A Summary of Inflation Reduction Act for Tribal Governments
Energy, Environment and Natural Resources 11/02/22 Pilar Thomas
On August 16, President Biden signed into law H.R. 5372 - the Inflation Reduction Act (IRA). Among many provisions, the IRA contains multiple energy-related provisions that are either specific to, or relevant to, tribal energy development efforts.
The IRA provides three major types of funding for tribes, tribal enterprises, and tribal members:
- Tribal Specific Programs - Grant and loan guarantee programs to implement energy projects for electrification, climate resiliency and energy generation.
- Tax Credits and Rebates - Direct payments available to tribes and tribal members to implement clean energy (solar, wind, geothermal, storage), electric vehicles and charging stations, and energy efficiency projects.
- Environmental and Energy Programs - Expanded funding and new programs and funding to address greenhouse gas emission reductions, environmental and climate justice, and rural renewable energy projects.
This white paper provides an in-depth summary of the major provisions that may be of interest to Tribes in clean energy and energy efficiency project development efforts.
Tribal Specific Programs
Department of Energy
- High Efficiency Electric Home Rebate program. Provides $225 million in grants directly to Tribes for rebates for electric appliance upgrades (i.e., replace fossil fuel furnaces, boilers, water heaters, stoves), energy efficiency, electric heat pumps and electric wiring upgrades. Rebate amounts are based on type of upgrade, with a maximum of $14,000 per home. Tribal member eligibility is based on income, with rebates only available to tribal member households that make less than 150% of area median income.
- Tribal Energy Loan Guarantee Program. Increases the loan authority from $2 billion to $20 billion, increases the loan guarantee from 90% to 100% and appropriates $75 million for loan guarantee credit support.
Department of the Interior
- Climate Resilience Fund. Provides $220 million in additional grants for climate resilience and adaptation programs.
- Tribal Home Electrification program. $145 million will be available, through a one-time distribution through 638 contract/compacts. Specifically, the funding can be used to:
- Provide electricity to unelectrified Tribal homes through zero-emissions energy systems;
- Transition electrified Tribal homes to zero-emissions energy systems; and
- Make home repairs and retrofitting necessary to install the zero-emissions energy systems.
Tax Credits and Rebates
Tribal Government Eligible
- Tax Credit Direct Pay. Tribal governments are "applicable entities" that can elect to receive the full value of tax credits as if they had paid taxes through a direct payment refund from the IRS ("Direct Pay"). Tax credits are described below.
- Renewable energy projects (solar, wind, geothermal, storage, interconnection), alternative fuel refueling property, clean hydrogen and carbon oxide sequestration projects, qualified commercial vehicles, and advanced manufacturing facilities are all eligible projects. To be eligible for Direct Pay, projects must begin construction after January 1, 2023 and before December 31, 2033.
- In addition, after January 1, 2025, the amount of the direct payment will be reduced if the project is greater than 1 MW and does not meet the IRA's domestic content requirements, which are discussed further below. For projects that begin construction before 2025, there is no reduction in the Direct Pay amount. For projects that begin construction in 2024, the Direct Pay amount will be reduced to 90%. For projects that begin construction in 2025, the Direct Pay amount will be reduced to 85%. And for projects that begin construction after 2026, the Direct Pay amount will be 0%. This means that tribal governments will have to really pay attention to estimated start dates for projects.
- Investment Tax Credit/Clean Energy Investment Tax Credit. The IRA extends the current investment tax credit - which is calculated as a percentage of the cost to construct or fair market value of the project - for solar, small wind, and geothermal by another 2 years, and creates the clean energy investment tax credit (CEITC) which is available from 2025 through 2033. Projects must begin construction by 2033. Certain technologies are also added, such as thermal solar and wind, standalone energy storage, geothermal heat pumps, and qualified biogas. For projects less than 5 MWac, interconnection costs and microgrid controllers are also eligible for the tax credit. The investment tax credit percentage is based on the following project's conditions:
- 30% tax credit if the project meets prevailing wage and apprenticeship requirements. Prevailing wage is based on Davis-Bacon Act wage scales, set at the state and county level. Apprenticeships must be qualified through a registered apprenticeship program, with a certain percentage of hours performed by apprentices and at least one apprentice for every 4 positions hired.
- 10% additional tax credit for meeting domestic content requirements. Domestic content requirements apply to steel, iron, and manufactured products used in the project. At least 40% of the total cost of the project must be attributable to these components that are mined, produced, assembled or manufactured in the United States.
- 10% additional tax credit if the project is located in an energy community. Energy communities are defined as: brownfield sites, as defined in CERCLA; areas with significant employment or tax revenue generated from coal, oil or natural gas and has high unemployment; or a census tract where a coal mine has closed or coal-fired electric generating unit has been removed from service or adjacent census tracts.
- Environmental Justice Credits. For solar and wind projects that are less than 5 MW, the Secretary will allocate "environmental justice solar and wind capacity limitations" (EJ Credits) to eligible ITC/CEITC projects. The allocations are limited to 1.8 GW capacity in each of 2023 and 2024 (for ITC) and 1.8GW each year for CEITC. For projects that receive the EJ credits, in addition to the above-listed ITC percentages, the projects can receive an additional:
- 10% for projects on Indian lands, or
- 20% for projects that benefit low-income residents or low-income economic development
- Production Tax Credit. The IRA also extends the Production Tax Credit (PTC) through 2024 and creates a new "Clean Energy Production Credit" for 2025 through 2033. Solar projects are now eligible for the PTC. Unlike the ITC, which is calculated based on a percentage of the cost basis, the PTC is calculated based on the amount of power produced from a qualifying facility. The PTC is equal to a set amount per kilowatt hour produced. Today, that number is approximately $.026/kWh. But, like the ITC, the amount of the PTC will be based on the size of the project (less than 1MW, less than 5MW) and whether the project meets prevailing wage requirements, domestic content requirements and energy community location. For projects less than 1MW, the PTC will be $.033/kWh. For projects greater than 1MW, if all three requirements are met, the PTC will be $.026/kWh.
- Electric Vehicles and Charging Stations. The IRA creates new tax credits for electric commercial vehicles and electric vehicle charging stations.
- If the commercial vehicle is all electric, then the tax credit is 30% with a maximum amount based on the vehicle's weight. For electric commercial vehicles that weigh less than 14,000 pounds, the maximum tax credit is $7,500. If the electric commercial vehicle weighs more than 14,000 pounds, the maximum tax credit is $40,000
- Electric vehicle charging stations are also eligible for a 30% tax credit, with a maximum tax credit of $100,000 - per charging station. If a tribe installs 10 charging stations, then each one is eligible for the tax credit (which the tribe receives through its election for Direct Pay).
- Commercial Energy Efficiency Tax Deduction. The IRA amends the tax deduction for the installation of energy efficiency equipment in commercial buildings to allow tribes to allocate the tax deduction to the project designer. Eligible equipment includes interior lighting, heating and cooling, and building envelope updates. The tax deduction (not a credit) is based on a sliding scale: the base amount is $.50/sf, with $.02/sf increase for every 1% improvement in efficiency. If the project pays prevailing wage, then the base amount is $2.5/sf, with a $.10/sf increase per 1% increase in efficiency and a maximum deduction amount of $5/sf. The project must achieve a minimum of efficiency improvement of 25%.
Tribal Government Implications
With Direct Pay, tribal governments will be eligible to claim and receive a payment from the IRS equal to the amount of tax credit. This payment will be made after the project is placed in production, so it serves as a refund (rebate) and not as a grant. This will require the tribal government to pay for the project(s) up front, which they can do through borrowing money from the federal government, state government or private lenders. Or tribes can partner with a third-party developer or investor to fund the development. Once the project is constructed, and the payment received from the IRS, the tribal government can then use the payment to paydown the loan or buy out the third-party developer or investor.
For tribes that are considering energy efficiency projects for government buildings, or enterprise buildings (such as casino, hotel, resorts), the newly available authority to allocate commercial tax deductions can also reduce the cost of the energy efficiency projects through the reduction of costs to the project designer (engineer, architect, energy services company). But, because a tax deduction is not as valuable as a credit, the tribe will not likely receive an equal reduction in costs.
The below matrix shows how some typical renewable energy projects might qualify for various tax benefits under the IRA:
Sample Project Eligibility*
*Assumes meets prevailing wage, domestic content and energy community requirements.
Tribal Member Eligible Benefits
Individual tribal members are also eligible for various tax benefits, such as tax credits for energy efficiency improvements and clean energy generation projects, for their homes. Tribal members will also be eligible for the various rebate programs that will pay for energy electrification projects.
- Residential Energy Tax Credits. The IRA extends the existing residential clean energy tax credit for 10 years. The tax credit covers small solar and wind, and now covers geothermal heat pumps and battery storage projects. The tax credit is 30% of the cost of the project until 2033, then the credit reduces to 26% in 2033 and 22% in 2034.
- Residential Energy Efficiency Tax Credits. The IRA increases the existing energy efficiency tax credits, removes the lifetime cap and extends the tax credit for 10 years. The amount of the energy efficiency tax credit is 30% with a maximum tax credit amount based on the type of energy efficiency improvements. For example, new lighting, insulation, energy efficient doors and windows have a maximum tax credit amount of $600 while a heat pump has a $2000 tax credit maximum amount. The annual tax credit limit is $1200.
- Residential Electrification Rebates. There are two residential electrification rebate programs, totaling $9 billion. Tribes have a $225 million set aside in the electrification program, and the states will receive the remaining funds. Tribal members who meet the eligibility requirements - focused on household income - may be eligible for the tribal and/or state programs. Note that the rebate programs have household income limits.
Implications for Tribal Members
The following matrix showing the various tax benefits and rebate benefits for individuals/households is based on information from Rewiring America:
Find more information about residential benefits here.
Additional Tribal Government Considerations
Tribes might consider creating a tribal member energy efficiency and rebate program to support tribal members that own their homes, both on and off tribal lands. Tribal housing authorities might consider establishing a rebate program for tribal-owned housing. For example, tribes could set up a short-term loan program (either through the tribe or through a Native CDFI) that lends funds to the tribal members to do energy efficiency or electrification projects, then use the tribal member's tax credit payment or rebate payment to pay down the loan. This will give tribal members access to capital to do the projects. The additional benefit to tribal members is that their energy bills will likely be reduced as well, and the savings can also be used to pay off the loan.
Environmental and Energy Programs
- Greenhouse Gas Reduction Fund. The IRA amends the Clean Air Act to give EPA authority to make grants to states, tribes, non-profits and invest in non-profit, state and local financing institutions to deploy low-zero emission technologies. Total funding is $27 billion and is available until September 30, 2024. The Fund has three components:
- $7 billion in competitive grants (states, tribes) for financial and technical assistance
- $12 billion to lending institutions to leverage private investment
- $8 billion in competitive grants to non-profits
- Climate Pollution Reduction Grants. The EPA will receive $9 billion to achieve or facilitate GHG emission reduction. Funds can be used for planning and implementation grants.
- Environmental and Climate Justice Block Grant. The EPA will also receive $3 billion for the block grant program that will provide funding to community led partnerships between tribes and non-profits. Funds can be used for climate resiliency efforts, low-zero emission/resiliency technologies, and environmental and climate education efforts in disadvantaged communities to address environmental and public health harms.
Find more information about the various environmental justice-focused IRA programs through Harvard's Environmental and Energy Law Program here.
- Provide comments to the IRS, which has issued notices seeking comment on various provisions in the IRA. See the attachment for a summary of each notice and potential comments.
- Monitor DOE implementation of the high efficiency electrification rebate programs for state energy offices and tribes.
- Key question for DOE - How will the tribal set-aside (of $225 million) be allocated?
- Key question for DOE - How will they define "area median income"? Is that based on tribal lands or surrounding areas?
- Monitor EPA implementation of, and be prepared to comment on, the new Clean Air Act authorities for the Greenhouse Gas Emission Reduction Fund, Climate and Pollution Reduction Fund, and Environment and Climate Justice Block Grants.
For your convenience, a summary of the IRS Notices relevant to the Inflation Reduction Act's implications for tribal governments can be found here.
Quarles & Brady is prepared to assist you in identifying and understanding how the IRA can specifically benefit your Tribe. If you have particular clean energy projects under development, are interested in submitting comments to the IRS, or want to receive additional information about the upcoming implementation efforts, please contact:
- Pilar Thomas: (520) 256-6628 / [email protected]