Update on IRA ITC Adder for Brownfield Sites: How Brown is Enough?
Almost 18 months since the Inflation Reduction Act (IRA) was enacted by Congress, it is reported that the legislation’s provisions are effectively driving renewable energy developers toward projects that utilize brownfield sites. The IRS has issued three guidelines defining an “energy community” and offering safe harbors for brownfield sites to encourage renewable energy development. However, there are still some issues to be addressed, including the lack of IRS guidance on the applicability of exclusions, the need for change in the ASTM Phase I and Phase II site assessment practices, and the risk that the IRS may argue that the brownfield adder is not available.
Understanding the Effects of Inflation Reduction Act on Renewable Energy Projects
It’s been around a year and a half since the Inflation Reduction Act (IRA) was implemented by Congress, which included provisions for renewable energy projects in “energy communities”. Specifically, these “energy communities” can be brownfields as defined under CERCLA.
As explained in a previous blog post, a brownfield is a site where hazardous substances are present but not enough to classify the site under Superfund, RCRA, TSCA.
The IRS has since released three guidance documents concerning the definition of an “energy community”, namely, IRS Notice 2023-29, IRS Notice 2023-45, and IRS Notice 2023-47. These documents provide “safe harbors” for brownfield sites, subject to statutory exclusions. Safe harbors include sites on federal or state brownfield lists, projects with ASTM Phase II assessments confirming hazardous substances, and projects with capacity ≤5MW (AC) with ASTM Phase I assessments identifying potential hazardous substances.
Market State 18 Months Post-Enactment
Post-IRA enactment market analysis reveals a few valuable insights:
- The IRA provisions have positively influenced renewable energy developers to invest in brownfield sites, leading to a significant increase in activity.
- Challenges persist in determining the applicability of the exclusions. Unfortunately, the IRS has yet to provide any guidance on this matter.
- The IRS’s Safe Harbors, meant to simplify qualification for the ITC adder, have unintentionally become a near requirement for obtaining project financing. This has resulted in reluctance from financing parties if a project does not qualify for the safe harbors.
- There has been a shift in ASTM Phase I and Phase II site assessments practices. Previously, developers preferred clean reports, but now, they are seeking reports indicating minor contamination as they are more likely to qualify for the brownfield adder.
- Insurance companies have started to support projects by offering insurance against the risk that the IRS may deem the project ineligible for the brownfield adder.
In conclusion, while the IRA is successfully incentivizing renewable energy development on brownfield sites, there is still a need for further clarity on defining brownfields and addressing associated exclusions.
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