U.S. Department of the Treasury

Theodore Lee, Deputy Assistant Secretary for Tax Policy and Delivery

Anisha Steephen, Office of Tax Policy

The Low-Income Communities Bonus Credit Program (the Program) is part of the Biden-Harris Administration’s Investing in America agenda – a transformative set of investments designed to create jobs, lower costs for American families, and spur an economic revitalization in communities that have historically been left behind. The U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) established the Program under Section 48(e), which was added to the Internal Revenue Code by the Inflation Reduction Act (IRA) to promote cost-saving clean energy investments in low-income communities, on Indian lands (as defined in statute), as part of affordable housing developments, and benefitting low-income households.

The Program is an unprecedented incentive to increase solar and wind installations in low-income communities. Section 48(e) increases the Section 48 energy investment tax credit of 30 percent (assuming prevailing wage and apprenticeship requirements are met) by 10 or 20 percentage points, making it a valuable bonus to increase clean energy development and adoption. The Program provides 1.8 gigawatts of annual capacity available to eligible solar or wind facilities with maximum net output of less than five megawatts. The program will transition to a “technology neutral” program that accommodates additional clean energy technologies in 2025 when Section 48E(h) takes effect. Treasury and IRS partnered with the U.S. Department of Energy (DOE) to manage an applicant portal, review applications, and make application recommendations to the IRS.

In its first year, the Program received over 54,000 applications from 48 states, the District of Columbia, and 4 territories, and approved over 49,000. These approved applications total nearly 1.5 gigawatts of expected energy capacity and approximately $3.5 billion in public and private investment into communities. As described below, these facilities are estimated to generate $270 million in offset energy costs annually.

To help effectuate the new statutory provision, Treasury and the IRS established several broad goals for the Program:

• to increase adoption of and access to renewable energy facilities in low-income communities and other communities with environmental justice concerns;
  • to encourage new market participants; and
  • to provide social and economic benefits to individuals and communities that have been historically overburdened with pollution, adverse human health or environmental effects, and marginalized from economic opportunities.

In August 2023, when Treasury and the IRS released the final regulations for the Program, which were the first final rules issued for the IRA’s tax provisions, Deputy Secretary Wally Adeyemo outlined Treasury’s approach to this first-of-its-kind program to drive an inclusive clean energy economy. The approach focused on:

• setting ambitious goals to keep Treasury accountable to the public;
  • listening to those most impacted by economic, climate, and environmental inequality;
  • creating access for the people, places, and institutions that do not always benefit from federal resources; and
  • taking the long-term view on our investment.

New data from Statistics of Income at the Internal Revenue Service offer summary statistics on awards from the Program’s first year of operation. These data highlight how the IRA has spurred clean energy investments that serve low-income households and are located in underserved places and on Indian lands. These results are in line with Secretary Yellen’s modern supply-side economics framework: Investment in underserved people and places can lead to disproportionately higher rates of return for the nation’s economy, and federal investments – like the ones provided by this Program – will simultaneously promote economic growth and help address inequality.

Background

Renewable energy facilities provide significant savings to adopters and promote clean energy generation, but research indicates renewable energy adoption rates are relatively low in low-income communities, predominantly minority communities, environmental justice communities, on Indian lands, and in other disadvantaged communities. ^[1] For example, research indicates that inequity in solar adoption reflects various structural, social, and economic challenges.

Solar: A Case Study

Adoption of solar power is one prominent example of structural inequity resulting from a scarce technology being deployed in a market with income inequality among consumers.

Research describes social challenges to solar power adoption, including policies and regulations that can have the effect of favoring adoption by high-income households. ^[2] Additionally, there can be a lack of trust in key energy institutions, including some utilities and solar power providers, in low-income communities and amongst disadvantaged demographic groups. ^[3] Systemic differences in housing within low-income communities such as household income and homeownership status in low-income communities also pose adoption challenges for renters and tenants of multifamily buildings who may not be able to own energy systems. ^[4]

For many underserved communities, economic challenges include high upfront costs to own energy systems, ^[5] and solar installer preferences to market to relatively affluent households. ^[6] Native communities face many of these challenges and also a “range of other barriers, including complex project economics, Tribal technical and human resource capacity, project funding and financing obstacles, and regulatory challenges.” ^[7]

At the same time, business ownership models can influence and promote solar adoption equity. System leasing models have significantly increased low-income rooftop solar adoption, ^[8] and there are some rooftop solar installers that specialize in serving low-income customers, such as by developing products that cater to low-income households. ^[9] Further, there is evidence that adoption is higher in communities with local providers and installers physically headquartered in low-income communities. ^[10] In addition, intermediary actors such as community-based organizations may help identify and implement measures to enhance solar adoption equity. ^[11] This may include community or cooperative ownership models. Finally, solar purchasing models like community solar have emerged as an effective measure to provide some equitable clean energy access to renters and low-income households. ^[12]

As demand for renewable energy grows and costs decline, there are positive trends for broader adoption. Recent solar adoption data indicates that owner-occupied Black, Latino, and Asian households have significantly increased adoption of rooftop solar over the last decade; efforts to address disparities in solar adoption could help to address income disparities as well. ^[13]

Program Design

Encouraging Facilities That Provided Direct Savings to Low-Income Households

The Program addresses some of the adoption challenges in low-income and Tribal communities, and challenges faced by renters and those without the resources to purchase or finance energy systems. It did so by incentivizing four categories of eligible facilities with specific requirements and capacity available in 2023, namely:

• 700 megawatts available for facilities located in a low-income community;
• 200 megawatts available for facilities located on Indian lands as defined in section 2601(2) of the Energy Policy Act of 1992;
• 200 megawatts available for facilities that are part of a qualified low-income residential building project; and
• 700 megawatts available for facilities that are part of a qualified low-income economic benefit project.

Treasury and the IRS chose to distribute the available 2023 Program year capacity across categories to capture current market readiness, while also signaling a desire to spur investments in more nascent market segments and facilities that provided direct savings to low-income households. For example, under the final regulations, qualified low-income residential building projects must equitably share the financial benefits of the electricity produced among residents of the affordable housing building. Additionally, energy facilities that are part of a qualified low-income economic benefit project must dedicate at least 50 percent of the financial benefits of the electricity produced from the facility to reducing the utility bill costs for individual low-income households in the form of a minimum 20 percent bill credit discount.

Using Additional Selection Criteria

To further the Program’s potential impact and to meet statutory objectives, Treasury and the IRS designed the Program to provide pathways for the broad adoption of clean energy. Treasury and the IRS consulted the breadth of research around the barriers to adoption of renewable energy technology by low-income communities and used additional selection criteria to encourage energy facilities with certain characteristics beyond Program eligibility. Per the Program’s final regulations, at least 50 percent of the Program’s capacity in each category was set aside for projects that meet additional selection criteria. These criteria provide access to institutions that have the potential to best serve low-income communities through ownership models designed to benefit low-income communities and encourage clean energy in areas that have historically seen the least investment and where adoption of clean energy may require additional incentives like the Program. Because these applicants and facilities may need more time to put together competitive applications, the final regulations and additional guidance established these set-asides and an initial application period of 30 days during which applications received earlier did not receive priority.

The additional selection criteria for the Program fall into two categories: ownership criteria and geographic criteria. Ownership criteria are based on facility ownership, and include facilities owned by Tribal enterprises, Alaska Native Corporations, renewable energy cooperatives, qualified renewable energy companies, and qualified tax-exempt entities such as nonprofits and state, local, and Tribal governments. Geographic criteria are based on the location of the facility and include facilities located in areas with the highest energy burden and the least investment as determined by the Energy Category of the Climate and Economic Justice Screening Tool (CEJST) or designation as Persistent Poverty Counties. ^[14] The additional selection criteria are crucial to prioritizing projects that meet the Program’s goals, as well as allocating capacity efficiently.

First Year Award Statistics

There was robust demand for the Program in the first year, which was open for application submissions from October 19, 2023 to February 29, 2024. In total, the Program received more than 54,000 applications from 48 states, the District of Columbia, Puerto Rico, American Samoa, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, requesting over four times the 1.8 gigawatts of direct-current solar and wind generation capacity available for allocation. ^[15]

Through a rigorous process, the IRS awarded allocations to more than 49,000 solar energy facilities across the country. There were only a small number of applications from and no awards to qualified wind facilities. While only certain Program categories were oversubscribed, awards were prioritized toward facilities that met additional selection criteria, over facilities that did not meet additional selection criteria and capacity was allocated toward categories that provided direct savings to households. 325 megawatts of unused capacity rolled over to the 2024 Program year.

_{Detail may not add to total because of rounding.} 

_{^[1] Application categories are established in IRC 48(e)(2) and further described in 26 CFR 1.48(e)-1(b)(2). Subcategories for facilities located in a low-income community are described in 26 CFR 1.48(e)-1(i).}

_{Source: IRS, RAAS, Statistics of Income, August 2024.}

FIGURE 1 – Energy Capacity Awarded By State And Territory In Megawatts (MW) Direct Current

_{Source: IRS, RAAS, Statistics of Income, August 2024}.

Of these over 49,000 energy facilities awarded an allocation, approximately one-quarter of the awards went to energy facilities meeting additional selection criteria. These facilities accounted for almost two thirds of the allocated electrical capacity. Of those awarded applications that met geographic criteria, more awarded applications are in areas of high energy burden as indicated by the CEJST, than are in Persistent Poverty Counties. Facilities that met ownership criteria included facilities owned by Tribal Enterprises, renewable energy cooperatives, qualified renewable energy companies, and qualified tax-exempt entities.

FIGURE 2 –Energy Capacity Awarded By Additional Selection Criteria In Megawatts (MW) Direct Current *

_{* Detail may not add to total because of rounding.
Source: IRS, RAAS, Statistics of Income, August 2024.}

Anticipated Economic Impact

As intended, these awards are supporting clean energy investments and energy cost savings in communities across the country. Once they are built and come online, the approximately 1.5 gigawatts of awarded energy facilities are expected to generate on the order of 2 billion kilowatt hours of clean electricity each year (using national average figures) which is the equivalent to the annual electricity use of 200,000 average-sized U.S. households. This is estimated to be around $270 million in offset energy costs annually. ^[16]

Facilities that received allocations in the Program’s first year include:

• Over 48,000 behind-the-meter residential energy facilities to reduce household electricity costs for single family or multifamily residences;
• Nearly 100 new energy facilities to be developed on Indian lands;
• Over 800 energy facilities to be installed on affordable housing developments serving thousands of low-and middle-income residents; and
• Over 300 energy facilities, including community solar, which must use at least 50 percent of the financial benefits of the energy produced to serve low-income households.

Addressing Energy Burdens for Low-Income Homeowners and Renters

These investments work to address inequities in energy burden that families in low-income communities face (i.e., the percentage of their income that they spend on home energy costs). Low-income families across the country face higher energy burdens, up to three times that of other families. ^[17] By design, the projects receiving Program allocations will reduce the financial burdens faced by large numbers of low-income households, particularly through the sharing of financial benefits required for qualified low-income residential building projects and qualified low-income economic benefit projects.

Creating Access for Increased Adoption

The Program is increasing clean energy adoption across the country. Awards were concentrated in areas with high energy burden as indicated by meeting the CEJST additional selection criteria, reflecting an opportunity to provide meaningful household energy savings. Awards in the Program’s first year were predominantly made in states with established solar markets and supportive regulations. However, the awards also reflect demand in states with emerging solar markets. These are expected to make up a growing portion of the Program over time as the market responds to the Program’s incentives to serve areas around the country including those with the lowest levels of historical investment.

The Program also made progress in creating access for new market participants. Increased participation and business models that serve local needs provide consumers more options for clean energy adoption. The application data indicates there is positive momentum by state, local, and Tribal governments, in addition to community-led tax-exempt organizations and energy cooperatives. Additionally, some applicants meeting ownership criteria are also considered applicable entities for IRA’s novel elective pay provision under Section 6417, which for the first time allows for a direct payment in lieu of a tax credit for certain tax-exempt entities. Utilization by tax-exempt entities that can meet the requirements of both Section 6417 and the Program may continue to increase.

Supporting Local Economic Development

Increased solar installation is driving more economic activity and supports jobs and business activity in underserved and Tribal communities. The over 49,000 energy facilities awarded allocations represent approximately $3.5 billion in investment, based on current average prices. [18] The United States continues to see rapid growth in solar jobs driven by the IRA. ^[19] Approximately two-thirds of U.S. solar jobs are in installation and project development, with the residential rooftop and commercial-scale solar installations supported by the Program creating more jobs per megawatt than large utility-scale solar projects. ^[20]

Many installers are small businesses and small businesses are vital to the economic opportunities for low-income communities. Businesses owned by socially and economically disadvantaged individuals can have substantial local impact, particularly in underserved and underrepresented communities. Supporting these businesses creates jobs, attracts other businesses and investments to the area, and overall strengthens local economies. Many of the facilities that are greater than 1 megawatt will also be subject to the IRA’s prevailing wage and apprenticeship requirements to further incentivize good jobs and workforce development in these communities.

Conclusion

The IRA is an historic investment in clean energy. With just two years having passed since the IRA’s enactment, it will take time to see the full impact of these investments, but there are encouraging early trends. As clean energy technologies are deployed in urban and rural communities across the country, families’ energy burdens will be reduced, communities will be better prepared for climate change, and the country will advance toward its climate goals. All the while, these investments are planting the seed for long-term economic growth, spurred by expanding our productive capacity and investing in all Americans and all communities.