It has been just over a year since the Inflation Reduction Act (“IRA” or “The Act”) was passed. This monumental piece of legislation for the clean energy industry provides hundreds of billions of dollars to build a clean energy economy, representing the single largest investment in climate and energy in U.S. history. At the one-year anniversary of its passage, the White House announced that The Act’s clean energy and climate provisions have generated over $110 billion in clean energy manufacturing investments and more than 170,000 clean energy jobs. This is still only a fraction of the incentives available for clean energy projects. There is still time to maximize your IRA incentives.
Government Incentives
For renewable developers, The Act is a historic opportunity. Through both the extension of existing tax credits and an array of new credits, the IRA rewards renewable projects located in qualifying locations, such as an “Energy Community,” “Low-Income Community or on Indian Land,” and “Qualified Low-Income Residential Building Project or Economic Benefit Project.” The IRS has released some guidance to help identify those locations, which indicates which parts of the U.S. will qualify. Finding sites that maximize these tax incentives as well as other value is where the real challenge begins.
Coupling both state and IRA incentives can dramatically improve a project’s economics. A state with favorable incentives also may indicate a higher likelihood of approval or a faster interconnection process, ultimately driving down development costs. On the flip side, better incentives can lead to more projects, resulting in longer delays and lower prices, reiterating the importance of analyzing the local market. Both state and federal incentives also may come with conditions that increase costs, and need to be considered.
Natural Resources
Natural resources can put a non-negotiable stop to any project. Whether it is the land itself, the local environment, geothermal properties of underground resources, or the nearby community, determining potential development sites are an important early step in the evaluation process. For buildable lots, criteria may include waterways, land gradient, and solar penetration. From an environmental perspective, conservation easements, special management areas, or endangered species habitats can be a deterrent.
Siting challenges can differ between private and public land, and any crossings between the two, threatening costs and timelines. Additionally, nearby communities can challenge a project. There are plenty of examples of projects being delayed or shut down due to community backlash, such as Cape Wind (the nation’s first proposed offshore wind farm), which was cancelled in 2017 after 16 years of battling local opposition. Fully assessing the land, environment, and community-wide restrictions should be an early part of the due diligence process.
Interconnection
Interconnection to a transmission or distribution system continues to be a major obstacle for many clean energy projects. Rising interconnection costs and long delays in the queue have proven to be detrimental. When identifying a potential site, one should understand the local electricity market, including queue movements and timelines of similar projects. Beyond just driving up costs, a long queue process can push project start to be outside of the IRA tax credit window.
Time also should be spent assessing local demand for a project, capacity of the local distribution system, and proximity to the grid, including transmission and distribution constraints. Curtailment is a lost opportunity. One must look beyond just available transmission capacity and consider other future forces like load forecasts and generation buildout. A proper risk assessment may include analysis of load and generation trends, generating insights from basis differentials between project sites and their delivery points. Basis differentials are an important factor in mitigating risks with any power purchase contract. A forward-looking view is key; reviewing planned transmission upgrades can help identify sites that will be attractive in the coming years.
Counterparties
Critical to a project’s long-term financial success is a credit-worthy counterparty who would actually buy the generated electricity and renewable energy credits. Project viability relies on adequate prices and credit-worthy off-takers. Looking at load trends and heat maps can provide insights into demand. Analyzing local pricing nodes also helps with financial modeling and determining the economic viability of a project. A review of the local generating fleet can also be a worthwhile exercise. The presence of significant localized low-cost capacity resources may make it more difficult for a new project to compete.
Financial Viability
Financial viability is key to getting the financing to get a project built. Developers recently have faced new challenges with inflation, supply chain delays, and higher interest rates. These challenges are evident in projects that are seeking contract renegotiations, such as various offshore wind farms under development in the Northeast. These conditions make maximizing tax incentives and optimizing project site conditions even more important.
In order to develop a competitive renewable energy project, developers must consider a variety of factors. The first step includes understanding how to maximize incentives offered under the IRA and state in which the project is located. Analysis of public data can help determine potential locations that maximize incentives. Data must be properly vetted however, as some proprietary data sources have proven to be outdated or incomplete. Making use of external data and external resources may incur an increase in upfront costs, but generally saves time and money, increasing profitability and environmental impact over the life of the project. Taking advantage of all the IRA has to offer is not just a smart environmental move, it’s good business.
