Why Now is the Time to Invest in Energy Efficiency and Solar for Industrial Properties

The financial incentives and tools to pay for upgrading your property to become more efficient and install solar are better than they ever have been.

This article provides information about the Inflation Reduction Act incentives and an alternative financing option called C-PACE (Commercial Property Assessed Clean Energy) for energy efficiency and solar.

 

The Inflation Reduction Act (IRA) of 2022 includes $369 billion of federal climate-related funding. It is designed to reduce the nation’s carbon footprint by 40 percent of 2005 levels by 2030.

There are many things we know about the IRA and other implementation details that are being developed. Multiple federal and state agencies have yet to issue regulations, guidance, or distribute grants to determine how to move these historic amounts of dollars.

 

Primary Provisions of IRA Relevant to Industrial Property Owners 

  1. 179D tax deduction for energy efficiency improvements to existing and new commercial buildings
  2. Section 48 Investment Tax Credit (ITC) for renewable energy including solar, combined heat and power (CHP), and energy storage

 

Energy Efficiency 

The IRA contains two major tax incentives for commercial property owners to reduce energy use in their buildings, for both new buildings and retrofits. 179D (a tax deduction) is an existing program that was set to expire. The IRA extends it for 10 years and increases the dollar amount an owner can earn.

The 179D incentive provides owners and long-term lessees with a dollar amount per square foot if their commercial or residential buildings meet a certain efficiency standard. Owners of a new construction or retrofitted building can earn up to $5 per square foot, depending on its energy efficiency relative to the ASHRAE standard. See White House Guidebook, page 115 for details. Eligible improvements include: interior lighting, heating, cooling, ventilation, hot water, and building envelope.

The 179D deduction is a stepped benefit, beginning at $2.50 per square foot for a building with a 25 percent reduction in energy usage relative to the ASHRAE standard. Every percentage point thereafter adds 10 cents until the maximum of $5 for 50 percent or more energy savings. These numbers apply only to those owners who pay workers a prevailing wage and registered apprenticeship requirements. Those who don’t pay prevailing wage are eligible for a maximum of $1 per square foot.

The IRS has not yet published guidelines for the 179D deductions thus many details are still unclear. To qualify, owners will need a third party to certify the change in energy efficiency.

 

Renewable Energy and Storage 

The IRA extends the investment tax credit (Clean Electricity Investment Tax Credit (Sec. 13702)). There is a 10-year extension of 30% of the cost of installed equipment to be tax exempt, falling to 26% in 2033, and 22% in 2034. That 30% credit also applies to energy storage, meaning retrofits of batteries to solar arrays can benefit. The ITC is eligible for an additional 10% – 20% boost for projects in certain communities and buildings. The ITC includes a 30% standalone credit for energy storage. Interconnection costs will be included for projects smaller than 5 MWac.

The IRA includes significant “adders” to raise the ITC beyond 30%. Projects featuring a minimum amount of domestically produced content are eligible for another 10% incentive. To reach that target, all steel and iron must be U.S. made and at least 40% of manufactured goods – solar panels, inverters, electrical gear – must qualify too, with certain percentages to rise in the future.

An additional 10% incentive is available to projects in designated “energy communities” – brownfield sites and former fossil fuel production areas. In the latter case, county subdivisions – or “census tracts” – and their immediate neighbors, are eligible as long as there has been coal, oil, or natural gas extraction since 2000.

C-PACE (Commercial Property Assessed Clean Energy) is a mechanism for commercial building owners and developers to finance energy and water efficiency improvements, renewable energy installations, IAQ and resiliency projects through a special assessment similar to a property tax assessment. It is a financing mechanism that allows 100% upfront financing, up to 30-year terms, and the special assessment stays with the property if a sale occurs. New and gut rehab buildings in Philadelphia are already required to meet a high energy efficiency standard (IECC 2018). C-PACE requires property owners to exceed the building energy code, but no specific amount above code. Most costs associated with building envelope, lighting, and HVAC can be financed with C-PACE, reducing the need for high cost mezz debt and equity. The illustration below shows a capital stack with no C-PACE in the center, C-PACE displacing higher cost capital on the left, and on the right, C-PACE is being used to go deeper with energy efficiency and/or on-site solar.

For existing properties, you only need to show that the new equipment or energy saving measures are more efficient that what they are replacing.

C-PACE has deployed more than $3.4 billion in private capital nationwide since its inception in 2000. In the three years since C-PACE has been available in Philadelphia, $160MM of capital has been financed in 13 different projects. Check out the Philadelphia projects which have used C-PACE here.

Lisa Shulock is Director of Commercial Programs with the Philadelphia Energy Authority. For more information, contact Lshulock@philaenergy.org.

 

IRA Resources 

Below are resources for you to explore about the IRA.

Looking for PACE Support in your county? Use the links below: