How Much Does the IRA Energy Community Adder Matter?
For renewable energy developers, the IRA offers bonus tax credits for projects located in "energy communities," broadly defined as areas that will be disproportionately affected by reducing or eliminating fossil fuel activity. The provisions seek to revitalize communities that historically hosted fossil fuels and to stimulate an economic transition. The three categories include coal closures—census tracts (and adjacent tracts) hosting retired coal mines or coal-fired electric generating units; statistical areas, which host a certain percentage of fossil fuel employment, and; brownfields—areas where the presence of hazardous substances, pollutants, or contaminants currently prevent redevelopment, expansion, or reuse.
Looking specifically to the census tract category, data suggests that 14.6 percent of U.S. land area will be eligible for bonus tax credits relating to coal mine closure, whereas eligible retired/planned retirement tracts (and those adjacent) comprise around 10 percent of U.S. land. Though these sites are widespread across the United States, they are particularly concentrated across Appalachia and the Rocky Mountain states. Analyses reveal that in the future, all but one of the country’s existing coal plants could be retired and replaced with clean energy technologies at a net savings to consumers. What’s more, replacing these plants with local wind and solar could generate nearly $600 billion in local capital investment.
Aside from its community benefits, the energy communities’ program offers renewable energy developers a lucrative opportunity. The 10 percent tax bonuses and multipliers are attractive incentives as developers screen the market for profitable sites; as an added bonus, however, retired coal sites also provide a potential solution to the sweeping challenge of interconnection. A typical energy project built in 2022 took five years to interconnect and enter operation; last year, interconnection queues increased 40 percent, totaling 2,000 gigawatts awaiting grid connection in the U.S. But coal closure sites are already connected to the transmission grid and have substations available to convert power for the nearby community.
Questions Raised
On the surface, developers would have an incentive to do projects in energy communities. The list below illustrates the different factors in project development and whether a project in a coal community has an economic benefit compared to a similarly sized project in a greenfield area.
Each site is a case-by-case situation and there is no hard and fast “rule” that all these factors collectively mean that a coal-remediation-turned-renewable-energy project is profitable.
Infrastructure Costs - Positive Economic Benefit Project development on a coal site saves on net $49 - $113 per kWh (AC) of solar capacity or 3-6 percent of total installed solar costs because infrastructure is already in place
Remediation Costs- Negative Economic Benefit Project site will need remediation, but developers are NOT eligible for EPA Brownfield grants ($500,000 - $2 million), which are earmarked for public/non-profits; guaranteed loans are available through DOE’s Energy Infrastructure Reinvestment program but still requires cash outlay. Alternatively, developers can partner with a non-profit to apply for Brownfield grants if they are a project partner.
Soft Costs - Negative Economic Benefit Duration of the interconnection study process may be reduced but removal of existing infrastructure or project redesign to avoid infrastructure and other site conditions mean delays and additional design/engineering costs.
Interconnection Costs - Positive Economic Benefit Existing infrastructure from a coal plant site means a renewable energy project should pass initial screens for interconnection, saving considerable resources
Tax Credits - Positive Economic Benefit IRA allows extra 10 percent through IRS 48c provision. However, project developers must adhere to labor provisions of IRA for this additional adder, which the Dept. of Treasury recently released guidance on.
What Do Developers Think?
Are developers flocking to do these projects? We spoke to several developers to find out. Overall opinion is mixed on whether developers see this as a good business opportunity. The engineering issues associated with these sites, and the liability concerns loom large despite the 10 percent tax credit adder. However, some developers said the community support and the presence of infrastructure plus the adder made this worthwhile. Each of these are discussed in turn below.
Markets Matter: One developer noted that the overall market is the first screen on where to build projects. There are key questions to consider, such as: (1) Is the market favorable to renewable energy projects? (2) Does the state have a clean energy mandate? (3) Is the state in a restructured market? (4) Does the utility commission provide favorable regulatory policies for independent power producers? Answers to these questions matter more than whether coal sites are present or not. So while redevelopment of coal plants for renewable energy may save developers both time and money in some cases, it is far more nuanced than simply pointing to a map and saying these communities will be favored sites for developers. Favorable market conditions and advantageous regulations win out. That said, one developer noted that many of the former coal sites are in PJM, which for some would automatically qualify as a “favorable market”.
Difficult Site Engineering and Technical Work: The consensus among the interviewed developers is that engineering work at a former coal site is exceedingly difficult. For example, land at a coal site will settle, particularly if it has been closed for years, rendering the site unworkable. Solar projects need flat, dry, and sunny locations, but coal sites are in mountainous terrain, and redevelopment under these conditions is challenging at best. One developer said that this is the main reason that they are not actively pursuing projects at coal sites.
Title Ownership: Becoming the sole owner of a former coal site is not an easy process. Surface and subsurface title ownership may involve different legal entities. In fact, one developer commented that there is a cottage industry of people who buy and then later resell titles at former coal sites at a considerable markup. While the 10 percent adder does somewhat close the gap, it may not be enough to wade out the excessive time delay and expense to get site ownership free and clear.
Despite this, some companies are pursuing these sites for redevelopment. One developer is constructing the Martin County Solar Project at Martiki Coal Mine at the border of West Virginia and Kentucky. Upon completion in early 2024, the former coal mine, which has been closed for more than thirty years, will be one of the largest solar energy projects operating in Kentucky. Another 50 MW solar farm is currently under development at the former 5,800-acre Hobet Mine in southwest West Virginia. The solar project will be completed by the end of 2024 and power a 2,800-acre site hosting industry, lodging, and recreation amenities. SunPark – as it is called – will be West Virginia’s largest solar project when completed.
Communities in many states often push back against greenfield solar development, but in Kentucky and West Virginia—both traditional coal states—there is community acceptance of the Hobet and Martiki Mine renewable energy projects. Residents welcome the opportunity for new economic development and the revenue added to their tax base.
Developers outline three main reasons for developing on former coal sites: less competition with others for development, general community acceptance where there may otherwise be a challenge, and the presence of existing infrastructure. Redeveloping coal plants for renewable energy allows faster implementation of new clean energy resources on the grid, and the 10 percent adder provides an enticing incentive. Even so, the opportunity poses several challenges, and interest in these business opportunities is decidedly mixed.
This article was published in partnership with Leyline Renewable Capital.