Demystifying “Energy Communities” and What It Means for Offshore Wind

The Internal Revenue Service (IRS) has ruled that renewable energy developers may receive a bonus tax credit if their project qualifies in areas designated as an “energy community.”  

On April 4, the IRS released updated guidance on the Energy Communities Bonus Credit, a new tax credit that was included with the passage of Inflation Reduction Act (IRA) in 2022. The tax credit provides a 10% bonus credit for renewable energy projects in areas designated as a so-called energy community when construction starts – therefore providing clarity to project developers to utilize the bonus credit. 

The inclusion of the Energy Community Tax Credit in the IRA was intended to ensure communities that have been instrumental in the production of fossil fuels are not left behind in the transition to renewable energy sources. Specifically, the credit will incentivize brownfield redevelopment and revitalize the economies of coal and power plant communities.  

While the bonus credit applies to an array of renewable energy technologies, the tax credit is particularly beneficial to offshore wind as developers may qualify for the bonus credit if the project’s onshore substation is deemed to be within an energy community. 

The tax credit is expected to boost project economics, as the 10% bonus is incremental to the Investment Tax Credit (ITC) or Production Tax Credit (PTC). For example, if built within an energy community, a project with an ITC of 30% can qualify for a 40% ITC. For the PTC, a project that qualifies for a $27.50/ MWh PTC will be eligible for an extra credit value of $2.75/ MWh. 

Nonetheless, the bonus will play different roles in the offshore wind markets around the US, depending on offtake mechanisms in place and the density of nearby qualifying energy communities.  

Will your project qualify?  

The Renewables Consulting Group (RCG) completed analysis on the three primary categories that would make a location an energy community, as they relate to offshore wind markets in the US.  

Generally speaking, RCG’s preliminary geospatial analysis of the bonus credit criteria shows that offshore wind projects in the Gulf of Mexico and Central California are more likely to qualify for the energy communities’ bonus than projects in the Northeast, Mid-Atlantic, and Pacific Northwest. This geographic distribution positions the ITC to support emerging US offshore wind markets. 

Brownfield Site  

A brownfield site is generally defined as real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant and certain mine-scarred land. Additional details on the specific definitions and exclusions are available within the IRS guidance.  

The EPA continually expands its brownfields database. Therefore, brownfield energy communities will change yearly. The map below reflects the EPA’s comprehensive brownfield database. 

Retired / Closed Coal Mines and Coal Fired Power Plants  

This category refers to a census tract and any directly adjoining census tracts in which (i) a coal mine has closed after December 31, 1999 or (ii) a coal-fired electric generating unit has been retired after December 31, 2009. This data is sourced from the EIA and the Mine Data Retrieval System (MDRS).   

Fossil Fuel Employment / Tax Revenue Criteria   

This category includes a metropolitan statistical area (MSA) or non-MSA that has had at any time since December 31, 2009 at least 0.17% direct employment or at least 25% local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas,and  an unemployment rate at or above the national average for the previous year. No publicly available database of local tax revenues related to fossil fuels is currently available.   

The US Department of Energy (DOE) has not yet released an official map overlaying the 2022 unemployment rate with the MSAs/non-MSAs with at least 0.17% direct employment in fossil fuels. However, RCG has completed an analysis to determine the MSAs that may meet the IRS criteria.  The analysis compared to national unemployment average of the previous year, between the years of 2017 to 2021, and overlaid it with the direct employment data. Energy communities will change yearly as employment levels in the fossil fuel industry fluctuate over time.   

This analysis demonstrates that qualifying MSAs/non-MSAs would have changed frequently over the past five years. Additionally, national unemployment rates for 2020, significantly reduced the number of qualifying MSAs/non-MSAs in 2021, demonstrating the dependence on previous year unemployment rates.   

Reflections On Impact  

In emerging markets with widespread energy communities, the availability of this IRA underscores the  opportunity for states to enact offtake policies that define and support offshore wind’s place in each state’s energy future. If government agencies and utilities put in place robust offtake mechanisms in markets like the Gulf of Mexico and the West Coast, they could turbocharge the expansion of offshore wind into new markets, deliver regional economic and workforce benefits and accelerate the energy transition.  

In regions where energy communities are less widely distributed or concentrated around small sites such as brownfields, the availability of the energy communities bonus will vary by project. Most energy communities along the East Coast are brownfield sites and therefore do not cover entire census tracts.  For developers in these regions, this creates a new kind of subsidy landscape.   

Overall, the guidance provides the offshore wind industry with a clear picture of how the energy community credit will impact current projects and how it will be factored into planning for future projects. But critical uncertainties remain. For example, how will developers monetize the credit? How will the locations of the energy communities change from year to year, and how can projects successfully navigate this risk?   

RCG will continue to closely monitor changes and guidance concerning the energy community bonus credit. For more information on this topic or other areas of market intelligence, management consulting and technical advisory services, please feel free to contact directly any of the authors and visit www.thinkrcg.com.