As detailed previously, the Inflation Reduction Act (IRA) offers incentives to renewable energy development that takes place on certain properties that are affected by potential or confirmed contamination. Under the IRA, a 10% adder is available to any investment tax credit (ITC) or production tax credit (PTC) generated by a renewable energy project constructed on a “brownfield site,” and there have been many questions since the IRA’s passage about what constitutes a brownfield site.
In April 2023, the Internal Revenue Service (IRS) and the Department of Treasury published guidance on the applicability of the adder, but a good deal of uncertainty remained. Since then, additional guidance has been published relevant to small projects.
Previous guidance indicated that a site constitutes a brownfield where, for small projects with a nameplate capacity of 5 MW AC or less, a Phase I environmental site assessment (ESA) was completed under the most recent version of the Standard Practice for Phase I ESAs, ASTM E1527-21. This suggested that any site could qualify as a brownfield for purposes of the IRA adder if a Phase I ESA was conducted for the site and if the planned development was 5 MW or less in size, which made little sense (since virtually all developers prepare Phase I ESAs before developing renewable energy projects). In July 2023, the IRS issued Notice 2023-45, clarifying that a site to be developed for a 5 MW or less project would constitute a brownfield only if the Phase I ESA identifies the presence or potential presence of a hazardous substance, a pollutant, or a contaminant (as defined by CERCLA).
Although this new guidance makes the 5 MW-and-under brownfield analysis more sensible, the result is still a very low burden. Arguably, if a Phase I ESA identifies an area where there is a small oil sheen, a single railroad tie that could have leached creosote, or a historical oil and gas well on-site that could have leaked, the safe harbor to qualify for the brownfield adder for a 5 MW or smaller project has been met. This seems contrary to what the IRS intended, as CERCLA’s definition of hazardous substances – which is the definition the IRA points to – says that a brownfield means a site, “the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant.” It is in the eye of the beholder whether one railroad tie, or one area of minimal contamination, would “complicate” the development of the site. A financing party may have questions about even minimal contamination risks. Does this mean those risks would “complicate” the development? If one molecule of contamination would dissuade an unusually cautious financing party or an extremely risk-averse developer, is that enough to consider the development “complicated”? There is no reasonableness standard, and so parties are left asking just how “brown” a brownfield needs to be and where IRS is ultimately going to draw the line.
Another remaining question, which is not specific to 5 MW and under sites, is whether, when there is the potential for contamination or actual contamination on a portion of a larger site being developed, the entire project site qualifies as a brownfield, or just the much smaller portion that is contaminated or potentially contaminated? As of yet, the IRS has not offered any guidance on this point.
While the guesswork continues, developers are advised to monitor new IRS guidance being published relevant to the brownfield adder on this webpage. For further information related to the brownfield adder and whether it applies to a target site, please contact Megan Caldwell, Jon Micah Goeller, or another member of the firm’s renewable energy team.