Direct Pay Video Summary

Full Video Transcription!

Word for word – no changes! Including the ‘um’s and ‘uh’s. 

What is Direct Pay?

Direct pay is one of the most important provisions of the new Inflation Reduction Act, which was passed in August of 2022 and has now come into full effect here in 2023. And essentially what it means is that tax exempt organizations are now eligible for. The investment tax credit or ITC and for anybody that’s, you know, following what’s going on in the solar world, this is brand new and very exciting.

Essentially, we’re now able to see nonprofits, churches, synagogues, mosques, and other houses of worship. Municipal entities and, uh, many other, you know, tax exempt organizations can now get that 30% tax credit coming back to them as a direct payment. Um, and that is just really reducing the cost of, uh, installation for solar and is increasing the return on investment for any solar.

Before the Direct Pay provision was, you know, introduced, nonprofits really had to jump through some hoops and do some fancy legal maneuvering in order to take advantage of the tax benefits. What they needed is a tax equity investor or a shell LLC that was capable of owning the solar installation and then taking that tax benefit.

The challenging thing is you needed an LLC that you created to have tax liability and you know, essentially you had to create a solar holding company in order to get the tax benefit. That’s very challenging. It involves, you know, filing legal paperwork, it involves setting up an LLC or involves knowing somebody who has a lot of tax liability.

Because you know, for some of these projects, if you’re, you know, putting six figures into a large solar array, you need, you know, five, six figures worth of tax equity in order to get that money back. So it was very challenging and really what happened is that most nonprofits and houses of worship just didn’t do it.

And tif they ever did go solar, they were missing out on 30% of the cost coming back to them. And, uh, it really stalled a lot of nonprofit projects for Solar States. Uh, we’ve talked to hundreds of houses of worship at nonprofits in the Philadelphia area, and only a handful have actually gone solar prior to direct pay because of all these obstacles that were in their way.

The floodgates are open, Direct Pay is possible, and we’re seeing a lot more  churches, nonprofits, and synagogues taking interest in this sort of thing.

How does it work?

The way that it works is very similar to any solar array. You get installed and after you’re installed, there’s something that’s called the Permission to Operate, which is granted by your utility, otherwise known as PTO. This usually happens about a month after the installation. You get inspected by your local inspector, and then you get your meter swap by the utility and they grant you permission to operate.

And so, whenever that PTO happens, that’s when you’re going to file for the tax credit or the direct payment. And so the following year you’re gonna say, ‘Hey, I got PTO last year for my new solar system’. Now I’m gonna get my direct payment. For most people this is gonna be in the coming tax cycle.

In the beginning of the year, most people file their taxes sometime between January and April, and then you get a refund check or in this case, a direct payment sometime in that first half of the year, you know, after you filed your taxes or filed for the direct pay.

About Adders

There are a lot of provisions in the Inflation Reduction Act and we’ve done our best to make sort out a multi-hundred page, you know, omnibus tax bill and, and give you a little bit of  insight into what’s going on. So the big news that was splashy when the inflation reduction Act happened was the tax credit amount, and that direct payment amount was increased to 30% and that 30% is holding for the next 10 years.

So about a third of the system cost is coming back to you. On top of that, there are three additional adders that can increase that tax credit payment or that direct payment beyond the 30%. One of the most critical adders that you may have heard about is referred to as the Domestic Content Adder.

Domestic Content is really The Biden administration’s push to have more solar panels, solar equipment and battery technology manufactured here in the United States. And so they are going to look at where did you get your inverters from? Where did you get the racking from? Where did you get your solar panels from?

And you know, as much as possible, we want to see these produced in the United States. Now, the fact of the matter is not all of these technologies are currently being produced in the United States. And so what the, you know, direct pay is going to be tied to a certain percentage of the equipment bundle that’s actually manufactured domestically.

And uh, our understanding is it’s going to be upwards of 50% of the, the manufacturer is happening here, and they may also use close trading partners. And so this may include, you know, countries like Canada and Mexico, and we can say those may be considered part of domestic content. So, you take the 30% and you get your, you know, products locally and from domestic content, you can add another 10% adding to 40% of the system costs coming back to you.

There are two other really important provisions in this Inflation Reduction Act, which can increase your, you know, adders beyond 40%. And both of these are specifically targeting areas that have been underserved by solar. And the goal here is to rectify some of the historical disinvestment that we’ve seen in low income communities, in tribal communities and in communities which have previously had fossil fuel extraction, Coal-fired power plants and these sorts of things. So just to name how these are gonna work, there is a, a, a 10% adder for any qualifying low income community. They haven’t fully defined what this is gonna look like, but we’re most likely going to be going off of census tracts.

Uh, In the 2020 and 2021 census, and they’re going to be saying, Hey, is this project something that’s in a low income community? And you can get an additional 10% adder and you know, if it’s actually a, a public housing, you know, building or a low income multi-family unit, you may be able to get as much as 20% on that low income.

So that is really huge and we think it’s so important to see low and moderate income communities able to access solar, which has been previously unaffordable. So this is really helping. And then, you know, just to get back to this whole idea of energy transition and thinking about what are the regions of the country, what are the regions of, of every state that are, you know, have been adversely affected by fossil fuel production, whether that’s a coal mine, whether that’s a refinery, whether that is, you know, a pipeline coming through, you know, something that’s, you know, very significant fossil fuel infrastructure. And so they’ve defined energy communities, which is again, gonna be, uh, defined by your census tract.

And so if you are in a specific energy community, you may be able to see an additional 10%. So we’re now talking about a situation in which, let’s say you are a nonprofit or a church that’s in a historically disinvested low income community that’s also been facing, you know, heavy fossil fuel infrastructure, we’re now saying you could get up to 60% of your solar system cost back the next year as a direct cash payment. That is remarkable. And this is on top of what you’re gonna see in electricity savings, which you may see in SREC payments. And so we’re now seeing, you know, uh, a church or a nonprofit that, you know, prior to the Inflation Reduction Act, wasn’t able to get the full direct payment or any ITC at all. They might have seen a 20 year payback period. They might have seen an ROI that was, you know, 5% or something like that. Now we’re seeing five to 10 year paybacks, making this much more appealing. And we’re seeing things where it’s 16 to 20% ROI, which is beating the stock market.

And so when when we say that this is monumental legislation that’s really going to change the solar landscape, we say that. You know, the tectonic plates of solar have really shifted. And in 2023, now that all of these provisions have come into play, um, we’re still learning more about it. But this is a really important time to look into, uh, solar and to look into, you know, some of the impact of the inflation reduction name.

We have seen a huge uptick in nonprofits. In community organizations, in churches, synagogues, mosques, um, houses of worship across, uh, the country. And you know, specifically here in the Philadelphia area and New Jersey, um, we have seen a lot more interest in solar and we’ve seen that, you know, with the direct pay.

The financials work out a whole lot better with with solar. And so this is really what we’ve seen and you know, coming down the pipeline with all of this is the fact that you now have municipal entities. You now have state entities, which of course are not taxed. If you have a borough hall or you have a fire department building, or you may have even just say, A parking lot, you know, that is owned by a municipality or sometimes they own water treatment plants and they may own a large tract of land somewhere that they don’t really know what to do with.

If they were gonna put solar on that land, there was gonna be no way to really monetize any tax benefits they were going to have to, you know, put up the money and then hopefully gonna see all the benefit back with the electric savings and SRECs. Well now if you’re a municipal entity or you are a state entity, you can now put solar and get a direct payment back the following year.

Now we’re going to see Public housing go solar, we’re going to see churches going solar. We’re going to see your local nonprofits, your food banks. You’re going to see all sorts of borough halls and municipal entities going solar because these entities have already wanted to go solar. They’ve been beating our doors down for years and we’ve shown them economic proposals that just don’t add up.

Now, with the IRA, Direct Pay and these other adders we’ve talked about, the financials are just really spectacular and it’s a fantastic time to look into going solar.

Further Reading on Direct Pay: