With Washington in retreat, governors and mayors need to double down on clean energy investments that make sense economically, fiscally and environmentally.
Federal tax incentives — along with grants under the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law of 2021 — were speeding the development and deployment of clean energy projects. Without these incentives, progress will slow. According to the Princeton REPEAT project, the percentage of electricity generated by carbon-free sources will rise to just 57 percent by 2035, compared to 74 percent if all the clean energy incentives under IRA remained in place.
Under OBBA, solar and wind projects must commence construction by July 2026 or the project must be in service by 2027 in order to qualify for tax credits. For the purchase of eligible electric vehicles and charging equipment, the timeline is even shorter: Vehicles must be acquired by the end of this month and charging stations must be in service by the end of June 2026.
In response, state and local governments need to speed up existing planning, design and procurement efforts related to clean energy projects where federal incentives are about to be eliminated.
Here are a few ways to do this:
Reset capital plans to take advantage of the remaining window for key tax credits. For public projects where direct pay is available as a funding source, revise multiyear capital plans to move what might have been outyear projects to the front of the line to take advantage of direct pay.
Use emergency authorities to expedite the contracting and regulatory processes necessary for clean energy projects. State and local governments should seriously consider declaring a state of emergency based on the threat to the environment from climate change. Doing so could expedite government procurement and regulatory review for many clean energy projects.
Focus on projects that utilize the IRA’s remaining clean energy credits. State and local governments should also focus on planning and executing projects where tax benefits remain available under direct pay beyond 2027. Under the reconciliation bill, the tax credits for storage, geothermal, hydropower and nuclear remain largely intact. Some of the most ambitious public-sector projects that have already benefited from tax credits under direct pay were for investments in geothermal power that would seem to continue to be available under the reconciliation bill.
Expand the use of and availability of technical assistance to local governments and nonprofit organizations. In addition to the early phaseout of solar and wind credits, OBBA also imposes a new set of restrictions on projects involving prohibited foreign entities (PFEs). Rules related to the beginning of construction and PFE guidance documents are likely to make accessing tax credits for wind and solar projects before the phaseout more complicated. Michigan, Minnesota, Washington, Pennsylvania and Rhode Island were all at the forefront of developing technical assistance programs before OBBA.
States’ Own Money
State and local governments should also consider creating new dedicated funding sources for clean energy investments that will pay for themselves over time in operational savings.
Illinois passed the Climate and Equitable Jobs Act in 2021, one year before the IRA. One Illinois solar developer predicted that a solar project with IRA tax credits that would have paid for itself in three years will now take five years to pay for itself; without state incentives, it would take 10 years.
Denver; Orange County, N.C.; and Portland, Ore., were all well positioned to take advantage of direct pay because they had already created dedicated funding sources for clean energy investments prior to IRA’s passage.
State and local governments are dealing with enormous economic uncertainty, so new, recurring funding for clean energy investments may be difficult to find. One answer may be reserve funds. Still, in many ways, this is a difficult time for state and local governments to dip into their reserve funds because of economic uncertainty and the need to address funding gaps in Medicaid and the Supplemental Nutrition Assistance Program created by OBBA.
But state and local governments with healthy fund balances should assess whether they can use reserve funding for nonrecurring investments in government clean energy projects that will save money over the long term.
Laurel Blatchford is the former chief implementation officer for the Inflation Reduction Act at the U.S. Department of the Treasury. David Eichenthal is a visiting research scholar at the Center for Urban Research at the CUNY Graduate Center after serving as a Biden White House aide working with the Treasury Department and Domestic Policy Council.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
