The U.S. Department of the Treasury (Treasury) earlier this week issued a notice of proposed rulemaking regarding the up to 20 percentage point additional investment tax credit (ITC) for certain solar and wind facilities placed in service in connection with low-income communities, which was added as part of the Inflation Reduction Act of 2022 (the IRA). The proposed regulations follow the initial guidance that was issued in February and was described in our prior alert, available here.
Low-Income Community Additional Credit Generally
The IRA provides for an increased ITC energy percentage for a qualified solar or wind facility with respect to which the Secretary of Treasury makes an allocation of environmental justice solar and wind capacity limitation (Capacity Limitation). The total available Capacity Limitation is 1.8 gigawatts direct current capacity for each of calendar years 2023 and 2024, and zero thereafter. To qualify for the increased credit, the owner of a qualified solar or wind facility must apply for and receive an allocation of Capacity Limitation. A qualified solar or wind facility must have a maximum net output of less than 5 MWAC and must be either located in a low-income community or on Indian land or part of a qualified low-income residential building project or a qualified low-income economic benefit project.
The IRA required the Secretary of Treasury to establish, within 180 days after the IRA was enacted, a program to allocate Capacity Limitation. Treasury issued initial guidance in Internal Revenue Service Notice 2023-17, in which it indicated that additional guidance would be forthcoming. The proposed rulemaking provides more detailed guidance regarding the requirements to qualify for the increased credit and the process for obtaining allocations of Capacity Limitation. The proposed rulemaking requests comments regarding all aspects of the proposed rules by June 30, 2023, and the rules once finalized will apply to taxable years ending on or after the date final rules are published in the Federal Register.
Multiple Facilities or Energy Properties Grouped in Single Project
The proposed rulemaking defines a “qualified solar and wind facility” for purposes of allocations of Capacity Limitation as a facility that (i) generates electricity from a wind facility, solar energy property, or small wind property, (ii) has a maximum net out put of less than 5 MWAC, and (iii) is described in at least one of the four categories described above. To prevent applicants from dividing larger projects that should be considered part of a single facility into smaller projects, the proposed rulemaking aggregates into a single facility multiple qualified solar and wind facilities of the same type that are operated as part of a single project, as determined based on a list of factors. Relevant factors include whether the qualified solar and wind facilities are (i) owned by a single legal entity, (ii) constructed on contiguous pieces of land, (iii) share a common intertie and substation, and (iv) described in common power purchase agreements and environmental or other regulatory permits.
In the case of solar energy property and qualified small wind energy property, a facility may include energy storage technology (i.e., a battery) that is installed in connection with the energy property. The proposed rulemaking provides that energy storage technology will be considered installed in connection with qualified energy property if (i) both the storage technology and other eligible property are considered part of a single facility because they are owned by the same legal entity, located on the same or contiguous pieces of land, have a common interconnection point, and are described in common environmental or other permits, and (ii) the energy storage technology is at least 50% charged by the qualified energy property. This minimum charging requirement is similar to the 75% “dual-use property” test that was applied to batteries generally prior to the enactment of the IRA.
Financial Benefits for Qualified Low-Income Residential Building and Low-Income Economic Benefit Projects
With respect to projects in Categories 3 and 4, the proposed rulemaking provides additional guidance regarding the requirement that financial benefits of a qualified low-income residential building project or a qualified low-income economic benefit project be provided to low-income persons.
For a solar or wind facility to be treated as part of a qualified low-income residential building project (Category 3), among other requirements, the financial benefits of the electricity produced by the facility must be allocated equitably among occupants of the dwelling units in the building. The proposed rulemaking provides detailed rules for determining whether and to what extent the financial benefits are considered provided to low-income residents under these requirements. The rules differ depending on whether the qualified solar or wind facility and qualified residential property are owned by the same person. The owner of the facility must enter into an agreement, either with the tenants or with the building owner, to ensure that residents of the building receive the requisite financial benefits. The proposed rules also contain detailed rules for how to measure financial benefits for these purposes. In general, the amount of financial benefits that are passed on to residential building occupants is based on net energy savings and the gross financial value of the annual energy produced by a facility, which is calculated from the total “self-consumed” kilowatt-hours produced by the facility multiplied by the applicable metered price of electricity and the “exported” kilowatt-hours produced by the facility multiplied by the applicable export compensation rate.
For a solar or wind facility to be treated as part of a qualified low-income economic benefit project (Category 4), at least 50% of the financial benefits of the electricity produced by the facility must be provided to low-income households. To qualify, (i) a facility must serve multiple households, (ii) at least 50% of the facility’s total output must be distributed to qualifying low-income households, and (iii) the facility must provide at least a 20% bill credit discount rate to all low-income households served. The 20% bill credit discount rate may take into account utility bill credits, reductions in electricity rate, or other monetary benefits accrued by a low-income household. The facility owner is responsible for proof-of-income verification to determine a household’s status as a qualifying low-income household. Verification may include obtaining proof of household participation in certain needs-based federal, state, tribal, or utility programs with income limits that meet the applicable qualification requirements.
Location in a Low-Income Community or on Indian Land
The proposed rulemaking also contains rules for determining whether a qualified solar or wind facility is located in a low-income community (Category 1) or on Indian Land (Category 2) as defined in the IRA. The proposed rules adopt a nameplate capacity test under which a facility will be located in a low-income community or on Indian Land if 50% or more of the total nameplate capacity of the energy-generating units of the facility are physically located in a qualifying area.
Application for and Allocation of Capacity Limitation
The proposed rulemaking outlines the process for applying for allocations of Capacity Limitation. A facility that is placed in service before being awarded an allocation of Capacity Limitation will not qualify for the increased credit. Applications for allocations of Capacity Limitation will be evaluated within the four categories described above, and priority will be given to applications for qualified solar and wind facilities meeting at least one of the two “additional selection criteria” described in the proposed rulemaking. These include
- “Ownership Criteria” – Facilities owned by Tribal Enterprises (as defined in the proposed rulemaking), Alaska Native Corporations, renewable energy cooperatives, qualified tax-exempt entities, and qualified renewable energy companies that serve low-income communities and that satisfy additional criteria.
- “Geographic Criteria” – Facilities that are located in “Persistent Poverty Counties,” or in census tracts that are designated in the “Climate and Economic Justice Screening Tool” as disadvantaged based on average income, all as defined in the proposed regulations.
Up to at least 50% of the total Capacity Limitation in each of the four categories may be reserved for facilities that satisfy at least one of these two additional selection criteria.
The proposed rulemaking contemplates an initial application window during which all applications received by a certain date (not specified in the proposed rulemaking) would be evaluated at the same time, followed by a rolling application process if Capacity Limitation is not fully allocated after the initial application window closes. If applications for qualified facilities exceed the Capacity Limitation for a category, after taking into account the applicability of the additional selection criteria, a lottery system may be used.
The proposed rulemaking sets forth a process for submitting required applications and documentation. In addition, the proposed rulemaking provides specific rules for post-allocation compliance and recapture of the increased credit if certain requirements are not satisfied. Disqualification from an allocation of Capacity Limitation may occur prior to or at the time a facility is placed in service for several reasons, including a change in the location of the facility, an increase in the nameplate capacity of the facility to more than 5 MWAC, failure to place the facility in service within four years after receiving an allocation of Capacity Limitation, or, if an allocation of Capacity Limitation was based in part on satisfying the Ownership Criteria, ownership changes that cause the facility to cease to satisfy the Ownership Criteria. Recapture may apply after a facility has been placed in service if, among other events, the facility does not provide or does not equitably allocate required financial benefits, the 20% bill credit discount rate requirement is not satisfied, or the facility output capacity increases above 5 MWAC. The proposed rulemaking includes an exception to recapture if a facility ceases to qualify for the increased credit but eligibility is restored within 12 months after such failure.
The proposed rulemaking provides helpful guidance regarding a number of issues. These include additional clarity regarding the circumstances in which multiple energy properties will be considered part of a single facility for purposes of the low-income communities increased credit, the treatment of batteries that are installed as part of an otherwise qualified solar or wind facility, and specific rules for determining whether and to what extent the financial benefit of a facility will be considered provided to low-income residents or households. The proposed regulations leave a number of important questions unanswered, however, and there are still questions regarding exactly how and when the application process for allocations of Capacity Limitation will begin and how allocations of Capacity Limitation will be made.
