With IRA tax credit rules finalized, issuers eye renewable projects

Treasury this week released closely watched final rules for renewable energy tax credits that will be available for the first time to cities and states and that could drive an uptick in power deals and bond financings.

"If direct pay works, if we can get through the hurdle of the mechanics, there will be a substantial uptick in bond issuances," said John Godfrey, senior government relations director at American Public Power Association. "A lot of these projects are going to be debt financed."

Treasury on Tuesday released final rules for the tax credits, which for the first time are open to local governments, tribes, states, territories and other tax-exempt entities. While in the past, the lack of a tax liability has meant entities like cities haven't been able to leverage tax credits, the Inflation Reduction Act changed that by treating the credit as a refund for a tax overpayment. Governments can receive 30% of the project costs plus a number of bonus credits. The Biden administration, which calls the provision a cornerstone of the climate law, said in January that more than 200 entities have already applied to finance 1,600 projects.

Detroit is closely tracking the rulemaking and hopes to take advantage of the law's tax credits, said Kevin Bain, the city's director of strategy in the Office of the CFO and Treasury. Bain has written previously on the credits, noting that "troves of money" are awaiting local governments who can figure out how to navigate the rules.

The final rules have helped clarify some of his questions, Bain told The Bond Buyer. The city has also put out a Request for Proposals to hire a tax advisor "to help us identify and apply for tax credits under the IRA, because we know that we don't have the expertise to do it in-house given this a brand new tax process," he said.

Detroit already has plans for a large solar project that "was in part inspired by the ability to get the tax credit," Bain said. It's yet to be determined if the project will have debt financing, he added. Other credit-eligible projects include plans to electrify the city's fleet, install rooftop solar and build out electric vehicle charging stations.

"We see the IRA as a way to accelerate meeting our climate goals in the city," Bain said.

One potential dilemma posed by the final rule that Detroit has already encountered is a timing question over an issuer's fiscal versus calendar year. Since many governments have never filed taxes, they don't have a formal tax year. For those that sync their tax year with a July-June fiscal year, they would have to forgo tax credits for projects that were launched prior to their 2023 fiscal year, noted the Government Finance Officers Association in an email to its members.

The GFOA asked its members for feedback on Treasury's final rules, in particular on the impact of potential fiscal/calendar year hitch.

The rules would restrict some partnerships, a question that has been an "ongoing issue" for public power agencies and other municipal issuers, Godfrey said. Many energy companies would like to bring in governmental entities as passive investors to take advantage of the tax credits, he said. "Our members don't want to be passive investors; we're in the business of public power," Godfrey said. "It seems like the intention of direct pay was to encourage ownership of assets."

Comments are due by May 10 and a public hearing is set for May 20.

The IRA provides $400 billion over 10 years to support climate provisions and features a lengthy list of tax incentives for public and private entities to finance clean energy projects. The law allows tax-exempt and governmental entities, some for the first time, to receive elective or direct payments for 12 clean energy tax credits, including tax credits for electric vehicles, charging stations, as well as major investment and production tax credits.