Tax Credit to Transition Coal Towns Blunted by Law’s Definition

Coal communities trying to lure development are likely to face competition from brownfields and areas with less fossil-fuel employment under a provision of the new climate and tax law intended to breathe life into areas with fading energy industries.

U.S. energy officials, private developers and communities are eagerly awaiting guidance from the Treasury Department on the scope of the 10% bonus tax credit for projects located in what the climate and tax law describes as “energy communities.” Last week, the Treasury Department opened a public comment period for this tax credit and others, with comments due Nov. 4.

The benefit—along with other additional credits to spur projects that pay prevailing wages and tap apprenticeship programs—is central to the Biden administration’s goal of making sure areas that have long depended on fossil fuels benefit from clean energy. It will likely cover projects in Appalachia decimated by mine and plant closures—the places championed by Sen. Joe Manchin (D-W.Va.), whose support was required for passage of the bill, known as the Inflation Reduction Act (Public Law 117-169).

But the bill’s definition of an “energy community” could span half the country, according to a recent analysis by environmental research group Resources for the Future.

If the interpretation is accurate, “the energy communities provision in the IRA does not target the communities that are most dependent on fossil fuels in a very precise way,” said Daniel Raimi, an RFF fellow and director of its Equity in the Energy Transition Initiative, who drew up a map with Sophie Pesek, an RFF research analyst.

“But if the intention is to make lots of the United States eligible for this additional tax credit, then it does do that,” Raimi said.

Expansive Definition

The law includes any census tract, or adjacent tracts, where a coal-fired power plant has closed after 2009 or where a coal mine has closed after 1999, qualifying much of the region.

But census tracts can span large areas, Raimi and Pesek noted. The law includes two other categories that may not encompass the most energy-dependent places: Brownfield sites, which total roughly 25,000 nationwide and cluster in the Great Lakes region, and a fossil-fuel employment threshold that sits well below the national average, according to their analysis.

Put together, the RFF map shows places reeling from coal closures competing with places like Denver and surrounding suburbs as well as a wide swath of the West Coast.

“If they’ve expanded it to include all these other things, it might dilute the impact,” said James Van Nostrand, a law professor and director of the Center for Energy and Sustainable Development at West Virginia University. “I think the brownfield thing is just way too broad. Is it really going to be the targeted relief it’s designed to be? It’s a huge concern.”

An aide for the Senate Energy and Natural Resources Committee who spoke on condition on anonymity called the RFF analysis “overly generous” in its estimates, adding that the law allows coal communities to successfully compete for development.

‘Pretty Big Holes’

Clean energy developers clamoring for the credit are studying the provision.

The American Clean Power Association published its own map for members that showed more limited areas than the RFF study. In a PowerPoint shared with Bloomberg Law, the group noted seven key questions, such as whether the government would publish its own map and how it would treat projects partially in a qualifying energy community, including offshore wind projects that may interconnect in qualifying communities.

Solar and storage projects are moving forward, but “there are certainly companies waiting on guidance before committing to a project site or signing agreements,” said Ben Norris, senior director of regulatory affairs for the Solar Energy Industries Association.

Outside of clearly defined coal communities, Treasury Department guidance could expand or shrink the qualifying territory depending on what industry and employment data defines fossil fuel employment, said Harriet Wessel, an associate in Norton Rose Fulbright’s Houston office.

Communities can also qualify if at least 25% of local tax revenues are related to extraction, processing, transport, or storage of coal, oil, or natural gas—but it’s unclear how to get local tax revenue data in enough granularity to target investments, Wessel said.

“People are making decisions to invest, and they’re looking to transact on this information in the energy space, and they can’t do that if there’s no certainty,” Wessel said. “I would say there are some pretty big holes.”

Challenge on Guidance

The challenge for agencies will be to draft guidance “as soon as possible, and hope there will be little or no litigation,” said Dan Reicher, senior research scholar at the Doerr School of Sustainability at Stanford University and former assistant secretary of energy for energy efficiency and renewable energy.

“I don’t think there’s any great clarity right now as to how this is all going to operate,” Reicher said. “The guidance that comes could make or break that for some of these communities.”

Meanwhile, coal communities are working hard to assemble energy transition plans that harness the power of the tax credits, said Brian Anderson, executive director of the Biden administration’s Interagency Working Group on Coal and Power Plant Communities and Economic Revitalization.

Planned West Virginia projects considering the tax credits include solar farms on former surface mine sites, an aerospace manufacturing hub powered by a renewable energy microgrid, and a new natural gas plant with carbon capture systems, said Marc Mignault, an associate with Bowles Rice LLP in Charleston, W.Va.

“We believe we will likely see many projects look to the IRA tax credits and the additional incentives applied to energy communities,” Mignault said. “We may also see projects not related to clean energy projects look to incorporate clean energy to be able to benefit from said tax credits.”