Maximizing Clean Energy Benefits: A Guide to Direct Pay for State Legislators

June 28, 2024



NCEL Point of Contact

Ava Gallo
Climate and Energy Program Manager


This blog provides an overview of Direct Pay for state legislators and compiles resources from a webinar NCEL hosted with Congressional Progressive Caucus Center on June 7. 

What is Direct Pay? 

Direct Pay is one of the most innovative concepts to come out of the Inflation Reduction Act. This new tax mechanism allows entities without tax liability – like schools, local & state governments, and nonprofits – to take advantage of the value of clean energy tax credits. These projects can encompass wind, geothermal, electric vehicle charging, clean fleets, utility or small-scale solar, heat pumps, and more. 

Direct Pay Tax Credit Options

Direct Pay funds come in the form of refundable tax credits. Since eligible entities like state governments are tax-exempt, the tax credits are cash payments from the federal government and are paid directly to the eligible entity once the project begins generating energy. 

State legislators can promote the use of this financial tool through the following ways:

  1. Using their role as important and trusted messengers to spread the word about this opportunity to local governments, community organizations, and other eligible entities within their state.
  2. State legislators can ensure that the state government implements the IRA and pursues Direct Pay projects across the state government and state agencies. 
  3. State legislators can use their policy-making function to help other eligible entities implement Direct Pay projects by:
    1. providing matching funds
    2. creating revolving funds or low/no-interest loans
    3. creating technical assistance programs, and 
    4. including incentives to increase equity and protect workers within Direct Pay programs in the state.

State-Based Projects

Although state legislators are not the entities to apply for Direct Pay reimbursement, it is a way to get legislative priorities funded, such as energy efficiency upgrades in schools, all-electric state vehicle mandates, adding solar panels to publicly-owned housing, and much more. 

State Highlight

A state can leverage Direct Pay to support electrifying state fleets by building more EV charging infrastructure for state vehicles. States like Oregon, Hawaii, Minnesota, and Washington all intend to electrify their state fleets. Alongside additional IRA provisions, Direct Pay can be a pivotal tool in funding these plans

Local Highlight

In Batesville, Arkansas, a school district worked to make their buildings more energy efficient and installed solar panels. The district saved nearly $300,000, and they used these savings to increase teacher pay. Similar state, city, or county projects would qualify for Direct Pay credits. This would help lessen the initial costs and increase savings for community-based projects. .

Funding & Financing

While Direct Pay can cover up to 70% of project costs, many entities will still need further financial incentives to make a project viable. States can create alternative financing to support these projects. California proposed a bill that would appear as a ballot measure (SB-867) to authorize $15.5 billion in bonds for environmental and climate programs. Minnesota also established a state competitiveness grant fund (HF 1656) with matching funds and federal grant-writing assistance.

Technical Assistance

In Washington, the Building Energy Upgrade Navigator Program has supported building owners looking to utilize electrification and energy efficiency services, especially in low-income, vulnerable, and overburdened communities. Washington has appropriated $2.5 million to increase access to federal funding and financial resources. This includes support for community-based organizations, local governments, and ports in overburdened communities. 

Looking Ahead

Direct Pay can become an expansive and accessible tool for providing renewable energy. When utilized to its full extent, Direct Pay can open the door for entities without previous access to the benefit of tax credits to participate in the clean energy transition. State legislators can help local entities navigate this process, advocate for local projects, provide financing to get projects off the ground, and assist with technical assistance and outreach.