IRS provides guidance to utilities on energy tax credits

The IRS announced Wednesday clarifications to rules affecting clean energy tax credits that are expected to boost bond issuance.

The credits were delivered via the Inflation Reduction Act, and took effect in January, but some utilities were cautious about trying to cash them in until the agency offered guidance. Most of the nation's electricity is provided by investor-owned utilities and merchant generators who receive clean energy incentives via deductions and tax credits. Prior to the IRA, publicly-owned power companies and rural electric co-ops, who combine for about thirty percent of the nation's power, were excluded from receiving the same kind of incentives due to their non-profit status. 

 "I think it will be significant," said John Godfrey, senior government relations director, American Public Power Association. "There's the potential for a transformative new tranche of investments in generation, storage, and other credible facilities."      

The IRA created a mechanism for publicly-owned power companies and co-ops to convert energy credits into funds that can be used to invest in renewable sources of energy including wind and solar. Clarifying the rules is expected to turn on the investment spigot. 

APPA

The APPA believes that "tax-exempt municipal bonds are the single most effective tool for financing investments in public infrastructure, including the generation, transmission, and distribution used to serve public power utility customers." 

Without funding to build out their own renewable energy infrastructure, publicly owned utilities can "green" their portfolio by buying energy through power purchase agreements. In PPAs, a third party owns and operates an energy system and sells the power to the utility who then sells it to its customers. 

The National Rural Electric Cooperative Association is also cheered yet cautious about the new move towards clarity.

"We're pleased to see Treasury unveil this long-awaited proposed guidance to give electric cooperatives direct access to energy tax credits for the first time, said Louis Finkel, senior vice president, government relations, NRECA via a statement. "The proposed guidance is complex, and it will take time to fully understand the impacts." 

The guidance comes in two parts. Section 6417 Elective Payment of Applicable Credits pertains to treating tax credits as a payment of federal income tax and affects tax-exempt organizations including state and local governments, tribal governments, Alaska native corporations, rural electric cooperatives and the Tennessee Valley Authority, the largest publicly-owned utility in the U.S. 

Section 6418 Transfer of Certain Credits deals with transferring eligible credits in a taxable year, including definitions and special rules applicable to partnerships and S corporations regarding excessive credit transfer or recapture events. In both cases, the Treasury is requesting comments on the new rules and promising public hearings. 

The credits don't come completely free of strings.

"As with all things, there's a bit of a caveat," said Godfrey. "To get an elective payment, you must meet the domestic content requirements."

Finding the domestic content for major infrastructure projects remains an ongoing challenge for a supply chain that still has some kinks in it. 

Even with monetized energy credits Godfrey predicts that bonds will still play a prominent role.

"There will definitely be an increase in issuances," he said. "Because we don't have cash on hand. We don't have investors that we can borrow from. We borrow from the owners of bonds."