It is now almost 18 months since Congress enacted the Inflation Reduction Act. One of the IRA’s provisions was an adder to the ITC for renewable energy projects located in an “energy community”. One way to be in an energy community is to be a brownfield. The IRA defined a brownfield simply as a facility that meets the definition of a brownfield under CERCLA.
And what does that mean? I defined it pretty simply in the title of our blog post about the brownfield adder: “It’s good to be a brownfield site – as long as it’s not too brown.” In other words – and you should read the original post to get all of the gory details – if hazardous substances (or pollutants or contaminants) are present or potentially present at a site, then it’s a brownfield, but only if there aren’t so much of the hazardous substances that the site is a Superfund site, or a RCRA site, or a TSCA site, or … you get the idea.
Since enactment, the IRS has issued three guidance documents concerning the definition of an “energy community”, IRS Notice 2023-29, IRS Notice 2023-45, and IRS Notice 2023-47. While these guidance documents included a range of useful information, most importantly they provided a number of “safe harbors”. There are three for brownfield sites (all of which remain subject to the statutory exclusions):
- Sites included on federal or state lists of brownfield sites;
- Projects for which an ASTM Phase II assessment has been performed, where the Phase II assessment confirmed the presence of a hazardous substance or a pollutant or contaminant; and
- Projects with nameplate capacity of not greater than 5MW (AC), for which an ASTM Phase I assessment has been performed, where the Phase I assessment identified the presence or potential presence of a hazardous substance or a pollutant or contaminant.
So, what’s the state of the market 18 months after enactment? The process is still evolving, but there are a number of points worth noting.
- First, and most importantly, it’s important to emphasize that the IRA provisions are working. They are clearly driving renewable energy developers towards projects that utilize brownfield sites. I’ve been doing this type of work for more than 35 years and EPA has been encouraging use of contaminated land for renewable energy development for more than 20 of those years, but the level of activity post-IRA has increased markedly.
- For many projects, it is more difficult to determine if any of the exclusions apply than it is to determine whether a hazardous substance is present, such that a site would qualify – as long as no exclusions apply. Thus, it is a disappointment that the IRS has not provided any guidance to date on the applicability of the exclusions.
- The Safe Harbors were intended by the IRS to be essentially a sure way to qualify for the ITC adder; as logicians would say, a sufficient condition to qualifying for the adder. However, the market has turned the Safe Harbor into something of a necessary condition. In at least some cases, parties providing project financing have been reluctant to do so, even where the facts clearly supported the applicability of brownfield adder provision, because the project did not qualify for one of the safe harbors. Beware unintended consequences.
- Somewhat relatedly, the practice of ASTM Phase I and Phase II site assessments is changing to reflect the new reality created by the brownfield adder and the IRS safe harbor guidance. It used to be that developers wanted a clean Phase I report. Now, at least for renewable energy projects, developers want a dirty report – as long as it’s not too dirty. Also, more developers are finding it prudent to request Phase II reports where there may be minor red flags raised by a Phase I report, but where, prior to the IRA, developers would skip the Phase II and deal with any minor contamination as part of site development work.
- Finally, it’s also worth noting that insurance companies appear to be stepping up to the plate, bridging the gap between project developers and financial partners, and offering to ensure against the risk that the IRS might take the position that the brownfield adder is not available.
Overall, as noted above, the IRA appears to be achieving its related goals of encouraging renewable energy development and driving such development toward brownfield sites. However, there’s still some work to do to smooth out some of the rough spots and answer some of the unanswered questions about what’s a brownfield and what isn’t.