[A note of caution: In this post, I am writing about a somewhat obscure provision of a wide-ranging new law. There is relatively little information on the web about this topic. I am not a lawyer or a legal expert. What I’m describing is based on my reading (as a layperson) of the language of the IRA and a few published comments of legal observers. I encourage comments from those who know more than I do. I’ll include important updates to this post, as needed.]
As most of you probably already know, the recently-passed “inflation Reduction Act” (IRA) directs large sums toward addressing climate change. What you may not know is the dramatic impact the IRA has on the funding of solar generation for non-profits, like Kendal.
In the past, non-profits have only been able to take advantage of Federal solar programs through a very indirect process. Now, that has changed, and the IRA provides a direct way for a non-profit to get cash back from the government when they install a solar system or certain other sustainability-related technology. This is called “direct payment”, and although it hasn’t been widely publicized, it appears to be a really big deal for Kendal and other non-profits.
For many years, the solar industry has benefited from the fact that those who install solar panels on their property can get a big tax break (amounting to up to 30% of the cost of the system). But non-profits have been left out: they don’t pay federal taxes, so they can’t make use of a tax reduction to help fund a solar installation. Instead, non-profits have either simply paid full price for solar, or they have had to resort to an arrangement called a “power purchase agreement” (PPA).
Avoiding the limitations of a PPA. In a PPA, someone other than the non-profit (an outside investor that does pay taxes) owns the solar equipment installed at the non-profit and charges the non-profit for the electricity that is produced, usually at a lower rate than the non-profit would otherwise pay. This is sometimes a mildly attractive option, but the PPA provider gets a tax savings of 30% of the cost of the system, and the non-profit misses out on most of the savings.
The IRA changes that situation completely. Now, a non-profit can purchase a solar system and get a “direct payment” from the government (a rebate, essentially) of 30% of the cost of the equipment. It can even go as high as 40% in some situations. No outside owner is involved.
The effective price of solar just dropped. The net effect of direct payment is that a non-profit can now save at least 30% on a solar installation. Related technologies, such as batteries, also qualify. (However, the direct payment option does not appear to apply to the purchase of electric vehicles.)
Taking the direct payment into account, the return on the investment in a solar system just increased by 30% (and the time required for financial break-even decreased correspondingly). An installation that might have been a marginal investment previously may become a solid money-maker now. If it would have taken 12 years to reach break-even, that might take just 7 years now.
There is an important limitation in the IRA: to obtain the 30% direct payment, a project must use a well-paid workforce (based on a formula used to calculate the “prevailing wage”). And if the project exceeds a certain size, it needs to incorporate an apprentice program. For solar, that threshold is 1 megawatt—several times the size of anything Kendal has contemplated so far, so it won’t affect us in the near term at least.
To move the direct payment up to 40% (instead of just 30%), a solar installation would have to use 100% US-made steel supports, and 40% of the materials used in its construction would have to be mined or manufactured in the US. That percentage would increase to 45% in 2025, and 5% in each of the following years. It’s not clear to me whether or not it would actually be difficult to meet those requirements.
Note that some features the IRA end in two years. The projects covered under it have to be started between December 31, 2022 and January 1, 2025. What happens in 2025 and beyond? That’s an unknown, up to a future Congress, so we’d be well advised to get things rolling right now.
Some more fine-print details. In the paragraphs above, I’ve covered the most important aspects of how the IRA treats solar for non-profits, but here are some additional details that might possibly interest you.
In addition to solar and batteries, most of the benefits described above apply to a number of other technologies. These include geothermal, fuel cells, combined heat and power generation, waste energy recovery, small wind-power operations, thermal energy storage, biogas from landfills, electrochromic glass windows (which electrically switch from transparent to reflective, reducing heat from sunlight), and microgrid equipment. It’s conceivable that a given retirement community might implement one or more of these.
The IRA provides startup capital for “green banks”, lending institutions that specialize in funding sustainability projects. This might open up a new source of low-cost loans for retirement communities with suitable projects.
As an alternative to the direct-pay options described above, which are based on the cost of the solar installation, the IRA offers a “production tax credit” based on the kWh produced by the project once it is in operation. For solar, the credit would start at $0.026/kWh and grow with inflation. But this seems to be a pure tax credit, and therefore not relevant to non-profits.
At one point in the drafting of this bill, I understood it to be likely that non-profits would be able to “sell” their solar credits to companies that needed the tax break (instead of getting the direct payment from the government). That is not the case. In the final bill, only “taxpayers” (not non-profits) can “transfer” (sell) the tax benefits.