The Inflation Reduction Act (“IRA”) is one of those once-in-a-lifetime, transformational pieces of legislation that’s so far-reaching and chock-full of potential, it’s hard to wrap one’s mind around it. Indeed, when it passed in August the mood in the climate community ranged from relief to ambivalence to, in some corners, disappointment and even opposition (click here to read my thoughts on the environmentalists that opposed the bill). Yet, not many of us felt elation. For starters, the bill, which includes about $370 billion in climate spending, is considerably smaller than what had originally been contemplated under Build Back Better; gone were key elements like the Clean Energy Performance Program and the Civilian Climate Corps. Additionally, securing the vote of Senator Manchin meant accepting some provisions that will benefit the fossil-fuel industry. And, after a year of wrangling–and the bill being declared dead on multiple occasions–many of us were a bit too tired to throw a party.
Now that we have had time to digest the over seven-hundred pages of legislative text, however, the full social and environmental potential of the IRA is coming into view–and it’s massive. Let’s start with that top-line figure of $370 billion: it turns out that number is a actually an estimate from the Congressional Budget Office (“CBO”), not a cap on spending. As Robinson Meyer noted in The Atlantic , an analysis by Credit Suisse found that “so many people and businesses will use [the bill’s] tax credits that the IRA’s total spending is likely to be more than $800 billion, double what the CBO projects. And because federal spending tends to catalyze private investment, that could send total climate spending across the economy to roughly $1.7 trillion over the next 10 years.” That’s the kind of impact that can induce elation!
But there’s more. Tucked into the IRA are numerous provisions that will catalyze investments which specifically benefit communities of color, lower-income folks, and other who have suffered from high energy prices, air pollution, and other environmental and economic injustices–a key goal of the Biden Administration’s Justice40 Initiative. I’d like to focus on just one such provision, which I believe will prove a game-changer for my nonprofit, Capital Good Fund, and the lower-income homeowners we serve: the establishment of Direct Pay of the Section 48 Investment Tax Credit for nonprofits, native tribes, and other exempt entities.
Bear with me: while this gets into policy-wonkery, it also gets at one of the central tenets of my philosophy of change, which is that much of the good–or ill–that transpires comes down to nuances in rules, regulations, and law that have been enacted through lobbying. Far too often, that lobbying is done by powerful industries who advocate for policy which benefits their bottom line, at the expense of people and the planet. But much of the IRA exists because advocates for environmental justice, cleantech companies, and others working to uplift people and the planet had a seat at the table when the bill was being negotiated and written.
Not only did the IRA increase the tax credit for technologies like wind and solar from 26% to 30%, it also extended the credit for another ten years. Under section 25D of the tax code, homeowners can now claim 30% of their system cost against their taxes. So for instance, if you install a $30,000 solar system this year, you are eligible to offset $9,000 of your tax liability when you file your taxes in 2023: a huge incentive! The problem is that, if you are lower-income and don’t owe $9,000 in federal taxes, then you have no means of monetizing the credit (though you can carry it forward for five years). We were part of a coalition that tried to make the credit refundable, so that all families would get it, regardless of income, but that was stripped out of the final bill. This is a significant barrier for families.
The other option is to lease the system, rather than own it. In a lease scenario, a third-party owns the solar panels and monetizes the 30% credit via a different part of the tax code, section 48; that third-party uses some of the credit to reduce the system price, but the rest, unsurprisingly, goes toward so-called “tax-equity investors”–that is, people with a tax liability to offset and an appetite for strong financial returns. As a result, solar leases are often a bad deal for consumers. So either way, if you are a lower-income homeowner, pre-IRA there was simply no way to take full advantage of the tax benefits meant to incentivize adoption of clean energy.
What’s more, pre-IRA nonprofits also had no means of benefiting from the credit because, well, we don’t pay taxes and therefore have no tax liability to offset. If we wanted to go solar, we would either have to the third-party ownership route–again, giving up a lot of the economic value to profit-motivated investors–or purchase panels and not claim the credit at all. But under the IRA, the section 48 tax credit now includes Direct Pay for certain entities, including nonprofits: if Capital Good Fund installs solar panels on our roof, for instance, we’ll be able to make a filing with the IRS and receive a check for 30% of the system price.
That’s powerful, because it means that schools, churches, hospitals, and affordable housing complexes no longer need to enter into complicated lease structures where the aforementioned investors siphon off a lot of the economic value; they can instead directly own the asset and receive the credit. And it gets even better, because section 48 now also includes certain “adders” that can increase the tax credit to up to 60%, if the system is installed in a low-income census tract and meets other criteria.
But when reviewing the text, a thought occurred to me: what if Capital Good Fund used section 48 to offer a residential solar lease to lower-income homeowners? Remember, under a lease, it would be us, the nonprofit, and not the homeowner, that owned the system. This is crucial because, again, the homeowner is unlikely to benefit from the 30% credit–but now, thanks to the IRA, we can. After speaking to a number of stakeholders, including a lawyer who specializes in clean-energy tax law, I have confirmed that, indeed, under this model, Capital Good Fund, and not a for-profit investor, would be in a position to receive the 30%, along with any adders, and pass on much of that savings to the homeowner.
To underscore how much of a game-changer Direct Pay can be, consider the following example. A low-income homeowner takes out a loan from Capital Good Fund for a 10 kilowatt solar system that will cover 100% of their annual electricity usage. Without benefit of the 30% tax credit, they will still save money–$35 per month, and, because electricity prices go up about 3% per year (at a minimum), his savings over the 25-year term of the loan will be $40,000. Not bad! However, were he able to receive the credit and use it to pay down the loan, then his 25-year savings would soar to $55,000! Think about that: the person with less income is receiving one-third of the economic value of the solar system as a wealthier homeowner would.
Now let’s suppose that, instead of taking out a loan, this same customer took out a solar lease with Capital Good Fund. We would be able to claim the 30% ourselves, passing much of the savings to the customer and using the rest to cover our operating and capital costs. In fact, I estimate that the same customer would save $50,000 under our leasing program: almost as much as a customer who owns the system and is able to receive the credit herself. Again, the only difference is that, thanks to the Direct Pay provision of section 48, Capital Good Fund can monetize the 30%, thereby opening the door to making solar more accessible to millions of families that would otherwise struggle to justify the time, risk, and effort of going solar.
We had originally set a goal of financing $11 million worth of residential solar systems in 2023. What will the impact of a leasing program powered by Direct Pay be? I can easily see us leasing over $50 million of systems next year, even though the program will only launch as a pilot in Q2. Keep in mind that not even 4% of homeowners in the U.S. have solar panels or battery backup systems. Yet in places like Puerto Rico, Texas, California, and Florida, they are becoming essential in the face of ever-increasing extreme weather events; in the wake of the recent hurricanes in PR and FL, for instance, families with solar and battery storage maintained power even as it took days to restore the grid. Elsewhere, the soaring price of energy is hammering the budgets of vulnerable families.
So why is solar adoption still so low? Too many think of solar as something for the wealthy, and for good reason: when you have a tax code that explicitly excludes you, how else would you feel? No more. The Inflation Reduction Act, thanks to voters who put Democrats in charge of the House, the Senate, and the White House, and advocates who have spent decades working on the policies that made it into the bill, will reshape our energy system in a way that lowers barriers to access, creates jobs, reduces emissions, and saves people money. I have no doubt that thousands of nonprofits, companies, and policymakers are finding in the IRA their own versions of section 48-and thinking of how they can leverage those provisions to tackle the climate crisis, serve communities, and do so profitably, or at least in a financially sustainable manner. As someone who has worked in the climate space for 14 years, this is the first time I’ve ever felt that, rather than fighting for people to take the climate crisis seriously, I can spend most of my time implementing the myriad solutions we have at our disposal. I find it, well, elating.
Oh, and if we want more good things like this to happen, well, we need to make sure to elect Democrats at the local, state, and federal level. So please, be sure that you are registered to vote in the November midterms, and that your ballot is counted! Go to vote.org to get all the information you need on your local election!