16851_Authority_Aug_2023

municipalauthorities.org | 23 E ndorsed P rogram Direct Pay: Providing Tax-Exempt Organizations a New Path to Owning Onsite Solar Projects By Jordan Nelson, Director, and Heather Carter, Senior Analyst, Renewable Energy Solutions, World Kinect Energy Solutions Renewable Energy plays a pivotal role in addressing environmental and energy concerns. Tax-exempt organ- izations, such as non-profit entities and government agencies, have historically faced limitations access- ing incentives due to their tax status. “Direct Pay” attempts to even the playing field by providing monetary incentive to tax-exempt organizations that would otherwise not be eligible. This overview will explain how direct pay works to empower tax-exempt organizations in the pursuit of renew- able energy solutions, and some of the specific values that can be utilized in more detail. The Inflation Reduction Act has pro- vided many new incentives for entities wishing to pursue renewable energy projects. Prior to direct pay being of- fered, tax-exempt organizations were at a financial disadvantage because they were unable to directly benefit through the ownership of a qualified renewable energy project from tax specific credits and rebates that help drive project economics. To participate in renewable energy projects, tax-ex- empt entities would often have to partner with banks or developers via a Power Purchase Agreement (PPA) to take advantage of the tax benefits ap- plicable to a specific project. Because developers and banks are taxable, they were historically the contracting entities that could monetize the tax benefits to provide the greatest value possible for a specific project. The inclusion of direct pay in the Inflation Reduction Act of 2022 seeks to offer the same financial incentive to tax-exempt organizations that are offered to taxable entities through a variety of credits introduced by the In- flation Reduction Act. For on-site solar projects, the most applicable credit pursued is normally the Investment Tax Credit (ITC) and referenceable in section 48C in the Inflation Reduction Act. The ITC was originally enacted in 2006 and has paved the way for mas- sive growth in the U.S. solar industry. The original tax credit legislation under the ITC provided a 30% tax credit on the cost of any solar system, but that had dropped to 26% in 2020 and was slated to step down each year prior to the Inflation Reduction Act passing, but now a ten-year runway has been created, which provides a huge opportunity for solar projects to move forward without the con- cern that time was running out. The Inflation Reduction Act replaced the existing ITC structure with a two-tiered structure composed of a minimum base amount, and a maximum bonus amount depending on the project size and if certain prevailing wage and Continued on page 42.