In March of 2024, the IRS released new guidance for the latest set of Inflation Reduction Act's (IRA's) Incentive Tax Credit (ITC) 'Energy Communities'. These are effective for solar installations until the next update in 2025 (likely in early summer). This guidance is crucial to understand which sites qualify and can earn additional bonus credits on top of the base ITC credit.
💡 Is there a capacity limitation?
In fact, unlike the 'Low Income' communities adder, there is no capacity limitation - if your project and site qualifies, you are eligible for the credits! These federal tax credits qualify a solar system for an additional 10% tax credit on the capital expenditure of the project above and beyond the basic 30% ITC credit; the 10% can make-or-break financial feasibility for many projects and is an important component of our feasibility analysis. So, what’s new with this set of census tracts? And why are these changes important?
Changes in 2024 to the IRS' designation of census tracts eligible for the 'Energy Community' (EC) designation for the Inflation Reduction Act's (IRA's) Incentive Tax Credit (ITC) adder. Green indicates newly included, orange newly removed, gray continued status as an 'Energy Community', and transparent indicates that a tract is not currently considered 'EC' and was not last year. Source: Station A, based on DOE public guidance.
💡 What are the differences?
First off, let's look at the differences. In this new guidance, these areas were added:
- Some rust-belt-type cities - Buffalo, Akron, New Haven, Erie, Binghamton
- Select areas in North Carolina
- The greater Chicago metro area
- Select metro areas in Texas
- Tucson and Flagstaff metro areas in Arizona
- Western Idaho
- Most of California and Las Vegas, NV
- The Anchorage, AK metro area
Meanwhile these areas were removed:
- Pittsburgh and Scranton, PA
- Eastern Mississippi
- Western Texas
- Western Wyoming
This begs the question - what changed between 2023 and 2024? Before diving into the specifics, let’s take a moment to understand the ITC Energy Community adder. There are three primary ways a site can qualify for this adder:
- Brownfields: If the site counts as a “brownfield site” (as defined in CERCLA).
- Fossil Fuel Employment: If the site is in a “metropolitan statistical area” or “non-metropolitan statistical area” 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; and
- An unemployment rate at or above the national average unemployment rate for the previous year.
- Coal Closure: A census tract (or directly adjoining census tract):
- In which a coal mine has closed after 1999; or
- In which a coal-fired electric generating unit has been retired after 2009.
For this discussion, we’re excluding local brownfields and noting that no census tracts were added between 2023 and 2024 based on coal closures. To understand the major drivers behind these changes, let’s look at the unemployment rate shifts in 2023:
Unemployment rate change by county from 2022 into 2023. Blue indicates an improvement toward lower unemployment rates, orange/red an increase in unemployment, and gray no change. Source data: US BLS.
Entering 2023, unemployment rates decreased in nearly all areas that were removed from the list, while unemployment increased in nearly all newly added areas.
Overall, the IRS' EC designation is based on "an unemployment rate at or above the national average unemployment rate for the previous year", and is also based on the local "statistical area". This distinction is why some areas in Ohio still qualify, for instance; even though unemployment improved compared to 2022, it didn't improve enough in those areas to clear the 'national average unemployment rate' of 3.6%. Meanwhile, in the map below you can see that places like western Wyoming and areas in Pennsylvania (which had major gains this year) have improved beyond the 3.6% threshold and are thus no longer eligible to be an 'Energy Community' as per the IRA.
Total unemployment rate in 2023 by US county. Yellow indicates an unemployment rate below 3.6% (the national average in both 2022 and 2023), orange exactly 3.6%, and red above 3.6%. Source data: US BLS.
This behavior aligns perfectly with what lawmakers intended - if an area is experiencing high unemployment, the federal government wants to help stimulate the local economy via solar investment. Meanwhile, if an area has low unemployment, prices for materials and labor are likely high and it's worth waiting to invest federal resources to decrease unemployment further.
🔮 Curious if your site could be included in the future?
Any statistical area that counts as a 'Fossil Fuel Employment' (FFE) community could qualify if local unemployment dips below the national average. Check out the "MSAs/Non-MSAs that only meet the FFE Threshold (not an energy community as of June 7, 2024)" layer on this map to see.
If an area meets the FFE threshold, it could be a strong candidate for future inclusion. The FFE designation itself typically remains stable year to year compared to unemployment, but it’s worth verifying the latest data each year to be sure that your site would still qualify, something that our team at Station A can do for you when you upload your portfolio.
👀 Want to find out if your sites might qualify?
Submit your portfolio today, and together we can determine eligibility and estimate your payback period. Let’s work together to boost your NOI while adding clean energy to our nation's grid.
