A Closer Look at the Inflation Reduction Act’s Energy Communities

Last month, BTU Analytics identified census tracts that qualify as energy communities under the Inflation Reduction Act (IRA) due to coal-fired power plant retirements. In that article, we discussed how the IRA provides a 10% bonus to Production Tax Credits (PTC) or Investment Tax Credits (ITC) so long as a given project is built in an energy community. As part of our continuing coverage of IRA-created energy communities, this Energy Market Insight will investigate other criteria established by the IRA, such as the existence of brownfield sites, employment and tax criteria, and other coal-related qualifications, to determine which areas in the United States may also qualify as energy communities.

First, we’ll consider EPA-designated brownfield sites. Unfortunately, the geographic boundaries for these sites are not publicly disclosed by the EPA. As brownfields may vary in size from less than an acre to thousands of acres, it’s difficult to determine which areas may qualify under this criterion. However, it’s interesting to note that brownfield sites tend to be in populous areas, with the highest concentrations located in the Midwestern states of Michigan, Ohio, and Indiana.

Next, we’ll consider the unemployment, direct employment, and tax revenue criteria. These criteria comprise two tests, both of which must be satisfied to designate an energy community. The first test qualifies a statistical area that has an unemployment rate at or above the national average for the previous year. The second test qualifies an area that, for any period after December 31, 2009, has had either 0.17% or greater direct employment in the extraction, processing, transport, or storage of coal, oil, and/or natural gas, or greater than 25% of local tax revenues stemming from such industries.

Notably, the IRA does not explicitly define what “direct employment” in the coal, oil, and natural gas industries is. Large swaths of the US are potentially qualified under this test, as an examination of US employment data using applicable NAICS codes shows that total employment in these industries constitutes 0.54% of the American workforce. Due to the volatility of unemployment rates from year-to-year, many areas that satisfy the direct employment test but didn’t meet the unemployment criterion for 2021 could still qualify in future years.

Unfortunately, the tax revenue criterion is not easily discerned from publicly available data. To estimate which areas might qualify under this test, we reviewed GDP data associated with mining, quarrying, and oil and gas extraction as a proxy for tax revenue. All areas deriving greater than 25% of local GDP from these activities already qualify under the direct employment test, implying strong overlap between tax revenues and direct employment. The map below shows qualified energy communities based strictly on the current unemployment and direct employment tests.

Finally, we’ll consider coal-related qualifications for energy communities. There are two separate criteria: the first relates to coal-fired generating unit closures and the second to coal mine closures after 1999. Under both criteria, census tracts containing closures and adjoining census tracts may qualify. As stated above, BTU recently highlighted the census tracts that qualify as a result of coal power plant closures, so the map below identifies census tracts that qualify due to the closure of coal mines only.

Taken together, all these criteria for energy communities create a complete picture that illustrates BTU Analytics’ current understanding of which areas may allow renewable energy projects to qualify for more favorable tax treatment under the IRA.

The detailed shapefile used to create the map below is available to BTU Analytics Power View clients and FactSet Workstation users. Not a Power View client? Reach out to the team here for more info!

After viewing the comprehensive map above, which was created using the expanded IRA criteria, it is clear that the Western region retains the largest share of energy community acreage in the US. Despite comprising more than one-third of all energy communities by area, the West is currently home to less than one-fifth of all planned renewables capacity under advanced development within these communities. The landscape in Southwest Power Pool (SPP) is similar, with a low number of projects in advanced development relative to a high number of qualified acres. While there are numerous factors to consider in terms of project siting and development, the low density of development within energy communities in these areas implies there might be untapped renewables development opportunities in these regions.

Many of the IRA’s provisions offer a clear roadmap for implementation; however, several sections require further regulatory guidance to clarify the intent of the legislation. Last week, the Internal Revenue Service issued six notices requesting comment to help draft regulations for this purpose. Notice 22-49 specifically requests comment on certain energy generation incentives, including the §45 ITC and the §48 PTC.

Stay tuned for more analysis and insight as BTU Analytics reviews the latest regulatory developments and considers their impact on power markets.

BTU Analytics is a FactSet Company. This article was originally published on the BTU Analytics website.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.