US Tax Incentive Sparks Solar Initiatives on Former Coal Sites

The Biden Administration's Inflation Reduction Act has introduced two bonus credit programs aimed at directing renewable energy deployment toward communities affected by coal mine and coal-fired plant closures, as well as low-income areas. These initiatives represent a concerted effort to address climate change and promote sustainability within the energy sector.

According to a recent survey conducted by the American Council on Renewable Energy (ACORE), over 90% of renewable energy investors and developers are showing some degree of preference for projects in these targeted regions. This signifies a significant shift towards prioritizing environmentally responsible investments.

One noteworthy feature of this program is its focus on retired coal-fired power plants. These sites, with their existing grid connections, offer significant opportunities for utility-scale solar development. This is in contrast to greenfield projects, which require new grid connections, a lengthy and costly process due to dwindling grid capacity. The slow approval of new grid connections has made closed coal plant sites increasingly attractive to developers seeking streamlined growth opportunities.

In addition to providing ample land for solar projects, closed coal plant sites often come with existing transportation and utility infrastructure. However, the development of closed coal mining sites is also gaining traction, offering unique opportunities but presenting challenges due to complex topography and land ownership issues.

One successful example of leveraging the bonus credits is the 710 MW Sherco solar project in Minnesota, developed by utility Xcel Energy. This project includes 10 MW of battery capacity that qualifies for the bonus credits, replacing 2.2 GW of coal-fired capacity. These credits enhance the competitiveness and feasibility of projects, encouraging their development.

Moreover, areas designated as energy communities often have land constraints that favor solar and battery deployment over wind farms. These regions, often urban or industrial areas with limited land and wind resources, are better suited for densely developed solar and battery projects.

The Internal Revenue Service (IRS) recently provided guidance on the Low-Income Communities Bonus Credit Program, another component of the bonus initiatives. This program seeks to promote renewable energy adoption in low-income areas and offer social and economic benefits to communities facing environmental challenges. It is specifically targeted at smaller projects with capacities below 5 MW, which have historically been challenging to finance under existing schemes.

Tax equity structures can be complex and costly, often making it unattractive for investors to fund smaller projects that yield fewer tax benefits. However, these smaller projects align well with solar and battery storage, and the level of bonus credit depends on the type of area. Projects in low-income or American Indian communities qualify for a 10% bonus credit, while community benefit projects and those in areas with low-income affordable housing schemes are eligible for a 20% bonus. Affordable housing projects are often located in dense urban areas, making solar arrays, particularly rooftop installations, the preferred choice.

Despite the complexities, these bonus credit programs have received praise from industry organizations like the Solar Energy Industries Association (SEIA). They are seen as critical steps in expanding clean energy access to communities in need while emphasizing the government's commitment to addressing climate change through the Inflation Reduction Act.