States have a new opportunity to supercharge their clean energy economies via direct pay, a transformative policy that allows states to help public and nonprofit organizations access deep discounts on clean energy projects that they can build and own themselves.
Direct pay, also referred to as elective pay, was passed in the Inflation Reduction Act (IRA) and allows tax-exempt entities such as states, local governments, and nonprofit organizations to access federal clean energy tax credits for the first time.1 Before the passage of the IRA, only private companies had access to these incentives. Direct pay has finally given tax-exempt public and nonprofit entities a real opportunity to bring clean energy’s job-creating and energy cost- and pollution-cutting benefits directly to more communities. Furthermore, the IRA increased the maximum credit available for certain clean energy projects, from 30 percent to 50 percent—and sometimes as much as 70 or more percent—for projects that are located in energy communities2 and low-income communities3 and built with American-made materials.4 These substantial incentives provide even greater opportunity for new investment and inclusive economic development.
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States have a particularly important role to play in implementing direct pay.5 These provisions are complex, and newly eligible public and nonprofit entities will be navigating these parts of the federal tax system for the first time. State governments can help empower eligible entities—including cities, Tribal nations, schools, municipal utilities, rural electric cooperatives, and community-based organizations—to access these credits by providing bridge loans and other supportive financing, as well as by providing education and technical assistance. States also can lead by example by sponsoring their own projects that use state-owned facilities, lands, and vehicle fleets. In addition, states have an important role in holding their public utilities accountable for taking advantage of these new federal incentives.
States have long played a central role in driving forward America’s clean energy economy.6 Over the past decade and a half in particular, the combination of federal tax incentives,7 state financing programs, and state policy requirements on electric utilities to use more clean energy,8 has dramatically scaled up clean energy in the United States.9 Now, expanded and more accessible federal clean energy tax credits, coupled with state implementation and policy leadership, can help unlock even greater and more equitable clean energy deployment—and America’s path to 100 percent clean energy.
Read more on direct pay and the IRA tax credits
What does direct pay offer?
Under the IRA, the following 12 credits are available to certain tax-exempt public and nonprofit entities via direct pay. These entities will be able to treat the amount of these credits as a payment against tax on their tax returns and receive them as direct payments from the U.S. Treasury:10
- Section 45, production tax credit for electricity from renewables: for production of electricity from eligible renewable sources
- Section 45Y, clean electricity production tax credit: a technology-neutral tax credit for production of electricity from clean—i.e., non-greenhouse gas-emitting—sources
- Section 30C, alternative fuel vehicle refueling property credit: for production of alternative fuel vehicle refueling and charging property
- Section 45Q, credit for carbon dioxide sequestration: for carbon dioxide sequestration
- Section 45U, zero-emission nuclear power production credit: for production of electricity from nuclear power facilities
- Section 45V, clean hydrogen production tax credit: for producing clean hydrogen
- Section 45W, credit for qualified commercial clean vehicles: for purchasers of commercial clean vehicles
- Section 45X, advanced manufacturing production credit: for domestic clean energy manufacturing
- Section 45Z, clean fuel production credit: a technology-neutral tax credit for domestic production of clean transportation fuels
- Section 48, investment tax credit for energy property: for investment in renewable energy projects
- Section 48E, clean electricity investment tax credit: a technology-neutral tax credit for investment in facilities that generate clean electricity
- Section 48C, advanced energy project credit: for investments in advanced energy projects
Providing bridge financing to help local and community clean energy projects address upfront costs
States should consider utilizing financing programs and institutions to support local public and community-owned clean energy projects seeking to use direct pay. To claim direct pay, eligible entities must first place their energy projects into service, and they will not receive payment from the federal government until the following year. While these tax credits will significantly reduce overall project costs, entities still need upfront capital to finance their projects before receiving the refund. Furthermore, local partners, especially in disadvantaged communities, may lack access to the full capital necessary to realize their project.
This provides states with a key opportunity to support local projects with bridge financing, as well as other types of low-cost financing, grant programs, and credit enhancements, that can make these projects maximally viable, accessible, and equitable. States can do this through their green banks, clean energy funds, and revolving loan funds (RLFs), as well as myriad other state financing tools and grant programs.
Green banks
This term generally refers to nonprofit, public, or quasi-public financial institutions built to finance clean energy and sustainability projects.11 Some states instead have “clean energy funds,” or refer to their clean energy financing institutions by other names.12 Green banks offer low-cost financing and use innovative financing tools to leverage additional investment in clean energy projects. Some also offer direct grants. Michigan Saves and the Connecticut Green Bank, established in 2009 and 2011, respectively, were some of the earliest green banks in the country.13 The successful growth of these institutions has also inspired the creation of the Greenhouse Gas Reduction Fund (GGRF)—a $27 billion program established in the IRA to support an equitable green financing ecosystem throughout the United States.14
State revolving loan funds
State energy RLFs exist in more than 30 states.15 Most of them are run by state energy offices and provide low-interest loans for energy efficiency and clean energy projects. Examples of pioneering state RLFs include the Nebraska Dollar and Energy Saving Loan program and the LoanSTAR Revolving Loan program in Texas.16 RLFs provide a proven, scalable, and evergreen source of bridge and complementary financing for clean energy projects across states.
State infrastructure financing and grant programs
There are a range of other state financing tools and investment programs that could provide financial support to entities looking to take advantage of direct pay. These include tax-exempt bond financed funds—through which states can use their capacity to issue tax-exempt bonds to raise capital to reinvest in qualifying projects17—as well as housing and infrastructure finance authorities, state clean energy and environmental justice grant programs, and other funds.
Already, state financing institutions are stepping up to help deliver projects. In March 2024, the Minnesota Climate Innovation Finance Authority, Minnesota’s newly created state green bank, announced that it would provide a $4.7 million bridge loan to The Heights Community Energy project, a community-owned district geothermal energy system on the east side of St. Paul.18 Many more states’ clean energy financing institutions are actively working to create financial products and financing programs to support projects benefiting from direct pay.
Furthermore, states can take advantage of new and expanded federal programs that provide them with additional capital or financing tools for project deployment, including the GGRF, the U.S. Department of Energy (DOE) Loan Programs Office—State Energy Finance Institutions (SEFI) Provision, and the Climate Pollution Reduction Grants.
Greenhouse Gas Reduction Fund
The aforementioned $27 billion program passed in the IRA is investing in hub financing entities to help accelerate deployment of clean energy and climate solutions across the country. The GGRF will provide many state-based green banks—and others, including community development financial institutions, credit unions, and community lenders—with more capital, which they can use to support more projects utilizing direct pay. The GGRF has three component programs, each of which can “stack” with and leverage direct pay tax incentives:
- National Clean Investment Fund: $14 billion in total funds awarded to three national clean financing institutions to deliver innovative, accessible, and affordable financing to clean energy projects19
- Clean Communities Investment Accelerator: $6 billion awarded to five entities that will provide funding and technical assistance to lenders working in low-income and disadvantaged communities20
- Solar for All: $7 billion provided to 60 state, local, Tribal, and nonprofit recipients charged with financing the deployment of distributed solar systems, such as rooftop solar or community solar arrays, to low-income households across the country21
DOE Loan Programs Office—State Energy Finance Institutions Provision
The IRA and the Infrastructure Investment and Jobs Act (IIJA) provided the DOE Loan Programs Office with expanded authorities for the deployment of clean energy and emissions-reducing projects.22 Under an IIJA provision, SEFIs can now facilitate greater access to the Loan Programs Office program—including an opportunity to waive the program’s “innovative technology” requirement for projects for which the state also provides meaningful financial support.23 The DOE Loan Programs Office generally only lends to projects that exceed $100 million in total cost, and some SEFIs are helping to aggregate and finance suites of projects that meet or exceed this threshold—including, for example, through partnerships with local school districts.24 Projects can also benefit from direct pay if they are sponsored by eligible entities. A SEFI itself can be the sponsor and Loan Programs Office borrower and take advantage of direct pay.25
Climate Pollution Reduction Grants
Earlier this spring, state and local governments throughout the country submitted applications for $4.3 billion worth of Climate Pollution Reduction Grants (CPRG), for measures that reduce climate pollution.26 The maximum grant size will be $500 million.27 These are highly flexible funds, and states can use CPRG dollars to provide grants or loans for projects that can also take advantage of direct pay. Award announcements are expected from the Environmental Protection Agency (EPA) later in 2024.28
Providing education and technical assistance for direct pay
Of course, in order for eligible entities to take advantage of direct pay, they need to know what it is and how they can access it. States have a key role to play here, too. State agencies—including governor’s offices, economic development agencies, state energy offices, green banks, and others—should focus on providing robust stakeholder education and technical assistance to local governments, Tribal nations, community groups, publicly owned utilities, and other eligible entities. As powerful conveners and public messengers, state leaders have a responsibility to provide information and resources that can help their constituents understand how to take advantage of these significant opportunities—such as the prefiling registration process necessary to take advantage of direct pay.29 This is especially true for ensuring that these investments reach low-income and disadvantaged communities, in line with the intent of the IRA and the Justice40 Initiative.30
For example, the Washington State Department of Commerce recently issued a request for proposals from entities qualified to administer professional tax and project finance guidance, as well as other assistance, to eligible entities that allows them to take advantage of federal clean energy tax credits.31 Other states, as well as technical assistance providers, have contemplated new program models that train people to assist communities in executing project finance or that convene statewide energy stakeholders to communicate market opportunities and consolidate technical assistance needs.32
In addition, a number of nongovernmental organizations, including the Congressional Progressive Caucus Center,33 Lawyers for Good Government,34 Center for Public Enterprise,35 and the BlueGreen Alliance,36 are already working to share technical assistance resources with a wide universe of direct pay-eligible entities. State officials can use these resources to begin to provide education and technical assistance to their communities—and indeed some are already doing so.37
Furthermore, states can help educate local entities about the myriad other IRA and IIJA programs that can help them to finance, build, own, and benefit from clean energy projects—especially those utilizing direct pay. These programs include the aforementioned GGRF, Loan Programs Office and CPRG programs, as well as the Community Change Grants and U.S. Department of Agriculture’s (USDA) rural financing programs.
Community Change Grants
This EPA program provides grants of up to $20 million to partnerships of two community-based organizations, or one community-based organization plus a local government, academic institution, or Tribal nation, to “benefit disadvantaged communities through projects that reduce pollution, increase community climate resilience, and build community capacity to address environmental and climate justice challenges.”38 States are not eligible to apply for this program, but they can help their communities, local governments, Tribes, and academic institutions design their proposals and apply for and administer the grant. Eligible projects can also take advantage of direct pay. The EPA is accepting rolling applications for $2 billion in program funding before November 2024.39
USDA rural financing programs
The IRA created more than $11 billion in new USDA programs to expand clean energy and electrification across rural America.40 Eligible rural entities can use programs as bridge or concessional financing and claim direct pay tax credits to further subsidize the cost of their projects. The Empowering Rural America (New ERA) program provides billions of dollars in loans and grants to rural cooperatives to install clean energy systems.41 The Powering Affordable Clean Energy (PACE) program also provides partially forgivable loans of up to 60 percent to eligible public entities to build renewable energy projects.42 And the IRA provided $2 billion for the Rural Energy for America Program (REAP) that provides grants for rural renewable energy development.43
Leading by example in building clean energy projects
In addition to helping to maximize the number of eligible entities claiming direct pay, state government agencies and instrumentalities can build their own projects and use direct pay themselves. In doing so, they can lead by example; demonstrate leadership in implementation of climate-focused initiatives that drive reductions of energy costs and greenhouse gas emissions in government operations; and share lessons learned with other eligible public and nonprofit entities.
These opportunities include, but are not limited to: utilizing direct pay to supplement costs of deploying renewable energy infrastructure such as solar panels and storage technologies on public lands and buildings; electrifying vehicle fleets; and building out electric vehicle charging infrastructure. These projects can reduce energy operating costs, and the federal incentive can reduce the investment costs. States and local government partners may consider applying these cost savings to advance more clean energy projects or to reinvest in teacher pay, child care programs, low-income assistance, and other state-provided public goods.
Clean energy siting on state-owned lands and buildings
States can build publicly owned utility-scale renewable energy projects on state-owned land, including brownfield lands, and receive cash reimbursement through direct pay tax credits, such as sections 45, 45Y, 48, or 48E clean electricity credits. States can also deploy solar, wind, or other clean energy infrastructure projects on state-owned buildings or in partnership with local governments and community-based organizations that can lease state lands and facilities at low or no cost. These opportunities could also provide a way to fast-track clean energy projects through often cumbersome siting and permitting processes.
State government vehicle fleets
Direct pay can be used to supplement the cost of electrifying state government vehicle fleets. To do this, state agencies could take advantage of two direct pay-eligible IRA clean energy tax credits, as incentives for purchase or lease of electric vehicles (Section 45W) and for the installation of electric vehicle charging stations (Section 30C).
Electric vehicle charging infrastructure
States can also help make electric vehicle charging more widespread and readily accessible for their residents—taking advantage of the Section 30C credit to install charging stations that are available to the general public on state-owned properties.
Hawaii is one example of a state that’s leading by example. Currently, it is putting in place systems to leverage direct pay. Under the leadership of its comptroller, the state’s Department of Accounting and General Services will be the single point of contact with the IRS for projects across departments and agencies, streamlining paperwork and centralizing knowledge within state government agencies to maximize uptake of these credits.44
Maximizing uptake of clean energy tax credits through utility oversight and clean energy standards
State governments also play a key leadership role in their oversight of public utilities, which may or may not be publicly owned but still serve the public and are expected to align with state climate, energy, and equity policies. In this role, states can drive the uptake of federal clean energy tax credits via their public utility commissions (PUCs) and state environmental regulators, as well as through the use of state performance standards that set rising requirements for the use of renewable and carbon-free electricity.
This state oversight applies more frequently to investor-owned utilities (IOUs), which are traditionally subject to PUC oversight and to state energy standards, than it does to publicly owned utilities; the latter are sometimes, though not always, exempt or limited in such requirements. While municipal utilities and rural electric cooperatives are eligible for direct pay, IOUs can continue to access the credits through traditional tax financing or take advantage of a new transferability provision.45 Both privately owned and publicly owned utilities that serve a state’s electricity customers now have access to major, unprecedented federal incentives that make it less expensive for them to build and maintain clean energy projects.
States that want to see lower energy costs for their residents, job-creating project investments, and emissions reductions should use their oversight and policymaking powers to ensure their electric utilities are taking advantage of these credits. States can do so by incorporating utilities into their planning and resource decisions, as well as in their compliance with state clean energy policies. In particular, utilities that file integrated resource plans with state PUCs should be made to show how they incorporate the federal tax incentives into their plans. And more states should take this opportunity to pass, and to accelerate the timelines for, their clean energy standards and renewable portfolio standards that require utilities to use more clean energy generation. Such state policy leadership will induce more new project investment and the use of more of these federal incentives to deliver clean, reliable, and low-cost power for more Americans. Recent examples include:
- Michigan: In November 2023, Michigan enacted legislation setting itself on a path to 100 percent clean energy by 2040 (and 60 percent renewable energy by 2035). Advocates and lawmakers supporting the Michigan clean energy future bills before they were passed pointed out that IRA incentives make the state’s path to clean energy even more cost-beneficial—and warned that failing to pass the bills would have meant reduced federal investment in the state.46
- Minnesota: In early 2023, Minnesota enacted legislation requiring its utilities to achieve 100 percent clean electricity by 2040. During debate over the legislation, state lawmakers and advocates noted that IRA incentives would make the state’s path to 100 percent clean energy even more affordable.47
- Nebraska: In December 2021, Nebraska also joined the 100 percent clean energy club, when the Nebraska Public Power District joined the Omaha Public Power District and the Lincoln Electric System in committing to achieve 100 percent clean electricity generation by midcentury.48 As the only state where all customers are served by public power, nearly every Nebraskan is now served by utilities committed to 100 percent clean energy, and all are now able to benefit from new clean energy projects that are supported by direct pay.
Conclusion
Direct pay provides an enormous opportunity for tax-exempt entities to play their part in building a more prosperous, equitable, and just American clean energy economy. State governments have a critical role to play in seizing the policy’s full potential. Through leadership on supportive financing, community education and technical assistance, leading by example, and next-generation clean energy policies, states can help deliver more job-creating, cost-cutting, climate change-fighting clean energy projects—for their communities and the entire country.
The authors thank the following individuals for their review of and input on this issue brief: Shannon Baker-Branstetter, Trevor Higgins, Devon Lespier, and Jean Ross of the Center for American Progress, and Melissa Cheatham and Franz Hochstrasser of S2 Strategies.