Opinion & Commentary

The IRA paradox: Energy for all leaves some of us behind

The IRA paradox: Energy for all leaves some of us behind
Solar panels are installed on a home in Peurto Rico by Barrio Eléctrico (Courtesy: Barrio Eléctrico).

Contributed by Lauren Rosenblatt, Co-Founder and CEO of Barrio Eléctrico

Yamil is a husband and father of two small children in Puerto Rico, supporting his family on less than $2,000 monthly net income. With help, he was able to secure a small home close to his workplace; however, the electric utility refused service to the home without payment of thousands of dollars due from a prior resident connected to that address. Because Yamil could not pay the bill for months, he used an extension cord from a neighbor to power his fridge while he attempted to address the situation.

For all of us, electricity is both a fundamental need and enables us to become our most productive selves. It is essential for safety and security, health, and economic development. When expensive or unreliable for a meaningful fraction of the population, it prevents a thriving society. That makes it a public good: it cannot benefit only some of us. It must be there for all of us.

In the last two decades, electricity generation technology has shifted towards renewable energy and distributed energy resources (DERs). DERs disrupt the utility model in which a single operator manages all equipment. After 2005, public policies and regulations drove the transition to cost-competitive large-scale renewable energy. Nevertheless, we have yet to fully realize the potential of DERs to meet growing energy demands.

Holding back the growth of DERs slows the price drops that come with mass adoption. The result is inequality: People with resources are adopting home solar and energy storage. The utility did not offer Yamil an affordable alternative, nor did the market for solar equipment. Any person with more resources would have paid the utility or, more likely, purchased his own solar and energy storage.

The federal government has recognized the need to reverse the uneven distribution of the benefits of DERs. The August 2022 Inflation Reduction Act (IRA) was momentous for electric infrastructure in the U.S. – establishing a host of spending programs and reinvigorating market incentives such as investment tax credits (ITCs) for renewable energy development. Importantly, it reflects the goal of the Biden-Harris Justice40 Initiative that “Federal investments flow to disadvantaged communities that are marginalized, underserved, and overburdened by pollution.”

The IRA: Light and dark

The IRA introduced two changes to the ITC to promote equity in green energy projects. It increases the amount of ITCs available for clean energy aimed at low- and moderate-income (LMI) consumers. It also offers “elective pay” for nonprofits, who are often behind these projects but cannot use the tax credits because they do not have tax liabilities. 

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Investors and nonprofits initially received the expanded ITC regime with enthusiasm. The tax credit modifications have indeed sparked investor interest in renewable projects beyond utility-scale wind and solar.

Since the IRA took effect, Barrio Eléctrico, which develops solar and energy storage within the reach of LMI families in Puerto Rico, says it has seen unprecedented interest in DER projects on the island. Before, Puerto Rico suffered from underinvestment by private capital due to perceived risks like climate change-driven disasters and the creditworthiness of energy customer(s).

Like any investment opportunity, social impact projects must present acceptable risk and return. Incorporating tax equity does not significantly enhance their economics. For instance, tax equity deal advisory costs are too high for projects under $100 million, which is common for distributed energy projects. Smaller projects do not have the same risk profile, economies of scale, and operating margins that utility-scale ventures do. Even with tax equity, the margins from distributed energy projects often fall short of the double-digit returns expected by investors.

In other words, the ITC has been lighter fluid for half the policy battle, promoting energy investments in utility-scale projects that are great for the rapid reduction of greenhouse gas emissions. Alas, the tax credits do not light up the smaller, distributed energy projects taking on the added burdens and expenses of creating energy equity.

Policy over profits

Both DER projects and energy equity generally lag in investment because of the assumption inherent in the ITC regime and our existing electric service model that all aspects of electricity service are and should be profitable enterprises.

Electricity has never been profitable. For example, renewable energy available today at competitive prices involves an incalculable amount of public investment. Regulators mandated renewable energy development when it was not cost-competitive. Utility customers paid for it. Governments invested tax dollars in high-risk technology development and the changes to market rules necessary to incorporate the energy from these new resources. Solar, wind, and energy storage projects today generate handsome returns to their developers but will not repay the tax and ratepayers for decades of investment within a period that any private investor would accept.

The IRA recognizes the government’s role in policies the market is not ready to fund. It created funding programs directed at energy equity, such as the Powering Affordable Clean Energy program under the Department of Agriculture.  PACE and the Department of Energy’s Puerto Rico Energy Resiliency Fund are examples of grants intended to fill funding gaps for renewable energy projects that target the unmet needs of LMI communities.

Energy equity projects need public funding not only because they are more expensive but also because their primary value is the long-term economic viability of individuals and communities. That has real value for all of us, but no individual can claim that benefit solely for himself. The increase in tax credits applicable to these projects helps marginally, but without public investment adequately directed, the energy sector will continue to leave important public policies and the people they serve behind.

No family left behind

Yamil and his son (Courtesy: Barrio Eléctrico)

Yamil learned of Barrio Eléctrico’s alternative energy service and adopted an off-grid, solar+storage system at a price he could afford. Yamil learned how to align household consumption with his energy production because he does not have the luxury of unlimited electricity, but his system provides most of the family’s needs most of the time. 

To serve Yamil and people like him, we must liberate social impact energy from the investor expectations and protections typical for private investment. Energy equity projects require, beyond equipment, a robust investment in people. Community solar cannot be built without expensive public processes and marketing for customer, land, and permit acquisition. Residential portfolios also have high customer education and acquisition costs, as well as higher operating costs due to the specificity of individual homes and the manner in which they use the equipment.

Moreover, if energy equity is to become a guiding principle of our electric sector, those projects must be able to fund the nurturing of their customers to serve as participants in the energy conversation. People need the opportunity to understand the present so they can contribute to the vision of change necessary for the future. This means actively cooperating with the consumers and educating those willing to learn and lead on technology, policy, regulations, and business models.

To its credit, the U.S. government is spending money on alternative technologies, including DERs. If we are all serious about a true energy transformation to an equitable electric service sector, however, we must relinquish the assumption that projects with energy equity must be profitable. We must recognize energy equity as a public investment beyond technology and as one that will pay unquantifiable dividends as an electric sector all of us can rely on.