The Inflation Reduction Act of 2022 (IRA) is a sea change in U.S. climate policy. At $369 billion, it stands as the largest one-time public investment in decarbonization in U.S. history and is already shaping large-scale investment planning for energy generation, storage, and transmission. The direct pay provisions of IRA §6417 allow tax exempt entities such as state and municipal governments to receive tax credits as direct transfers from the Internal Revenue Service (IRS). These direct pay provisions create new opportunities for public outlays on energy generation while having no formal cap on how much the government will spend through 2032.
Direct pay funded programs can play a catalytic role in seeding new public-sector capacity for planning and investing in large-scale clean energy projects nationwide. It creates the opportunity for a reorganization in how clean energy is developed in America. Prior to the IRA, only private entities could claim federal clean energy tax credits. As a result, our public entities and agencies had limited options for developing these clean power sources themselves. This report describes direct pay, discusses its implications for energy project financing and public entities, and points toward several possibilities for a robust and successful direct pay implementation over the next decade.