2023 Minnesota Clean Energy Law SF4
What the bill likely means for your clients
By John Kapral, JD, CPA, LLM
November 16, 2023
In the wake of recent legislative changes to Minnesota’s clean energy bill Senate File 4 (SF4) passed this past February, it’s important for CPAs and financial advisors to understand provisions of the Inflation Reduction Act of 2022 (IRA).
SF 4 is designed to move Minnesota to a carbon-free electricity standard by 2040 and is mainly aimed at electric utilities by increasing renewable energy portfolio standards. But provisions of the IRA can benefit many of your clients, and you can help them make a cost-effective transformation to clean electricity by taking advantage of generous tax credits in IRA.
Keeping abreast of these valuable tax-saving opportunities will help you keep your clients financially out in front of these coming changes.
MN SF 4 and electric utility renewable energy standard obligations for electric utilities
If climate issues weren’t convincing enough considering that 2023 is likely to be the hottest year in recorded history, the greater incidence of heat waves, hurricanes, wildfires and geopolitical turmoil directly threaten our energy infrastructure and security daily.
Meanwhile our aging infrastructure badly needs maintenance and upgrades to meet today’s demand. Further, we’ll need at least 20% more output by 2050 according to independent sources.
Why are these significant changes to energy policy happening now?
As part of long range federal and state initiatives to address issues of energy security and serious climate concerns, Minnesota public utilities are now required to attain 80% carbon-free electricity generation by 2030; 90% by 2035; and 100% by 2040. Other Minnesota utilities, including private utilities (owned and maintained by private investors) are required to attain 60% carbon-free electricity generation by 2030; 90% by 2035; and 100% by 2040.
These ambitious targets are not just a public regulatory compliance issue; they affect community and private investor-owned utilities as well as their customers.
What does SF 4 mean for non-public Minnesota utilities?
The primary challenge will be figuring out how to upgrade and convert systems to renewable fuel stock over the next 16 years on a cost-effective basis. The convergence of laws — such as SF 4 and the IRA —open opportunities to start facility upgrades now to take advantage of what could be more than 40% in investment tax credits (ITCs) or substantial production tax credits (PTCs) over 10 years depending on which credit pencils out as the better alternative.
It’s important to know that the ITC is generally taken in the year that qualified energy property — such as a small wind farm or solar array — is placed in service. By contrast, the PTC is taken at established rates over 10 years after being placed in service. Qualified energy property is discussed further in the Strategies section of this article.
What do these energy supply and infrastructure changes mean for Minnesota businesses and homeowners?
As with any cause-and-effect relationship, the new renewable energy portfolio requirements will not just impact owners and operators. Initially, electric bills are likely to continue rising due to the capital expenditures required, as well as to the ramp-up to more renewables and related decommissioning costs. Over time, though, these cost increases will likely resolve through winding down and the benefits of scaling and rise of new technologies that almost always follows wide adoption.
Planning strategies for homeowners and businesses making energy upgrades
As noted, the short-term effect of moving toward carbon-free electricity generation by utilities will likely be higher rates to customers. The easiest way to offset increased costs is to utilize energy efficiency incentives and credits that are readily available and cost-effective. Examples include construction materials, smart windows and buildings, renewable energy or reduced carbon energy sources — such as rooftop or parking lot solar, geothermal heat pumps, combined heat and power systems, biomass converters and batteries that store electricity for outages and off-peak rates.
How can MN homeowners and businesses manage higher energy costs and improve energy security?
Some of these opportunities are available to homeowners through the year 2032, in addition to the immediate monthly energy cost savings:
- Energy Efficient Home Improvement Credit up to $1,200 per year total for allowable energy property including building envelope components like windows and skylights, doors, and insulation.
- Energy Efficient Home Improvement Credit up to $2,000 for heat pumps, heat pump water heaters, biomass stoves and boilers.
- Up to $150 for a home energy audit.
- A 30% credit through 2032 then 26% for 2033 and 22% for 2034 for solar electric, solar water heating, fuel cell, small wind, geothermal heat pump or storage battery expenditures.
Businesses have further opportunities for either a 6% or 30% basic federal investment tax credit or 10-year production tax credit if 100% of the power is sold. Rates are dependent upon construction costs that meet prevailing wage and apprenticeship rules or other exceptions— either by being grandfathered in or by having output less than 1 MW.
In addition, there are several stackable bonuses to the base credits including 10% for using domestic content products, parts, and components. There is an additional 10% for being located in an energy community that is either a brownfield site, a statistical area with certain employment or tax revenues related to carbon energy and unemployment higher than the national average, or a census tract in which a coal mine or coal fired electric generating unit has been closed.
Specific types of qualified energy property subject to the 6% to 30% and bonus credits include:
- Fuel cells such as those used for electrical generators.
- Solar electricity generated for heating, cooling, or lighting.
- Small wind energy property.
- Waste energy recovery property.
- Energy storage technology.
- Biogas property.
- Microgrid controllers and Interconnectivity.
- Combined heat and power systems.
- Geothermal heat pumps.
If your client’s business can’t use the credits described above, they can sell them to unrelated parties, and not-for-profits can elect to treat these credits as tax payments, effectively making them refundable credits. These rules are generally effective for 2023 through 2024, but some will carry back to 2022 and others have longer applicability as noted.
The time to act is now
Nobody can predict the future, but one thing is certain: Our renewable energy economy will be transformative and will eventually provide abundant low cost, clean energy and supply chain security for many years to come.
John Kapral, JD, CPA, LLM is Senior Director – Renewable Energy Incentives & Credits with Tri-Merit Specialty Tax Professionals. He can be reached at john.kapral@tri-merit.com.
