On August 12, 2022, the House of Representatives approved the Inflation Reduction Act of 2022, paving the way for the largest investment in clean energy development and climate change mitigation in U.S. history. The Act passed the Senate on Aug. 7 and President Biden is expected to sign the bill into law imminently. The Act will provide approximately $369 billion in government funding across a wide range of programs and initiatives for clean energy development and reduction of carbon emissions.

The Biden Administration has made climate change a cornerstone of its domestic policy. Shortly after taking office, Biden announced an ambitious goal of a carbon neutral economy by 2050.  But putting meaningful action behind those plans had been a source of frustration for federal officials. The proposed Build Back Better bill, which would have allocated $550 billion to clean energy and climate change, failed to garner enough support to win passage in the divided Senate in 2021. 

While the Administration has made modest progress in attaining its goal through executive action (for example, bringing the U.S. back into the Paris Accords),  Congressional action is necessary to materially move the needle. The Inflation Reduction Act, if passed, will put significant federal dollars towards “Energy Transition” in the United States.

key breakthrough took place in late July 2022, when Sen. Joe Manchin (D-W.Va.) agreed to support the climate change spending package. Manchin is a strong supporter of his home state’s coal industry, and his opposition scuttled the Build Back Better bill. But Manchin and Senate Majority Leader Chuck Schumer (D-N.Y.) were able to negotiate agreement on the Inflation Reduction Act. 

As a budget reconciliation bill, supporters in the Senate were able to pass the Inflation Reduction Act with a simple majority. Members of the Senate voted 50-50 along party lines, and Vice President Kamala Harris provided the tie-breaking vote on the bill. 

Key Takeaways from the Landmark Package

Some major climate change and clean energy provisions in the Inflation Reduction Act include:

  • New tax credits hydrogen production, including both “blue” hydrogen generated using gas or coal and “green” hydrogen generated by renewable energy sources;
  • Expanded and extended tax credits for a variety of clean energy technologies, including solar, geothermal, wind, biogas, fuel cells, battery storage and carbon capture technology; 
  • “Technology-neutral” tax credits starting in 2025 for zero-emission energy generation systems, to stimulate technological innovation and development of new renewable energy sources;
  • Approximately $30 billion in grant and loan programs for states and electric utilities to accelerate the transition to clean electricity;
  • A tax credit of approximately $30 billion for existing nuclear power plants;
  • More than $60 billion to support clean energy manufacturing in the U.S., including manufacturing of wind turbines and solar panels. The goal is to increase domestic production and reduce reliance on imported goods, particularly from China; and 
  • Tax credits and grants to reduce industrial emissions.

In addition, the Act contains a number of programs targeting individual consumers, including a tax credit for buying a new or used clean energy vehicle, home energy rebate programs, and home energy efficiency tax credits.

Energy Tax Credits Under the Inflation Reduction Act

The expanded and extended tax credits for clean energy development is long in coming and welcome relief for investors in, and developers of, clean energy. What is important to note is that the revamped tax credits will tend to be paid on a two-tiered system, with a base rate and an increased rate for investors in, and producers of, clean energy that satisfy certain criteria. This new two-tiered system will apply to the energy investment tax credit (“ITC”) under Section 48 of the Internal Revenue Code,  and the production tax credit (“PTC”) under Section 45 of the Code. The updated PTC and ITC will apply to projects that start construction before 2025.

Companies that meet prevailing wage requirements (not only during construction but also for repairs and alterations) and qualified apprenticeship requirements for clean energy/climate change projects can qualify for an increased credit rate. Given that the increased rate is five times higher than the base rate, there will be ample incentive for most project developers to meet these standards. The bill further provides for a further increased credit rate if eligible projects satisfy identified domestic content requirements.

So, what are prevailing wage and qualified apprenticeship requirements?  The “prevailing wage” requirement is determined by the U.S Department of Labor and based on wages paid for similar types of jobs within the same market. The apprenticeship requirement states that project developers must employ “qualified apprentices” from Registered Apprenticeship Programs (i.e. these programs that are validated by the DOL or a corresponding state labor department). Depending on when construction starts, apprentices must contribute 10-15 percent of the total labor hours in order to qualify for the increased rate. 

Clean energy and carbon reduction projects that already are under construction will automatically qualify for the increased rates if they otherwise satisfy the current eligibility criteria. The bill provides a transition period that will allow renewable developers to adjust to the new prevailing wage and apprenticeship requirements and plan accordingly for new projects. 

Solar energy has been added to the list of technologies eligible for production tax credits, along with wind energy, hydropower, geothermal power and other previously eligible resources. Additionally, biogas will become eligible for an investment tax credit.

Another notable change is that standalone energy storage facilities are now eligible to qualify for the ITC. While certain battery storage systems that are co-located with renewable energy generation systems are currently eligible for the ITC, industry advocates have long sought for standalone storage systems to be eligible.

Finally, the Inflation Reduction Act extends the duration—and increases the amount—of carbon capture tax credits under section 45Q of the Internal Revenue Code. The amount paid varies depending on the technology in question, but in general, companies can qualify for double or even triple the tax credit offered under previous law. The new Act also significantly reduces the minimum amount of carbon capture required to qualify for tax credits. This should spur more players to enter the carbon capture market, which certainly may help with the energy transition and could play a role in expanding the use of hydrogen, for example.

For those projects that begin after 2024, the Inflation Reduction Act creates a new round of tax credits, which will effectively replace the traditional ITC and PTC. Eligibility for these new credits will be available for zero-emission electricity generation, without a requirement for any specific generation technologies to be used. Such credits will be available for projects that produce carbon-neutral electricity, at a base rate of 0.3 cents/kWh base rate and an increased rate of 1.5 cents/kWh of electricity generated, or at a rate ranging from six percent (base rate) to 30 percent (increased rate) of the taxpayer’s cost of the energy property. These credits will remain available for eligible facilities that begin construction any time prior to the end of 2032. 

Perhaps what is most notable in the bill for investors in, and developers of, is that the bill will allow renewable energy tax credits to be transferred among taxpayers, which is a significant change from the current rules that require a taxpayer have an interest in the energy property before it is placed in service to claim the ITC or PTC. 

This will effectively permit the tax credits to be sold to third parties in exchange for cash, after the associated project is operational. That likely will have a major impact on how the construction of renewable projects is financed, given renewable developers frequently use capital contributions from tax equity investors to finance a portion of project construction costs. Now that the tax credits are transferable, it will be key to monitor how those deal structures evolve in response. 

Initial Reaction to the Climate Change Plan

Clean energy trade groups generally have praised the steps outlined in the Inflation Reduction Act.

“This is the vote heard around the world. It puts America on a path to creating 550,000 new clean energy jobs while reducing economy-wide emissions 40% by 2030. This is a generational opportunity for clean energy after years of uncertainty and delay. This unprecedented investment in clean energy will supercharge America’s clean energy economy and keep the United States within striking distance of our climate goals,” said American Clean Power in a statement.

With the Inflation Reduction Act, the federal government is putting significant money on the table for clean energy production and emissions reduction. There is likely to be significant interest in new opportunities to obtain funding and take advantage of incentives. The earlier companies begin working on their green energy plans, the more benefits they are likely to reap from these expanded opportunities.