The Inflation Reduction Act’s Direct Pay Provisions: Three Strategies to Make it Work Locally

In one of the most powerful tools in the IRA’s toolbox – direct pay (or elective pay) provisions – the IRS pays local governments and other tax-exempt entities tax credit value for building qualifying clean energy projects. Maximizing the opportunity will require cities to work in new and innovative ways. Discover three key actions your community can take to meet the moment. 

Direct Pay: An Opportunity to Make Clean Energy Just

The Inflation Reduction Act (IRA) has potential to deploy widespread clean energy technology, spur economic growth, and benefit historically disadvantaged communities – a triple win. Underserved communities benefit from clean energy investment in several ways, including:

• creating new, high-quality jobs
• building and maintaining new projects and facilities
• lowering energy costs
• reducing air pollution in local communities 
• reducing climate pollution long term nationwide

However, clean energy access is still unequal, with low-income communities and communities of color often paying a disproportionate share of their income for energy. By contrast, higher-income Americans are more than four times as likely to install rooftop solar panels.

Yet since the IRA was enacted 18 months ago, we’re already seeing promising indications of its impact. According to Rhodium group, “clean investment,” which includes manufacturing, retail sales, and industrial deployment of clean energy technologies, increased 38% in 2023 compared to 2022, reaching $239 billion. And early evidence shows that 45% of the investment is in disadvantaged communities. 

Thus, implementation is starting to match the spirit of the law: To drive investment and associated benefits to places historically excluded.

Tax credits are among the most powerful tools in the law. While clean energy tax credits have helped propel wind and solar energy expansion for decades, with direct pay regulations recently finalized there is unparalleled opportunity for governments and nonprofits to promote economic inclusion and drive clean energy – with a focus on residents in greatest need. With over 90,000 local governments in the United States alone, the potential is immense – and high-quality, innovative implementation will be crucial for delivering on that potential. We share recommendations for successful local implementation below, based on our work with governments and non-profits all over the world.

Three Key Actions to Support Local, Inclusive Clean Energy Economies Using Direct Pay 

1. Prioritize disadvantaged communities. 

A critical success indicator for direct pay (and the IRA overall) will be whether it benefits disadvantaged communities – those who are “marginalized, underserved, and overburdened by pollution” –  as the legislation’s crafters intended. About a third of the U.S. population lives in disadvantaged communities by one definition, but needs within each community vary greatly. Therefore, it’s important to be intentional, ensuring projects benefit those most harmed by the status quo. Our recommendations:

• Include residents in planning and project development from the outset: The best way for governments to design impactful projects is to create ideas with local community members present at the decision-making table and able to shape priorities. In many places, these ideas may already exist, and the IRA offers an opportunity to support existing local priorities. 
• Focus investments to ensure residents with greatest need benefit directly: Through the Justice40 initiative, the Federal government has committed to ensure that benefits from clean energy, transportation, and other investments flow to historically excluded residents. Communities should be intentional when siting and designing projects to help ensure that economic and environmental benefits support places that have been specifically “overburdened and underserved,” often communities of color.

2. Form new partnerships & strengthen existing ones.

Building and installing clean infrastructure will require new and different types of external partnerships. Our recommendations:

• Convene widely and creatively: Bring together local governments, renewable energy developers, non-profits, utilities, financial institutions, and community members to develop and finance projects that meet the moment. Many of these partnerships already exist in some form as cities have been developing clean energy by entering into public-private partnerships, but the opportunity for governments to directly own solar panels, electric vehicle chargers, and more will shift the opportunity and responsibility even further towards governments. 
• Explore new financial models: With the advent of the Greenhouse Gas Reduction Fund, many local and national financial institutions will be capitalized to help finance the transition to an inclusive clean energy economy. Local governments can explore new models – using direct pay in combination with other capital sources to accelerate progress. 
• Persist through inevitable hurdles: While building clean energy is not “new,” IRA and direct pay will require new skills and collaboration. Local government and its partners will need to persist through the challenges of working across sectors.

3. Work differently within local government to build capacity.

Local governments have a tremendous opportunity to drive inclusive and sustainable outcomes through direct pay, but that will require stretching outside of city comfort zones – even within city hall. Our recommendations:

• Set ambitious goals: Mayors and senior officials can lead by setting ambitious goals for how to leverage the IRA to meet – or even exceed – previous climate or clean energy goals. 
• Ensure that senior leaders – such as mayors, city managers, and county executives – foster collaboration. By bringing together and empowering senior teams to set ambitious goals and try new things, mayors or other local executives (county executives, superintendents, etc.) can help prioritize collaboration among government departments that traditionally sit apart (e.g. sustainability, economic development, finance, and others).
• Plan ahead to meet direct pay requirements. Local governments will need to learn about the process of filing for tax credits, meeting prevailing wage and apprenticeship requirements, and clean energy project eligibility. The IRS and others provide resources to support local governments in identifying eligible projects. 

The makings of a triple-bottom-line success story

With many of the IRA’s tax provisions “uncapped” (meaning they can be claimed for any qualifying project with no set limit in the Federal budget), there is immense opportunity for local governments to deliver – socially, environmentally, and economically. Let your response to the IRA help shape local government’s  role – and legacy –  in the clean energy transition. And let it make your city better for the residents you serve.

‍Delivery Associates is a long-time supporter of government implementation, having worked with hundreds of cities across the globe. We look forward to helping cities with the hard work of partnering with their communities to set ambitious goals and deliver impact that counts. Share your ideas for making direct pay work in your community here.