As your city develops its strategy for renewable energy, cost is inevitably part of that equation. In fact, understanding the available incentives, including tax credits, may help clarify and refine your strategy.
The Inflation Reduction Act contains a variety of new tax credits designed to boost technologies to advance local climate action. It also enhances established tax credits, like the Investment Tax Credit (ITC) and Production Tax Credit (PTC), to incentivize investment in and production of renewable energy in the United States. Most of these tax credits start at a base credit level, and then offer “adders” — further incentives for developers to use certain materials, support labor requirements, or benefit specific communities.
Determine Whether Tax Credits Enhance Your City’s Strategy
You should factor in tax credits into your city’s financial strategy and project models, even though this is not a typical consideration for a tax-exempt entity. Previously, cities (and other tax-exempt entities) had to use more complex financing mechanisms, like a power purchase agreement, green tariff, or virtual power purchase agreement, to capture the full value of the federal tax credits for renewable energy. To be clear, these are still options and will likely remain competitive options as the market adjusts to the Inflation Reduction Act. However, new structures like direct pay will also make each of these tax credits more accessible to tax-exempt entities.
Tax credits that are directly applicable to municipalities through the direct pay provisions enacted by the IRA include: the ITC, PTC, other commercial tax credits, and other consumer tax credits.