The Inflation Reduction Act is a boon for the entire solar industry, but perhaps no sector benefits more than community solar. Along with the 10-year 30% ITC extension, other tax credit adders meant to expand equity in solar deployment are especially suited for community solar development.
To start, a long-term ITC is welcome news for the community solar industry, since state programs take time to get up and running. Community-solar enabling legislation must be in place at the state level for projects to be built, due to their unique, multiple-off-taker structure. Community solar developers typically set up agreements with utilities, often governed by state policy, that allow subscribers to receive monthly utility bill credits for electricity generated by their share of the solar project.
“You’ve got to first get legislation through, then you’ve got to set up the program, then you have to implement the program. It can be a few years before solar panels even get into the ground,” said Matt Hargarten, VP of campaigns at the Coalition for Community Solar Access (CCSA). “Having 10 years in which to operate is going to be incredibly beneficial to community solar specifically.”
Along with the 30% ITC available for community solar-scale projects are adders that could apply to this sector more than any other. A 10% adder is available for siting projects in “energy communities” — including brownfield sites and former centers for fossil fuel development.
“Because community solar projects are smaller-scale projects, they just naturally lend themselves to some of these brownfield sites. We expect that a number of community solar developers will be attracted to that and move in that direction,” Hargarten said.
The IRA also allows projects under 5 MWAC — which includes many community solar installations — to collect the ITC for interconnection costs. These costs have skyrocketed in recent years, as project queues grow and available capacity on the aging grid shrinks. While utility-scale developers can often afford to take on the high cost of a transformer update, smaller community solar developers cannot.
“Often, these costs can make these projects uneconomical. Now, those costs can be folded into the ITC, so they can get a tax credit on that portion of the project cost,” Hargarten said.
Marc Palmer, founder of solar finance software firm Conductor Solar, expects this provision to push projects that were on the margins into economical territory.
“It’s just going to take a huge lump of projects and it’s going to take them from where they didn’t save the host money to now where they will save the host money,” Palmer said.
The IRA also incentivizes solar projects serving low-and-moderate-income (LMI) populations — an area where community solar has already been a leader. Projects under 5 MWAC can receive a 10% adder for siting projects in low-income communities or on tribal lands, and up to a 20% adder for projects that serve multifamily LMI buildings or that provide at least 50% of the financial benefits to qualified LMI households. The 20% credit only applies to the portion serving eligible low-income households.
“Community solar has already been moving in that direction in the last five years, where state programs across the country have been creating carve-outs for community solar to cater to LMI households, so this is a very natural place for community solar projects to go,” Hargarten said.
One such state program is in New Jersey, which requires community solar projects to serve at least 51% LMI customers. Project developer Solar Landscape has been working on these LMI-focused projects since its founding in 2012.
“That’s our whole business to date in New Jersey community solar. From our perspective, it’s the total essential part of community solar. It just makes a lot of sense, and what the IRA did is formalize that from a federal level,” said Mark Schottinger, president of Solar Landscape.
He believes states developing new legislation will prioritize LMI requirements to align with the IRA as well as state objectives for equitable clean energy deployment. Illinois has already followed closely behind New Jersey, creating a rubric for community solar approval based on factors for community engagement and equity.
“Community solar is increasingly becoming this very versatile tool viewed by both the [federal] government and state governments as a way to accomplish all these policy goals that have been leaned on increasingly, especially the environmental justice equity in energy,” said Stephen Cortes, senior director of public affairs and communications at CCSA. “Community solar specifically has these built-in ways to approach every renter, business, organization, church and institution that other forms of solar just don’t.”
The final big-ticket item in the IRA that will benefit community solar is $7 billion in Environmental Protection Agency (EPA) grant funding for states, cities, tribal governments and nonprofits to create distributed generation programs that benefit disadvantaged communities. CCSA expects community solar to shine in this category too.
“We believe that a lot of this money is going to flow toward community solar programs, whether it’s helping to evaluate the effectiveness, to lower the cost basis or to direct more funding to LMI communities,” Hargarten said.
Community solar was already on an explosive path even before the IRA. In an early August 2022 report, Wood Mackenzie projected at least 7 GWDC of new community solar will come online in existing markets by 2027. As of September 2022, 22 states have an enabling policy in place allowing community solar to flourish. But that leaves 28 states potentially missing a huge opportunity to access new federal incentives.
“The federal government has now drawn lines in the sand of where they want to see dollars going, but those dollars aren’t going to go anywhere unless states take action and pass bills that enable the development of these projects,” Hargarten said.
CCSA lobbies states to adopt community solar legislation and helps them craft policies that work best in a region. Hargarten sees the IRA as another tool to encourage policymakers to act.
“This gives us a platform to go in to show that there’s both credibility to this form of energy and there’s money on the table to incentivize them to move now,” he said. “It’s free money on the table. Do they want to take advantage of it or do they want to allow their neighbors to take advantage of it?”