Hospitals enjoy new opportunities for renewable energy projects

A new direct payment option is now available for hospitals and health systems planning renewable energy projects. For hospitals and health systems that are planning a renewable energy project at a new or existing facility, provisions of the recently enacted Inflation Reduction Act now allow the federal government to provide a direct payment for qualifying projects owned by tax-exempt entities, including 501(c)(3) organizations. These direct payments are meant to mirror tax credit programs often used by taxable for-profit entities. 

This change is intended to create incentives for green projects in the governmental and not-for-profit sectors. Kaufman Hall believes health systems and hospitals nationwide executing green energy projects should review these direct payment options as part of the normal course of project planning and development.

The details of these direct payment programs are outlined in a publication by members of the tax, public finance and energy teams at the Orrick law firm. 

Key considerations

For hospitals and health systems, relevant details include the following.

Types of projects that qualify for the payments. Qualifying projects, depending on the underlying tax credit equivalent program, include those related to solar, geothermal, wind, waste energy, energy storage, heat pump and combined heat and power. Interested organizations should consult their legal and financial professionals to determine whether their projects, or portions of the projects, qualify.

Basis for payments. Direct payments are based on existing tax credit programs. These include either a production tax credit (PTC), which is based on the amount of renewable energy produced each year over the first 10 years of the project, or an investment tax credit (ITC), which is a one-time tax credit based on a percentage of the qualifying costs of a project. Both the PTC and the ITC have specific project requirements. If a project qualifies for both, the tax-exempt entity must choose one. For projects placed in service in 2023 or 2024, the PTC generally requires the sale of energy to an unrelated party, which may limit most hospital and health system projects to the ITC. 

Payment rates. Each tax credit program prescribes a base rate — i.e., 6% in the case of ITC and 0.52 cents/kWh (inflation adjusted for 2022) in the case of the PTC — which can be increased substantially if the projects meet certain thresholds in the act. The thresholds relate to factors such as the utilization of U.S. domestic materials, and the extent to which the organization meets certain apprenticeship and prevailing wage standards. In total, an ITC could provide a direct payment for 30% or more of a green project’s cost, and a PTC could provide 2.6 cents/kWh or more.

Project timing. Projects already under construction may qualify for the direct payment option if they are placed in service after 2022.

Financing option. Most tax-exempt entities eligible to receive the direct payment may also finance the project using tax-exempt debt. This financing approach will lead to a reduction in the tax credit, but that reduction is capped at 15% and can be lower depending on the portion of the project that is financed with tax-exempt debt.

Implications of the direct payment option

The availability of a direct payment option may affect financing decisions for construction projects; equity might be used for a renewable energy portion of the project, for example, and tax-exempt financing for other portions. As noted by Orrick’s lawyers in the publication cited above, this direct pay option “changes the market for these types of projects and opens up the door for projects to be owned by tax-exempt entities, financed by tax-exempt bonds, and receive direct payments of tax credits.” 

Hospitals and health systems that have renewable energy projects underway or are in the planning process of projects with an energy-related component should be aware of this new direct payment opportunity as it could provide a meaningful benefit.