Shifting Opportunities: Recent and Upcoming Changes to the IRA's Energy Communities Tax Credit

April 29, 2024

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Ascend Analytics’ analysis of the Q1 2024 IRS guidance (IRS Notice 2024-30) and 2023 unemployment data indicates important changes to Energy Community Eligibility, significantly impacting certain developer projects.

Key Takeaways  

  • The IRS added 118 counties eligible for the lucrative energy community tax credit on Mar. 22nd, 2024, improving the economics of up to 89 GW of wind, solar, and storage projects in ISO queues.
  • Ascend expects at least 85 counties to gain eligibility in May 2024, opening new opportunities for up to 62 GW of wind, solar, and storage projects in ISO queues.
  • Ascend expects 175 counties to lose eligibility for the credit in May 2024, creating challenges for up to 87 GW of wind, solar, and storage projects in ISO queues.
  • Anticipating these changes is possible with Ascend’s forward-looking IRA Locational Incentives mapping feature.
  • Clean energy developers in negatively affected areas, including ERCOT’s popular West Zone, must move quickly to establish a safe harbor or risk missing out on the bonus credit.

Recent IRS Guidance Opens New Opportunities

On March 22nd, 2024, the IRS issued Notice 2024-30, the latest guidance regarding the Inflation Reduction Act’s lucrative Energy Community tax credit. This credit provides a 10% bonus to the Investment or Production Tax Credit of clean energy projects in brownfields, former coal communities, and statistical areas with both a) historical employment in certain fossil-fuel related industries and b) an unemployment rate higher than the national average in the previous year. This last category is of particular interest for several reasons:

  1. The statistical area class covers the most land of the three Energy Community categories.
  1. The recent updates expand the definition of “historical fossil-fuel employment”, as seen in Table 1, increasing the number of potentially eligible areas.
  1. Eligibility under this grouping is subject to change in May of each year, when previous-year unemployment data is published by the Bureau of Labor Statistics (BLS) and processed by the IRS to refresh eligibility for the following 12 months.

Specifically, the IRS added two industries to their qualification (in bold below).

Table 1: IRS List of Qualifying "Fossil Fuel" Industries. IRS Notice 2024 - 30's Additions in Bold

The new industries, particularly Natural Gas Distribution, are geographically diverse from the pre-existing set of qualifying sectors. The result, as shown in Figure 1, is an additional 118 counties newly eligible for the Energy Community credit. The bonus offered by the credit dramatically improves project economics, boosting returns for currently planned facilities. Critical to the Inflation Reduction Act’s goals, borderline-economic projects may also become profitable when they would have otherwise struggled to find investors.

Assessing the Impact of Recent IRS Guidance

Figure 1: Changes to Employment-based Statistical Area Energy Communities due to IRS Notice 2024-30

The clean energy industry will benefit from the additional eligible areas, but some markets will benefit significantly more than others. In Table 2, Ascend calculated the nameplate capacity of wind, solar, and storage projects seeking interconnection in the newly eligible areas, revealing a wide gap between markets. CAISO is the clear winner, with over 44 GW located in newly eligible counties as of March 22. Meanwhile, SPP, NYISO, and ERCOT saw little to no change in the capacity of projects in qualifying areas.

Table 2: Capacity of Active Wind, Solar, and Storage Projects in ISO Queues with a Projected COD in 2024 or later located in Counties Made Eligible by IRS Notice 2024-30. Data pulled from Ascend's Interconnection Queue Map as of April 2024

Changes Coming: Eligibility Today is not Eligibility Tomorrow

However, projects in certain areas may not be in a position to benefit from their recent addition to the IRS’ list of qualifying areas. The IRS updates eligibility in May of each year, and based on the previous year’s unemployment rates, some of these areas will lose eligibility as quickly as they gained it. Development assets in regions where the 2022 unemployment rate was higher than the national average, but below the national average in 2023, may receive bad news when the IRS publishes its refresh in May (see gray areas in Figure 2 below).  

Project developers in areas where eligibility will not be refreshed are left with limited options:

  1. Expedite a start of construction date before the IRS refreshes eligibility in May 2024.
  1. Wait until the following refresh date, (May 2025), to see if the 2024 unemployment dynamics shift to the developer’s favor.
  1. Miss out on eligibility.  

Conversely, some areas not on the IRS list of qualifying areas have experienced increases in their unemployment rate from 2022 to 2023 and will gain eligibility when the IRS refreshes their list of qualifying areas.  

On April 19th, The Bureau of Labor Statistics (BLS) published the data the IRS will use to determine which of the potentially qualifying areas had a 2023 unemployment rate higher than the national average and will ultimately qualify during the upcoming May 2024 - April 2025 eligibility period. Ascend processed this same data and visualized expected changes to the statistical area category of Energy Communities in Figure 2.

Assessing the Upcoming Impact of 2023 Unemployment Data

Figure 2: Expected Changes starting May 2024 to Employment-based Statistical Area Energy Communities due to Shifting Unemployment Dynamics in 2023

When the IRS processes 2023’s unemployment data and publishes their updated list of qualifying areas, it will have once again inadvertently picked winners and losers. In Table 3, Ascend calculated the capacity of wind, solar, and storage projects in counties whose eligibility is expected to change. CAISO again sees clear benefits and is expected to pick up nearly 15 GW of projects in qualifying areas. The effect in other markets is mixed. Notably, urban areas in ERCOT containing nearly 27GW of development projects are expected to gain eligibility, while rural counties, primarily in ERCOT’s West Zone, containing a staggering 62 GW of projects are expected to lose eligibility.

Table 3: Capacity of Active Wind, Solar, and Solar Projects in ISO Queues with a Projected COD in 2024 or later Located in Counties whose Statistical Area Energy Community Status is Expected to Change due to Shifting Unemployment Dynamics in 2023. Data pulled from Ascend's Interconnection Queue Map as of April 2024.

Anticipating Annual Changes to Eligibility

This news may come as a shock to many developers in West Texas, who favor the region for its cheap land, high solar and wind resources, and for the past year, its eligibility for the Energy Community tax credit. But it is possible to gain insight into Energy Community re-qualification risk ahead of time. The official IRS notices give information on whether an area’s previous year’s unemployment rate was above or below the national average, but they do not provide insight into the magnitude of the margin, nor historical trends. Recognizing the potentially predictive value of that data, Ascend’s Market Intelligence Maps calculate and visualize the difference between the relevant statistical area’s unemployment rate and the national average for each county in the US back to 2011, as seen in Figure 3.

Figure 3: West Texas Statistical Area Unemployment Margin, with the National Average Unemployment Rate Normalized to 0.

Taking the West Texas non-metropolitan area as an example, Ascend’s data gives two key insights that alerted Ascend clients on the risk of losing eligibility in the upcoming annual refresh, even before the latest unemployment data was published by the BLS:

  1. The West Texas statistical area’s current margin of qualification is miniscule. Its current eligibility is attributable to a 2022 unemployment rate that was just 0.02% higher than 2022’s national average.  
  1. This area’s unemployment rate was lower than the national average in every year from 2011-2021, indicating that the positive 2022 unemployment rate margin is an outlier.

Interested in Learning More?

If you are interested in learning more about Ascend’s latest Energy Community updates and interactive map layers please visit Insights (ascendanalytics.com) or email us at sales@ascendanalytics.com to talk to an expert.