://home.treasury.gov/news/press-releases/jy1945#:~:text=This
%20groundbreaking%20program%20through%20President,facilities%20in%20low%2Dincome%20communities.
[5] Id.
[6] Id.
[7] Id.
[8] How Much Land Do I Need to Build a 5MW Solar Farm?, Powertech Energy (Aug. 2023), https://www.powertechenergy.com.au/a/how-much-land-do-i-need-to-build-a-5-mw-solar-farm#:~:text=Considering%20this%20range%2C%20a%205,to%2012%20hectares)%20of%20land.
[9] George Duval, How Many Homes Can Be Powered By a Wind Turbine?, Today’s Homeowner, (Nov. 23, 2023), https://todayshomeowner.com/eco-friendly/guides/how-many-homes-can-be-powered-by-a-wind-turbine/
[10] Elizabeth Ross et al., Intersections of disadvantaged communities and renewable energy potential: Data set and analysis to inform equitable investment prioritization in the United States, 41 Renewable Energy Focus 1, 2 (2022).
[11] Id. at 2.
[12] Eric O’Shaughnessy et al., The impact of policies and business models on income equity in rooftop solar adoption, 6 Nature Energy 84, 88 (2021).
[13] Id. (“[t]he under-utilization of LMI rooftop space could reduce or at least decelerate the realization of the benefits of rooftop PVs as a clean energy resource by reducing PV market potential.”)
[14] Id.
[15] See Annie McCabe et al., The application of renewable energy to social housing: A systematic review, 114 Energy Policy 549, 553 (2018).
[16] See Id., at 554.
[17] Id. at 556.