Identifying the Inflation Reduction Act’s Energy Communities

The Inflation Reduction Act (IRA) put forth measures that will undoubtedly accelerate the US’ buildout of wind, solar, storage, and emerging technologies. While both the production tax credit (PTC) and investment tax credit (ITC) were expanded, projects that meet certain requirements are eligible for adders to their tax credits. In upcoming Insights, we will focus on one of those adders that provides projects an additional 10% credit: energy communities. We will also discuss where these energy communities are, what projects are already proposed there, and how they will evolve in the future. However, today’s Energy Market Insight will focus on identifying energy communities that are created by coal-fired unit retirements.

All projects that are eligible for PTCs and ITCs (wind, solar, storage, nuclear SMRs, carbon capture, etc.) are eligible for a 10% increase in their credits if the project is built in an energy community. The IRA defines an energy community as:

• A brownfield site as defined by the EPA
• A metropolitan statistical area or non-metropolitan statistical area with an above-average unemployment rate and either greater than 0.17% direct employment or greater than 25% local tax revenues related to coal, oil, or natural gas processes
• Census tracts containing mines that have closed after December 31, 1999, and any adjacent tract
• Census tracts containing coal-fired generating units that were retired after December 31, 2009, and any adjacent tract

BTU Analytics discussed previously how coal’s share in the US capacity mix has steadily declined. Since 2010, 122.7 GW of coal-fired units have retired in the US Lower 48. Combining those retirements with the 83,776 census tracts also found in the US Lower 48 creates the map shown below.

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!

The map above shows energy communities as they stand today. However, with an additional 19.5 GW scheduled to be retired by 2025, these tracts will expand. The map below shows currently qualifying tracts (black) and two flavors of potentially qualifying tracts: tracts where a coal unit currently has a planned retirement date (blue) and tracts with a coal unit that has no announced planned retirement date (purple).

The noticeable difference in tract size in the West vs the East is due to how census tracts are determined in both areas. Each census tract is designed to have an average of 4,000 people with a minimum of 1,200 and a maximum of 8,000. This means that retired coal units in more densely populated areas of the country will have a smaller area of land designated as an energy community compared to coal units that were in a more sparsely populated location. As a result, the West region easily has the most land available for renewable energy projects looking to increase their PTC or ITC, as shown in the graphic below.

Despite having the third least amount of qualifying land among ISOs, ERCOT has the most amount of planned renewable capacity slated for qualifying census tracts. Tax programs, such as Chapter 313, higher solar and wind potential, and unique market structure help explain why there would be more projects within ERCOT. Based on the amount of land available, we may expect to see more renewable projects target MISO and SPP, as they have the 2^nd and 3^rd most amount of qualified land, respectively.

The impacts of this section of the IRA may already be visible in Montana. Talen Energy recently announced that they are buying out Puget Sound Energy’s stake of the coal-fired Colstrip power plant. Two units of the plant were retired in 2020, thus qualifying 9.5 million acres surrounding the unit as an energy community and making Talen’s previously announced 600 MW Silverthorn Wind project eligible for the 10% adder. How much of an impact this section of the IRA has in other parts of the US remains to be seen.

Be sure to check back in the coming weeks as BTU Analytics continues to explore the impacts of the IRA and energy communities in future Insights.

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.