On Aug. 16, 2022, President Joe Biden signed the $750 billion Inflation Reduction Act (IRA) into law. Originally introduced as the Build Back Better Act in September of 2021, this cornerstone of the Biden legislative agenda was whittled down due to disagreements within the Democratic caucus. As recently as early July of last year, any deal was considered dead in the water. However, on July 27, 2022, a surprise deal was announced that involved numerous tax provisions, including $370 billion in energy security and climate investments, as well as $300 billion of tax increases set aside for deficit reduction.
While full guidance of all of the bill’s provisions has not yet been released, now is the time for interested industry members to engage in the possible benefits, many of which will come in the form of tax credits.
Of the nearly $370 billion in climate-related incentives in the bill, $270 billion will be delivered to eligible entities through tax subsidies. Already, the Internal Revenue Service (IRS) has begun accepting comments on how to implement these provisions and has received a higher than normal number of submissions (to read more about some of these requests for comment, please see Brownstein’s analysis here). This underscores how heavily the federal government will rely on industry and stakeholder feedback to carry out these new tax provisions, as many of the details that will inform how the clean energy credits should work are outside of the agency’s usual scope and require industry-level knowledge.
Initial guidance has been released in only two areas: the prevailing wage and apprenticeship requirements (which now generally apply across all energy credits) and on electric vehicles. In addition, the White House released a guidebook detailing clean energy, climate mitigation and resilience, agriculture and conservation-related tax incentives, as well as investment programs in the IRA. More guidance is expected in the coming months.
Below is a selection of credits and grant opportunities that Brownstein has already seen strong interest in.
Renewable Electricity Production Credit (Section 45)
The IRA modified this existing credit for the production of electricity from renewable resources, including wind, biomass, geothermal, municipal solid waste and hydropower. It also will allow solar producers to take advantage of this credit for the first time since 2006. The credit is listed at 2.75 cents per kilowatt hour for green energy produced.
The most important change was to the calculation of the credit. The base amount was lowered (allowing for 20% of the credit), and the credit can be increased by meeting new prevailing wage and apprenticeship requirements. IRS issued initial guidance on those wage and labor requirements on Nov. 29 (to read more about the initial guidance, please see Brownstein’s summary here).
Other bonus credit amounts may apply for meeting domestic-content requirements and for locating projects in specified areas. If domestic content requirements are met, the credit amount is increased by 10%. This requirement dictates that 100% of steel and iron used on a project is produced in America and 40% of manufactured products used in a construction project are American made (this threshold is lowered to 20% in the case of offshore wind energy production). Also, an additional 10% credit is earned if the project takes place at an abandoned, idled or underused industrial and commercial property where financing expansion or redevelopment is complicated by actual or suspected environmental contamination as a result of past uses (a brownfield site); facilities that are located in, or adjacent to, a census tract that contains “significant” employment in the processing, mining, transport or storage of coal, oil or natural gas; or energy communities where a coal mine has closed or a coal-fired electric generating unit has been retired.
Advanced Manufacturing Production Credit (Section 45X)
The advanced manufacturing production credit encourages U.S. manufacturing of solar panels, wind turbines, batteries and critical minerals processing. The goal of this funding is to build new supply chains of clean energy while increasing American competitiveness in the green energy market.
The credit amount is dependent on the product that is being claimed (this information can be found in Section 45X(b)(1)(A)-(M)). In most cases, the credit amount is based on the efficiency of the product in producing green energy. The full credit is only available through 2029, dropping by 25% each year starting in 2030, until it is zero in 2032. This will create pressure to invest in domestic manufacturing facilities sooner rather than later.
Clean Hydrogen Credit (Section 45V)
The new clean hydrogen credit is designed to wean the industry off so-called grey hydrogen in favor of green hydrogen. Grey hydrogen is produced using a steam methane reformation (SMR) process that releases large amounts of greenhouse gasses, as the methane left over from the process is not captured. Green hydrogen is produced via electrolysis that is powered by renewables such as solar or wind energy.
The credit provides $3 per kilogram for zero-carbon hydrogen production, which industry experts are saying should make the current $4–$8/kg price of green hydrogen more competitive with the $1.50–$2/kg cost of grey hydrogen.
Section 45V also seeks to reward producers of blue hydrogen, which is produced in the same manner as grey hydrogen but seeks to capture the carbon emissions released in the process. These credits can be claimed on a sliding-scale basis, starting at $.60/kg for producers that capture a little more than half of all emissions from SMR and capping at $1/kg for higher levels of capture.
As with many of the credits included in the IRA, claimants must meet prevailing wage and workforce development requirements.
Investment Tax Credit (Section 48)
The investment tax credit of the IRA allows taxpayers to claim tax credits based on the cost of energy property. The bill expanded the definition of property to include standalone energy storage, such as batteries and biogas projects.
The credit starts at 6% and increases to 30% of qualified investment on projects that meet the prevailing wage and apprenticeship requirements. Organizations claiming the investment tax credit may be eligible for the same bonus credits as those taking the Section 45 production credits described above.
Extension of the Advanced Energy Project Credit (Section 48C)
The IRA includes an additional $10 billion in investment tax credits to build clean technology manufacturing and recycling facilities, like facilities that make electric vehicles, wind turbines and solar panels. The expansion also covers water-produced power for the first time. Outside of energy production, this funding will apply to infrastructure related to energy storage, grid modernization, carbon capture and EV production and charging. Taxpayers interested in this program must apply to the Treasury Department to be certified and awarded a credit allocation.
The credit has the same base, maximum and bonus structure as the investment and production tax credits. In addition, it includes $4 billion set aside to build new clean technology manufacturing facilities in legacy coal communities.
Direct Pay and Transfer of Credit
The credits mentioned above are all eligible to be distributed as a direct payment. This entitles tax-exempt organizations as well as state, local and tribal governments to cash distributions, equal to the value of the tax credit. A full list of the credits eligible for direct payment can be found at the end of this Treasury Department fact sheet. Non tax-exempt entities can claim direct payment for the clean hydrogen production credit and advanced manufacturing credit described above, as well as the carbon capture credit (Section 45Q).
Tax credits in the IRA can also be sold for cash and transferred. The purchaser of the credit can be a tax-paying organization or individual. The credits cannot be resold after they are purchased and the cost of purchase cannot be deducted. Organizations that attempt to sell more credit than they have already earned may be subject to further penalties.
Advanced Industrial Facilities Deployment Program
The bill provides nearly $6 billion in funding for the Department of Energy’s (DOE) Office of Clean Energy Demonstrations to carry out the advanced industrial facilities deployment program. Under the program, DOE must deploy advanced industrial technology to reduce greenhouse gas emissions from industrial facilities, targeting the heaviest emitting industries. This includes manufacturing facilities engaged in energy-intensive processes, including production of iron, steel, steel mill products, aluminum, cement, concrete, glass, pulp, paper, industrial ceramics, chemicals and others. Eligible projects will also be able to retrofit current facilities to reduce emissions from existing locations.
Projects that achieve the most significant levels of greenhouse gas reduction will be prioritized. Entities must provide 50% of the non-federal cost share.
DOE has recently released a notice of intent (NOI) to issue up to $6.3 billion to complete the climate change reduction goals listed above. A webinar to further detail this NOI has been announced for Jan. 24, 2023.
Greenhouse Gas Reduction Fund
The IRA allocates $27 billion to the Environmental Protection Agency (EPA) for a new program called the Greenhouse Gas Reduction Fund that will provide grants and technical assistance to state, local, regional and tribal projects that reduce greenhouse gas emissions. The program has been referred to as EPA’s “green bank,” because it attempts to leverage private capital and financing for projects that lower emissions. The fund includes $7 billion for competitive grants to enable disadvantaged communities to deploy zero-emission technologies; $12 billion to provide financial and technical assistance to projects that reduce or avoid greenhouse gas emissions; and $8 billion for competitive grants to provide financial and technical assistance to projects that reduce or avoid greenhouse gas emissions in low-income and disadvantaged communities.
EPA put out a request for information earlier this year seeking feedback on implementation for the program. The agency plans to share further guidance on the program next year.
Climate Pollution Reduction Grants
The bill also provides EPA with $5 billion for Climate Pollution Reduction Grants. The program will be used for state planning and additional implementation of greenhouse gas reduction programs. Specifically, this section provides $250 million for Greenhouse Gas Air Pollution Implementation planning grants and $4.75 billion for Greenhouse Gas Air Pollution Implementation grants for programs, policies, measures and other investments that will achieve or facilitate greenhouse gas emission reductions. EPA will define the structure and administration of the grants through additional regulatory processes.