Solar for schools

Local education agencies in Pennsylvania have a unique opportunity to leverage both state and federal initiatives to significantly reduce the cost of eligible solar energy projects.

The “Solar for Schools” Grant Program, administered by the PA Department of Community & Economic Development (DCED), is available to Pennsylvania public schools, intermediate units, career and technical schools, charter schools, cyber charter schools, community colleges and certain chartered schools for the education of the deaf or blind. The Solar for Schools Grant will cover up to 50% of the total cost of solar energy projects. Combined with federal Inflation Reduction Act (IRA) tax credits, this can lead to substantial savings.

Eligible projects include those at school facilities (owned by an eligible applicant) where photovoltaic or solar thermal devices convert, transfer or store energy into usable forms of thermal or electric energy. Solar for Schools grant funds may be used for:

• Site preparation for ground-mounted systems
• Engineering, design and inspection costs (not to exceed 10% of the grant amount)
• Purchase and installation of eligible equipment
• Energy storage costs for energy produced by the solar energy system
• Operation and maintenance contracts offered by the installer for the first two years
• Administrative costs, permit fees and professional services (not to exceed 2% of the grant amount)
• Other costs as approved by DCED

Grant awards will be determined based on an Applicant Market Value/Personal Income Ratio, with awards ranging from the lesser of $500,000 or 50% of the project cost to $300,000 or 30% of the project cost. 

Solar for Schools is a competitive grant process. DCED opened the application window on November 1, 2024, and will accept applications through January 31, 2025. The initial $25,000,000 has been allocated evenly across three regions in Pennsylvania, with the potential for additional funding in future budget years.

When combined with federal Inflation Reduction Act opportunities, schools could see significant savings on eligible solar energy projects.

IRA overview

The Inflation Reduction Act (“IRA”) is federal legislation that was signed into law in August 2022. It contains billions of dollars of funding for school districts looking to complete eligible energy improvement projects.  Example projects include electric vehicles, electric vehicle charging stations, geothermal, thermal energy storage tanks and solar. The IRA overall is a 10-year legislation. However, some tax credits for certain types of energy projects expire sooner than the 10-year time frame.

Direct pay tax credit summary

An exciting change for school districts in the IRA is that it made project funding available through a direct pay tax credit. Previously, tax credits had little value to school districts since they are not subject to federal taxes. The direct pay allows school districts to capture tax credits through cash payments upon construction completion through filings with the Internal Revenue Service (“IRS”). A simple illustration would be if a school district constructed an eligible $1 million solar energy project and achieved a 30% direct pay tax credit. They would receive a direct federal cash payment of $300,000. Funding for potential projects can now achieve hundreds of thousands or millions of dollars depending on the project size.

Direct pay tax credit calculation overview

Common projects for school districts are geothermal, solar and thermal energy storage tanks. Each eligible project starts at a 6% base tax credit. If the project complies with the prevailing wage and apprenticeship requirements within the IRA, a 5x multiplier is applied that increases the tax credit to 30%. Additional tax credit adders include 10% for domestic content requirements, 10% for projects in an energy community and 10% or 20% for eligible environmental justice locations. Projects under 1 megawatt are eligible for the 5x multiplier without being subject to the IRA prevailing wage and apprenticeship requirements. 

Tax-exempt financing of energy projects impacts the credit percentage. The tax credit percentage is reduced by 15% for projects using tax-exempt financing. This applies to projects started after August 16, 2022.  An illustration would be a 30% tax credit project funded by tax-exempt financing would then be reduced to 25.50% (30% x 15% = 4.50%). For any project under construction before August 16, 2022, the credit percentage is reduced by 50%.

The timing of projects is important.  Projects beginning construction after January 1, 2024, that do not meet IRA domestic content requirements will begin to have tax credit percentages reduced. The reduction is 10% for the calendar year 2024. The reduction is 15% for the calendar year 2025 and the credit is reduced to 0%. For projects that start after January 1, 2026, no credit is available without meeting the domestic content requirement.  For example, a project that begins in the calendar year 2024 achieves a 30% tax credit but does not meet IRA domestic content requirements. The final tax credit would be reduced to 27% (30% x 10% = 3%).  Projects under 1 megawatt capacity are not subject to the domestic content tax credit reduction outlined in this paragraph. IRA also provides opportunities to document good faith efforts to meet domestic content rules such as unavailability or excessive costs to source domestically.

One key IRA timing factor for direct pay is that projects must be placed in service during taxable years beginning after December 31, 2022. This can allow projects beginning construction in 2022 to be eligible for tax credits when placed in service in 2023 or later. For fiscal year entities where projects are completed in 2023 but within a tax year beginning before January 1, 2023, the IRS allows those direct pay entities to file a calendar year 2023 tax return.  The circumstances and facts of each project are important to determine eligibility.

IRA project process

An IRA project can engage several different steps. Below is a summary looking at these projects from a big picture standpoint.

Estimates and options
The beginning stage is the school district working with construction and tax consultants to evaluate the project eligibility and estimated dollars available through the IRA. Construction professionals provide key information regarding construction costs, timing and differences in future operating expenses upon project completion. Tax consultants review the design, timing, size, location, financing and other considerations to estimate the potential IRA dollars available. With key construction and tax information, school district officials can evaluate the advantages and disadvantages of the energy project along with different routes on how to proceed.  Remember that direct pay tax credit dollars are not received until after project completion. Part of the planning process includes identifying funding and how IRA tax credit dollars will be utilized once received after project completion.

Planning, bidding, and construction
Once a project begins, collaboration between the working groups is imperative. Many school district projects include eligible and non-eligible IRA costs. A planning meeting should occur between the construction team and tax consultant regarding the best way to bid the projects in conformity with IRA tax rules.  In addition, if the project is over 1 megawatt and will be subject to the IRA prevailing wage and apprenticeship requirements, project bid documents must include the appropriate language, and a system must be identified to track payroll and apprenticeship requirements during construction. Errors in any of these areas can result in a bad start that potentially jeopardizes IRA tax credit dollars. 

Work papers and tax credit filing
Several steps occur once the project is nearing and achieving completion. Projects approaching completion need to be filed in the IRS pre-registration portal. Next, work papers including invoice copies identifying IRA eligible and non-eligible costs need to be organized for documentation.  Reports presenting the IRA eligible project size and applicable tax credit percentage are needed.  For projects subject to prevailing wage and apprenticeship rules, payroll records along with apprenticeship ratio documentation need substantiation. Once the project is complete and all work papers organized, final filing and registration with the IRS is initiated to receive the funds.  These steps coincide with the school district’s fiscal year. 
 

Electric vehicles and EV charging station credits

Electric vehicle purchases and EV charging station projects are also eligible for direct pay tax credits.  However, they utilize a different system than outlined previously in this article. 

Electric vehicle tax credits vary depending on the date of delivery and if the vehicle is over or under 14,000 lbs. The credit can range from $3,750 to $40,000. 

EV charging station projects must be located in eligible geographic areas defined as either low income or non-urban. These projects start at a 6% base credit up to a 30% credit if the prevailing wage and apprenticeship rules are followed. The maximum allowable credit is $100,000 per charging station.  Eligible locations can be reviewed through New Markets Tax Credits mapping tools and the Census Bureau’s defined urban and non-urban communities.

Key items and take aways

The earlier an IRA project is discussed and reviewed by a tax consultant, the better. The concept of the IRA direct pay tax credit is straightforward in that it is an eligible project cost multiplied by an applicable IRA tax credit percentage. However, project specifics such as whether over/under 1 megawatt, when did construction begin and construction bidding/timing can have large impacts on the final direct payment received. Starting a project without key IRA tax concepts being followed could result in the tax credit percentage being reduced. Many projects are counting on hundreds of thousands or millions of dollars.  IRA tax credit preservation is exceptionally important.

The IRA provides tremendous opportunities for school districts to capture funding. If your school district is in the process of evaluating equipment and facility needs, be sure to include IRA as a part of that planning process.