In the wake of increasing inflation and as a means of codifying several of the Biden administration’s legislative priorities, the Senate passed the $750 billion Inflation Reduction Act on August 7, 2022 (the “Act”), by a 51-50 party-line vote. The Act, which is comprised of sweeping healthcare, energy, and tax measures, was approved by the House of Representatives on August 12, 2022, and signed into law by President Biden on August 16, 2022, creating a significant number of renewable energy sector benefits.
Incentivizing “The Energy of the Future”
While economists disagree over the Act’s ability to curb inflation near-term, most analysts agree it will materially impact carbon emissions by deploying nearly $370 billion earmarked for clean energy and climate change measures. Some predict the Act will reduce domestic carbon emissions by up to 40% by 2030, but nearly all agree that the Act represents the largest climate investment in U.S. history, allocating nearly $430 billion in anticipated tax revenue between healthcare, carbon emissions reduction, and incentives for what Senator Joe Manchin calls “the energy of the future” – domestic renewable power projects. Several of those incentives most significant to the renewable energy industry and which are anticipated to spur the greatest increase in project development are discussed below.
Expanding Renewable Energy Output
Analysts expect the Act will more than triple renewable energy production, creating up to an additional 550 gigawatts of electricity from wind, solar, and other clean power sources (an amount the American Clean Power Association estimates could power 110 million homes), including by creating new and expanded tax credits for low-carbon technologies. Notably, several such credits are meant survive for ten years – a period designed to provide certainty to green energy developers, whose projects are often underpinned by tax incentives and who often face financing uncertainty caused by historically recurring lapses in tax incentives.
Production Tax Credit
The Act extends the production tax credit (“PTC”) available to facilities generating electricity from renewable sources from those starting construction prior to the end of 2005 to those starting construction before January 1, 2025. Such facilities which generate electricity from sun, wind, biomass, municipal solid waste, geothermal sources, or hydrokinetic energy may receive a base credit rate of 0.3 cents or a bonus credit rate of 1.5 cents per kilowatt hour produced, so long as they meet prevailing wage and apprenticeship requirements. Facilities satisfying domestic content requirements (including that minimum amounts of steel, iron, and manufactured products used are domestically produced) will also be eligible to receive a rate increase of 10%. Those located in an energy community (an area which is a brownfield site or a community in which significant employment is provided by the energy industry) will also be eligible for a 10% increase. The Act further eliminates the previously existing credit rate reduction for hydroelectric production.
In addition to modifications of the existing PTC, the Act creates a new emissions-based PTC, called a Section 45Y credit, equally available to clean electricity technologies. Operators are permitted to choose between it and the also-new Section 48D investment tax credit (described below); those electing the Section 45Y credit will be entitled to a base credit rate of .03 cents and a bonus credit rate (subject to satisfying prevailing wage and apprenticeship requirements) of 1.5 cents (similar to existing Section 45 credits), in each case based on grams of carbon dioxide equivalent emitted per kilowatt hour either sold to a third party or metered and used by the generating operator. To qualify for the Section 45Y credit, facilities must have been placed in service after December 21, 2024, and may not exceed maximum greenhouse gas emissions rates.
Investment Tax Credit
The Act also provides for the extension and modification of the investment tax credit (“ITC”) available to geothermal energy facilities, including by extending it to facilities starting construction before January 1, 2035, and to solar energy facilities starting construction before January 1, 2025. Further, the Act establishes a base credit rate of 2% (for microturbine operations) or 6% (for solar, fuel cell, waste energy recovery, and combined heat and power operations), and bonus credit rates that increase the rate to a maximum of either 10% or 30%, subject to the satisfaction of prevailing wage and apprenticeship requirements. Eligible technologies will be expanded to include energy storage technology, qualified biogas property (which does not generate electricity), microgrid controllers, and linear generators (in addition to previously eligible technologies, like solar arrays). A 6% base credit rate increase (up to a 30% bonus credit) will be available to certain geothermal projects, and a bonus credit rate of 2% will be available to projects meeting domestic content requirements (increasing to a bonus credit rate of 10% for projects meeting prevailing wage and apprenticeship requirements).
Like the newly created Section 45Y credit, the Act also provides for the creation of a new ITC, called a Section 48D credit, available to clean energy investments (regardless of technology). The Section 48D credit is available to projects placed in service after December 31, 2024, including a 6% base credit rate (that can increase to a 30% bonus credit rate in the same manner as existing Section 48 credits). Notably, projects must elect either the Section 48D ITC or the Section 45Y PTC; they cannot receive both.
Bonus Credit Related to Low Income Communities
To spur environmental equity and the creation of high-quality jobs in low-income communities, the Act creates a 10% bonus investment credit for projects located in low-income communities or on Indian land (which credit increases to 20% if that project is a part of a low-income residential building project or a qualified low-income economic benefit project). Solar and wind facilities with a nameplate capacity of 5% or less, including energy storage properties installed in connection with solar property and interconnection property, would also qualify for this bonus credit.
Clean Hydrogen Credit
To make “green” and “blue” hydrogen more competitive with “grey” hydrogen and natural gas, the Act also creates a new credit for qualified hydrogen produced at a qualifying facility during the facility’s first 10 years in operation. The base rate for the credit is 60 cents per kilogram multiplied by the applicable percentage range (20% – 100%, depending on the lifecycle greenhouse gas emissions rate related to the hydrogen). Eligible projects must begin construction before January 1, 2033, but facilities in existence prior to that date may qualify based on the date clean hydrogen-producing modifications to it are placed into service. However, the credit is unavailable to taxpayers already claiming a Section 45Q carbon capture credit (discussed below).
Curbing Carbon Emissions
Section 45Q Credits
Among the Act’s primary carbon-related reforms is an extension and modification of the existing Section 45Q credit program, which incentivizes the capture and storage of carbon oxide emissions by providing monetizable credits to operators capturing at least a minimum threshold of emissions. The Act extends the deadline for eligible projects to commence construction from January 1, 2025, to January 1, 2033, and introduces a variable capture threshold (measured by metric tons captured per taxable year). Under the Act, direct air capture facilities will benefit from the lowest capture threshold (1,000 metric tons), whereas electricity generating facilities will be subject to the highest threshold (18,750 metric tons) and will also be required to capture at least 75% of their baseline carbon oxide. However, the capture rate is only 60% for facilities not yet in service or that were only recently put in service.
The Act is meant to reward oil and natural gas producers who address methane leaks along pipelines and penalize those failing to curb leaks with fines, while simultaneously rewarding operators for capturing and storing carbon emissions with tax credits. Such sequestration tax credits are designed to enable gas- and coal-burning plants to remain economically operable by adopting evolving technology to capture and store their emissions. Other industries will see annual carbon capture minimums of at least 12,500 metric tons.
Some environmental groups have historically opposed carbon capture, arguing it prolongs the use of fossil fuels and that cutting carbon emissions by cutting fossil fuel use is preferable, but Senator Brian Schatz disagrees: “There is no reason to be a purist about this stuff. The only thing we should care about is, how do we achieve the absolute largest emissions reductions given the current configuration of Congress.”
Like ITCs and PTCs, Section 45Q credits will include a base and bonus structure built on two tiers: metric tons of carbon captured will generate credits of $17 each if sequestered and $12 if used in enhanced oil recovery; if projects meet prevailing wage requirements during construction and for 12 years thereafter and satisfy an apprenticeship requirement during construction, Section 45Q credits will increase to a bonus of $85 per metric ton sequestered and $60 per metric ton used in enhanced oil recovery. In the case of direct air capture facilities, those incentives are richer still: $36 per metric ton sequestered (with bonuses bringing it up to $180) and $26 per metric ton used in enhanced oil recovery (with bonuses bringing it up to $130).
Gas and chemical giant Occidental Petroleum Corporation, which is presently developing the world’s largest direct-capture facility, welcomed news of the credit: “When you look at the Gulf of Mexico benefits, and you look at the requirements for the methane emissions and reductions and that sort of thing, which are things we already were doing, this is turning into, for us, net very positive,” Vicki Hollub, its chief executive officer, said. Exxon Mobil, Chevron, and others in the oil sector have been supportive of these provisions, also, having identified carbon capture technology as a new commercial opportunity. The Act will incentivize them to build out carbon capture facilities and to incorporate hydrogen businesses, while simultaneously punishing failures to cut or capture emissions with fees of up to $1,500 per metric ton of methane emitted in some instances. Experts suggest carbon capture and sequestration, combined with hydrogen development and the use of small nuclear reactors, are the best strategy to reduce domestic emissions to net zero by 2050.
Greenhouse Gas Reduction Fund
The Act also amends the Clean Air Act of 1963 by inserting an appropriation of $7 billion to the U.S. Environmental Protection Agency for fiscal year 2022 until September 30, 2024, which will be awarded as grants, loans, and other forms of financing on a competitive basis to states, tribal governments, municipalities, and other eligible recipients for the purposes of deploying zero-emission technologies, including distributed technologies on residential rooftops, and to carry out other greenhouse gas emission reduction activities.
Reducing Energy Costs
In addition to emissions reductions benefits, the Act contains tax incentives designed to decrease the cost of electricity by bringing more and better renewable energy resources online (including $60 billion meant to incentivize the growth of renewable energy component manufacturing). Part of growing the manufacture of energy components includes rolling back a prior moratorium on offshore wind leasing, which legislators hope will spur increased development of wind energy and a commensurate uptick in wind turbine manufacturing.
Specifically, the Act restricts the Department of the Interior from issuing any right-of-way for wind and solar energy development projects on federal land for 10 years from the enactment of the Act except that during this period, the Secretary of the Interior may grant rights-of-way for solar and wind energy developments if the onshore lease sale has been held during the 120-day period ending on the date of the issuance of such right-of-way or if the total acres being offered in onshore lease sales on the first year of the issuance are less than 2 million acres. The Secretary of the Interior may also issue an offshore lease if it will be held for the first year for offshore wind development or if the total acres offered for lease in offshore lease sales is not less than 60 million.
Transmission Planning and Reinvestment Financing
The Act allocates $100 million for use by stakeholders in developing interregional electricity transmission and the transmission of electricity generated by offshore wind, and an additional $5 billion for the Secretary of Energy’s use in guaranteeing loans to rework, repurpose, or replace energy infrastructure no longer in operation and to support the operation of energy infrastructure that reduces, sequesters, or utilizes air pollutants or greenhouse gases. This funding will remain available through September 30, 2026.
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