Energy Community Guidance for Brownfields under the Inflation Reduction Act
The Internal Revenue Service (IRS) and the Treasury Department released guidance last month on the bonus credit available for certain production and investment tax credits issued to qualified projects located in “energy communities” pursuant to the Inflation Reduction Act of 2022 (IRA). The IRA allows taxpayers to deduct a percentage of the cost of eligible renewable energy systems from their federal taxes through an Investment Tax Credit (ITC) and Production Tax Credit (PTC). Qualified projects include: multiple solar and wind technologies, geothermal, tidal, energy storage technologies, microgrid controllers, fuel cells, biomass, landfill gas, hydroelectric, marine and hydrokinetic projects and interconnection costs. In addition to clarifying how to qualify for the increased credit under Internal Revenue Code Sections 45, 45Y, 48, and 48E, the guidance announced that the Treasury Department and the IRS intend to propose future regulations to formalize the rules outlined in the guidance.
There are three categories of “energy communities” established under the IRA:
- Brownfield Category: Any “brownfield site” as defined in certain sections of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), namely, 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, subject to the exclusions outlined in CERCLA. Exclusions include CERCLA Section 101(39)(B), which describes, inter alia, facilities subject to an administrative order or consent decree, facilities that are listed on the National Priorities List or proposed for listing, and facilities where there has been a release of polychlorinated biphenyls subject to remediation under the Toxic Substances Control Act.
- Statistical Area Category: A metropolitan statistical area (MSA) or a non-metropolitan statistical area (non-MSA) that has an unemployment rate at or above the national average for the previous year as determined by the Secretary of the Treasury, and either has 0.17% or greater direct employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas (defined as the “Fossil Fuel Employment” threshold), or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas (defined as the “Fossil Fuel Tax Revenue” threshold).
- Coal Closure Category: A census tract or a directly adjoining census tract where a coal mine closed after 1999 or a coal-fired electric generating unit was retired after 2009. The IRS published a list of census tracts and directly adjoining tracts that qualify.
A qualified project or facility located or placed in service in these areas is eligible for bonus credits under the IRA. Specifically, if a qualified project or facility is located in an “energy community,” the PTC is increased by ten percentage points and the ITC is increased by a minimum of two percentage points and a maximum of ten percentage points if certain wage and apprenticeship requirements are satisfied or a maximum net output of electrical or thermal energy is met.
The guidance also provides additional pathways for a site to qualify as a brownfield under CERCLA. Referred to as a “safe harbor,” the guidance states that land can automatically qualify as a brownfield if it meets one or more of the following criteria:
- The site was previously assessed as meeting the definition of a brownfield under Section 101(39)(A) of CERCLA through federal, state, territory, or Indian tribal programs.
- A Phase II Environmental Site Assessment (Phase II) following the most current version of ASTM E1903 has been conducted at the site and confirmed the presence of a CERCLA pollutant, contaminant or hazardous substance.
- For projects with a nameplate capacity of less than 5 megawatts of AC current, a Phase I Environmental Site Assessment (Phase I) has been completed at the site.
Projects can qualify for these safe harbor provisions so long as they are not excluded under CERCLA Section 101(39)(B). Notably, the third category of the safe harbor does not explicitly require that a pollutant, contaminant, or hazardous substance be found during the Phase I. Commentators have largely inferred the requirement that the Phase I must also turn up the presence or potential presence of contamination in order to qualify under this prong of the safe harbor. However, it should be noted that the guidance does not explicitly require that such contamination be uncovered during the Phase I to be eligible, as long as the maximum nameplate capacity is satisfied.
The guidance also clarifies what it means to be located, or placed in service, in an energy community, and when that determination is made. With respect to the PTC, which is a per kilowatt-hour (kWh) tax credit for electricity generated for the first 10 years of a qualifying system’s operation, whether a qualified facility is eligible for the bonus credit is determined separately for each taxable year of the qualified facility’s 10-year credit period. Alternatively, for the ITC, an energy project or energy storage technology is eligible if it is located in an energy community as of the date it is placed in service. If a taxpayer begins construction on the project on or after January 1, 2023, in a location that is an energy community as of the “beginning of construction” date, the location will continue to be treated as an energy community throughout the credit period (with respect to the PTC) or on the placed-in-service date (with respect to the ITC).
A project is treated as “located in” or “placed in service” in an energy community if the project satisfies either the nameplate capacity test or the square footage test set forth in the guidance. A project that has nameplate capacity, which is defined in the guidance as “the maximum electrical generating output in megawatts (MW) that the unit is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer,” must apply the nameplate capacity test. Under the nameplate capacity test, a project is considered located in or placed in service within an energy community if 50% or more of the project’s nameplate capacity is in an area that qualifies as an energy community. Under the footprint test, a project is considered located in or placed in service within an energy community if 50% or more of its square footage is in an area that qualifies as an energy community.
The guidance states that its rules are intended to be included in forthcoming proposed regulations with a proposed effective date retroactive to taxable years ending after the date of the guidance. Until the issuance of the proposed regulations, taxpayers may rely on the guidance to determine whether a project site is located in an energy community. Nevertheless, in the interim, there is significant uncertainty on the final form of the regulations, and there are a number of open questions raised by the guidance that require clarification. It remains to be seen whether the regulations or additional future guidance will provide more comfort and certainty to entities interested in taking advantage of this incentive tool in the IRA. The SPR Blog will continue to track these developments and provide updates and analysis.