Treasury Issues Low-Income Communities Solar and Wind Credit Guidance

The U.S. Department of the Treasury yesterday released Internal Revenue Service Notice 2023-17, Initial Guidance Establishing Program to Allocate Environmental Justice Solar and Wind Capacity Limitation under Internal Revenue Code Section 48(e) (the Notice). The Notice provides anticipated guidance related to the up-to 20% bonus investment tax credit (ITC) for certain solar and wind facilities placed in service in connection with low-income communities, which was added as part of the Inflation Reduction Act of 2022 (the IRA). The Notice was issued pursuant to the requirement in the IRA that the Secretary of the Treasury establish, within 180 days after enactment of the IRA, a program to allocate amounts of environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities, and provide procedures to allow for an efficient allocation process.

As discussed in our prior alert, the IRA provides for an increased ITC energy percentage with respect to eligible property that is part of a qualified solar and wind facility and is located in certain low-income communities or on Indian land. The IRA provides that the total annual Capacity Limitation is 1.8 gigawatts direct current for each calendar years 2023 and 2024.

The Notice defines a “qualified solar and wind facility” as a facility that (1) generates electricity solely from a wind facility, solar energy property, or small wind energy property, (2) has a maximum net output of less than 5 megawatts alternating current, and (3) is described in at least one of the following four categories:

• Category 1: The facility is located in a low-income community;
• Category 2: The facility is located on Indian land as defined in 25 USC 3501(2);
• Category 3: The facility is part of a qualified low-income residential building project; or
• Category 4: The facility is part of a qualified low-income economic benefit project.

The Notice allocates the annual capacity limitation for calendar year 2023 among the four categories as follows: 700 megawatts each for Category 1 and Category 4, and 200 megawatts each for Category 2 and Category 3. If the annual Capacity Limitation exceeds 1.8 gigawatts for calendar year 2023, the excess will be applied against the 1.8-gigawatt Capacity Limitation for calendar year 2024. If excess capacity exists for calendar year 2024, the excess will be carried forward and added to the Capacity Limitation under Section 48E(h)(4) (the new technology-neutral clean electricity investment credit). A lottery or other process may be used to allocate the Capacity Limitation to applicants if applications selected for a category exceed that category’s Capacity Limitation. If a category has excess Capacity Limitation, the excess may be reallocated among the categories to maximize 2023 calendar year allocations.

The Notice makes clear that a facility that is placed in service before being awarded an allocation of Capacity Limitation is not eligible for the increased ITC energy percentage. An owner may apply for an allocation in only one category for calendar year 2023. Applicants that are denied a 2023 allocation may apply for future allocations.

The Treasury Department will use a phased approach for calendar year 2023 applications, and anticipates accepting Category 3 and Category 4 facility applications in the third quarter of 2023 during a 60-day application window. The Treasury Department will later open a 60-day window for Category 1 and Category 2 applications for calendar year 2023, with additional guidance forthcoming on the application process and facility eligibility for all categories. The applicant then will have four years from the date of the acceptance to place the property in service.

The Notice provides helpful information for how applications for Capacity Limitation will be allocated. It leaves a number of questions unanswered, however, and indicates that the Treasury Department will address some or all of these unanswered questions in future guidance. For example, the Notice provides that, to further the overall program goals, the program will incorporate additional criteria in determining how to allocate the Capacity Limitation reserved for each facility category among eligible applicants. These criteria may include a focus on facilities that are (i) owned or developed by community-based organizations and mission-driven entities, (ii) have an impact on encouraging new market participants, (iii) provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and (iv) have a higher degree of commercial readiness. The Notice indicates that future guidance will describe these additional criteria in greater detail. The Notice also provides that forthcoming guidance will address the parameters of financial benefit that must be provided to a low-income residential building project or low-income economic benefit project.

The Notice provides helpful guidance to developers of and potential investors in qualified projects, but additional guidance is needed to provide greater confidence that a project may qualify for an allocation of Capacity Limitation and the additional ITC. Hopefully the Treasury Department and the IRS will provide that additional guidance in the near future.