Maximizing Inflation Reduction Act of 2022 Bonus Tax Credits

The Inflation Reduction Act (IRA) of 2022 is an unprecedented, transformative piece of legislation that provides consistent support to accelerate the deployment of clean power over the next decade. For clean energy projects, the legislation’s available tax credits are structured in tiers, with a partial credit value, a full credit value when prevailing wage and apprenticeship requirements are met, and an opportunity to unlock bonus adders when specific conditions are met. There are various conditions organizations must meet to unlock the full value of a 30% Investment Tax Credit (ITC) or a 2.6 ¢/kWh Production Tax Credit (PTC) – read our overview of the Inflation Reduction Act to learn more. In this blog, we’re focusing on what we know to date around the bonus adders: what they are, how they work, and how projects can qualify for them.

As a global leader in the energy sector, Enel North America is driving the energy transition from fossil fuels to renewables. We also believe in ensuring a just energy transition that is accessible to all. While there is still much work to do, we applaud the inclusion of the bonus adders in the Inflation Reduction Act to support good-paying manufacturing jobs in the clean energy supply chain and drive growth in areas most impacted by the energy transition, including low-income communities and those in communities historically dependent on fossil fuel mining or extraction.  

What We Know So Far About the Inflation Reduction Act’s Bonus Adders

The Inflation Reduction Act of 2022 includes preliminary criteria for what these bonus adders entail – so let’s start with what we do know. The Inflation Reduction Act includes three bonus adders: the domestic content bonus, the energy community bonus, and the low-income community bonus.

The Domestic Content Bonus is a 10% bonus adder awarded to facilities for which: (1) 100% of their steel or iron components is produced in the United States, and (2) 40% of their manufactured product components are produced in the United States. 

The Energy Community Bonus is a 10% bonus adder for electricity produced in communities most impacted by the energy transition. An energy community is defined as one of the below: 

• Brownfield site: A site where expansion, redevelopment, or reuse can be complicated by the presence (or potential presence) of a hazardous substance, pollutant, or contaminant
• Fossil fuel employment: A metropolitan or non-metropolitan statistical area (MSA or non-MSA) that has (or had, at any time after 2009) 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas (as determined by the Treasury Secretary), and has an unemployment rate at or above the national average for the previous year (as determined by the Treasury Secretary)
• Coal community: A census tract containing a coal mine that has closed after December 31, 1999, or a coal plant that has retired after December 31, 2009, plus adjoining census tracts

The Low-Income Community Bonus is a ITC-only 10% bonus adder for wind, solar photovoltaics (PV), and energy storage combined with wind or solar PV projects less than 5 MW (AC). If the project is in a low-income community or on tribal land, the bonus is 10%. If the project is part of a qualified low-income residential building or an economic benefit project, the bonus doubles to 20%. Because there will be a finite pool of tax credits available each year, applicants must apply and compete for an award.

It's important to note that each of these bonus adders affects the PTC/ITC differently. Qualifying projects built within these communities receive a 10% or more boost in tax credits. For the ITC, the boost is expressed in percentage points – a 10% increase means going from the full credit value of 30% to a total of 40%. For the PTC, the boost is expressed in percentage terms and is only applicable to energy communities – a 10% increase means going from the full credit value of 2.6¢/kWh to a total of 2.9¢/kWh (numbers shown in 2022 dollars and are current as of December 2022 – they will be adjusted annually for inflation). Figure 1 shows how these adders are stacked to achieve the potential maximum. Since an additional 10% or more boost in tax credits can make the difference between a project that makes economic sense and one that does not, it’s important to understand the eligibility requirements for capturing these bonus adders.

What We Don’t Know Yet About the Inflation Reduction Act Bonus Adders

Among the three bonus adders, the key terms and criteria for energy communities are currently most open to interpretation, and too vague to determine whether a project would qualify for the 10% ITC adder based on its location. Until the Treasury Department provides final guidance, we can only conjecture as to where the boundaries are drawn. 

To illustrate the range of the interpretations for energy communities, we show select analyses from: Resources for the Future (2022), Vibrant Clean Energy (2022), and Charles River Associates (2022), highlighting differences in interpreting the coal community and fossil fuel employment criteria.

Coal Community: In Figure 2, the CRA analysis shows coal and coal-adjoining communities in green and purple. In Figure 3, the VCE analysis shows coal and coal-adjoining communities in yellow and green. Both consultants arrived at similar answers (see annotated example), because the plant-level data is easily obtained from the Energy Information Administration’s EIA-860 form, leaving little room for discrepancies. 

However, larger differences emerge when trying to identify census tracts with closed coal mines, even though both consultants referenced the Mine Safety and Health Administration (MSHA) data set from the U.S. Department of Labor. This is seen in the difference in the blue and purple areas in Figure 2 versus the magenta and aqua areas in Figure 3 (see annotated example). The difference likely stems from a difference in interpreting exactly which specific equipment components make up a coal mine, and which specific statuses are consistent with a mine being “closed”.

Fossil Fuel Employment: This is the most open-to-interpretation portion of the definition – on identifying whether or not a MSA and non-MSA: (1) has direct employment related to the extraction, processing, transport, or storage of fossil fuels; and (2) receives local tax revenues related to these activities; and (3) has an unemployment rate at or above the national average unemployment rate for the previous year. For all three, there is either a data availability (eg, local tax revenues) or a definition issue (eg, how to select the relevant categories of employment, what time period to compute the average over, etc). Figure 4 shows how VCE and RFF (see the darker red with higher-than-average unemployment label) came to completely different interpretations for this criterion.

Overall: These differences in interpretation can put into question the eligibility of large areas of land. Figure 5 shows the final low-income and energy communities, as identified by the VCE and RFF. Whereas the RFF analysis concluded that these areas are likely to cover between 42% to 50% of US land area, we can see that the VCE interpretation is much more aggressive.

To further complicate things, the time-variant nature of some of the definitions means that, based on the current income and unemployment rate data, projects may qualify as low-income or energy communities one year but not the next, and vice versa. At Enel North America, our team of experts are continuously monitoring the ever evolving landscape to provide you with the most up-to-date information. In this way, we can ensure you receive the most value from these tax credits.

How to Proceed from Here

While different data sources lead to different assessments that determine whether specific sites would qualify for the bonus adders, there are some broad takeaways that will hold regardless of the final guidance.

First, as expected, there is a large concentration of coal communities in the Appalachian, the Interior, and Western coal regions (see EIA map below). With another 46.1 GW of coal set to retire by 2029, more census tracts in these regions will be designated as energy communities, providing renewable energy projects there a 10% boost in their tax credits (EIA). 

Second, because the geographical unit considered here is a census tract, traditionally designed to be an arbitrary area with a set number of people, this means more acreage of qualifying land will open in sparsely populated regions (West) than in densely populated regions (East). For energy storage projects, which have great siting flexibility, this means more development opportunities in the West, all else equal.

Multi-site organizations should keep these considerations in mind when looking to leverage the tax credits and their potential adders. Understanding the known and unknown of the incentives will help you get ahead of the interconnection and supply chain bottlenecks as we await the Treasury Department’s final guidance.

At Enel North America, we have a dedicated public policy team that is actively tracking and advocating for clean energy technologies. While the rules around the Inflation Reduction Act are evolving and we await final guidance from the Treasury Department, it’s important to start a conversation today so you are ready in advance of the final guidance. Our team of experts is ready to help you capture the most value from the Inflation Reduction Act. Reach out to us today to discuss the opportunities available to you – and how our integrated suite of on-site and off-site energy solutions can meet your specific energy requirements and sustainability goals.