Thanks to the Inflation Reduction Act (IRA), which went into effect in January, it can pay to be a brownfield – a term used to refer to a property that is affected by potential or confirmed contamination. Specifically, the IRA offers incentives to renewable energy development that takes place on a brownfield site, which is included as an “energy community” under the IRA. On April 4, 2023, the Internal Revenue Service (IRS) and the Department of Treasury published limited guidance (Notice 2023-29, Energy Community Bonus Credit Amounts under the Inflation Reduction Act of 2022) on the bonuses available for production and investment of energy facilities in energy communities. Unfortunately, even with the guidance, the eligibility of certain sites as brownfields remains uncertain.

Brownfields as Energy Communities

Under the IRA, an investment tax credit (ITC) or production tax credit (PTC) as well as an extra 10% credit is available if a project is located in an “energy community.” Energy communities include “brownfield sites,” which the IRA defines brownfield by referencing the definition in the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). This CERCLA definition is extremely broad with a long list of exceptions. Still, the gist is that a brownfield is a property that is “complicated by the presence or potential release of hazardous substances, pollutants, or contaminants” but not a property that is a proposed or listed Superfund site, a property that is the subject of a court/administrative order or consent decree under CERCLA, a property that is the subject of a Resource Conservation and Recovery Act (RCRA) corrective action, a closed RCRA landfill disposal unit, a property with a cleanup funded by the RCRA Leaking Underground Storage Tank Trust Fund, or a property for which a permit has been issued by the United States or an authorized State under certain environmental laws”. Thus, a site must be “dirty”, but not too dirty, because then it will not qualify as a brownfield. Clear as (brown) mud, right?

That’s why the IRS and Treasury issued guidance to try to clarify the brownfield eligibility confusion. Under the guidance, a “safe harbor” exists where a site automatically qualifies as a brownfield site energy community if one of the following three conditions is satisfied:

• The site was previously assessed through federal, state, territory, or federally recognized Indian tribal brownfield resources as meeting the above-mentioned definition of a brownfield site. These sites can be identified on the U.S. Environmental Protection Agency webpage “Cleanups in My Community” or similar online databases maintained by states, territories, or tribes.

• A Phase II Environmental Site Assessment (ESA) has been completed with respect to the site in accordance with the most recent version of the Standard Practice for Phase II ESAs, ASTM E 1903. In addition, the Phase II ESA must confirm the presence on the site of a hazardous substance as defined under CERCLA.

• For small projects with a nameplate capacity of five megawatts or less, a Phase I ESA must have be completed under the most recent version of the Standard Practice for Phase I ESAs, ASTM E1527-21.

If a site satisfies one of these three criteria, the brownfield qualifies for the 10% adder if the “Nameplate Capacity Test” or, for non-electric generating or storage facilities, the “Footprint Test,” is met. Under the Nameplate Capacity Test, a project qualifies if at least 50% of its nameplate capacity is in the energy community area, which is calculated by dividing the number of turbines or solar panels in the energy community by the total generating units. Under the Footprint Test, a project is in an energy community if at least 50% of the project’s square footage is situated in an energy community area.

Remaining Uncertainties

Unfortunately, the recently published IRS and Treasury guidance and safe harbor provisions may have just added more mud to the mix.

For instance, under the first of the three criteria, it is unclear how a site is “previously assessed” to meet the CERCLA brownfield definition. This is particularly confusing because a contaminated property redevelopment can be completed under a state’s voluntary cleanup program or corrective action program where such program does not formally designate the site as a brownfield. Thus, is it not clear whether the safe harbor includes those sites in remediation programs, only those sites formally enrolled in a state-specific brownfield redevelopment grant program, or any site that identified by those federal or state resources as having brownfield characteristics.

For all three safe harbor conditions, confusion can also stem from the lack of clarity on what constitutes the “site” and whether all portions of the site must satisfy the criteria. Wind and solar projects often include noncontiguous parcels of land that have varying degrees of contamination. Does the brownfield credit apply only to portions of a site that meet the brownfield safe harbor or to the entire project site area? This uncertainty is particularly relevant for the second safe harbor condition that requires a Phase II ESA that involves extensive soil and groundwater testing performed, likely on isolated portions of the full project site. Under one interpretation, if a Phase II ESA confirmed the presence of contamination, even in a limited area, the credits could apply to the entire project. Under another interpretation, if the project site for purposes of the 10% adder can only include contaminated areas, then sites will rarely display contamination in enough areas to qualify a large wind or solar project as a brownfield safe harbor. This restrictive interpretation would make projects like biogas and battery storage, with smaller footprints and greater potential Phase II survey coverage, more appealing for brownfield safe harbor purposes.

Finally, as written, the third safe harbor condition suggests that as long as a Phase I ESA is conducted for a less than 5 MW project, the site qualifies as a brownfield energy community, which is nonsensical since it is standard industry practice for all such sites to have Phase I ESAs conducted, and since the criterion would be satisfied for all sites regardless of whether the presence or potential presence of contamination is found. Until further guidance is published on this third criterion, it remains unclear if this condition will extend as broadly as it is written or whether the Phase I ESA must find a recognized environmental condition (REC) in order for the site to qualify.

How Developers Can Move Forward

So what is a developer seeking the 10% adder to do when scoping out potential contaminated sites for renewable energy development? While waiting for the IRS and the Treasury to issue proposed regulations concerning the IRA and to publish further guidance, taxpayers may rely on the current limited guidance in the interim. As mentioned in the safe harbor conditions, EPA maintains a Cleanups in My Community platform to track past and ongoing cleanups funded by its brownfields program (although remember, if a site is subject to CERCLA or RCRA cleanup, it is not a brownfield for purposes of the IRA). EPA also has a tool called the “RE-Powering America’s Land Initiative Mapper,” which provides data for over 190,000 brownfields and other contaminated sites to help developers identify sites for renewable energy development. Some states have databases mapping designated brownfields, and many states also have voluntary cleanup programs, grant programs, and liability assurance letters involving contaminated sites, all of which involve the state’s consideration and determination of whether a site constitutes a brownfield. If a prospective brownfield site is listed in a federal or state database, another option for added certainty is to seek input from EPA or the relevant state on how to receive a brownfield designation for the site outside of the established processes.

Wind, solar, and battery storage developers who decide to proceed with a site on the assumption that it constitutes a brownfield under the IRA should document, document, document in accordance with IRS Code Section 6001. The IRS will eventually perform audits of sites to ensure they qualify for tax incentives, and developers will need to be ready to substantiate their brownfield claims.

Despite the uncertainties associated with the IRA interpretations, given the IRS guidance, it is likely that many sites will ultimately qualify for the 10% adder, and siting a renewable energy project on a contaminated property has many other potential benefits. Most brownfield sites in the U.S. are in urban or near to urban areas, and thus are typically located in close proximity to power lines and public roads, which can mean significant construction cost savings. Sites near established cities and towns often have clear ordinances and policies concerning wind and solar projects, which can sometimes expedite and simplify development plans and permitting. Communities and local residents may be more supportive of projects that redevelop dirty sites than those built on agricultural or “clean” land. More generally, these sites present an excellent opportunity to facilitate the reuse and redevelopment of contaminated properties around the country and support the green-minded goals of the IRA.