Financial Model with IRA

This page discusses the IRA (not the Irish Republican Army, but the Inflation Reduction Act). Provisions of the act allow different Investment Tax Credit or Production Tax Credit depending on various factors such as fair labour practices and whether the project is in a low income area. The act also allows direct transfer of the Investment Tax Credit to an Investor. In this page I demonstrate a model that simulates various provisions of the IRA in the context of energy efficiency programs. In addition to the provisions for possibilities of very high investment tax credit, complexities of tax equity transactions still exist. I have worked on a model that includes IRA provisions and I describe the IRA model on this page. I have made the model in the context of a energy efficiency investments, but the model can be used for other investments.

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The financial model with the IRA is attached the the button below.

Economics of Energy Efficiency Programs

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Note how you can input different programs and evaluate the economic return. You can use the check boxes to turn the programs on and off.

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Allocation Issues in Energy Efficiency and Tax Equity

There are a whole lot of issues in making allocations. The first is the allocation between the investor in the energy efficiency programs and the owner of the facility. This is done with some PMT functions.

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Allocation to Investor and Building Owner

The screenshot below illustrates calculation of the IRR with and without the ITC. The general idea is that after computing the economic effectiveness of different options, you can split the economics between the developer and the building owner. As shown in the diagram, you can use different target IRRs to compute the lease rate and allocate the savings. This is dependent on the ITC as shown in the diagram.

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Tax Inputs from the IRA

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