The Inflation Reduction Act Emphasizes Energy Tax Credits to Spur Energy Transition

The Inflation Reduction Act of 2022 (IRA) provides $369 billion in spending and tax credits over 10 years to expedite the transition to decarbonized energy sources. The Act reforms and expands the system of energy tax credits to provide incentives for existing and emerging zero-emissions energy sources, including solar and wind, energy storage, clean hydrogen, nuclear, and carbon capture technologies. Overall, it establishes an energy policy with the aim to promote existing renewable energy, provide incentives for new energy sources, and support the workforce changes related to the energy transition.

Accelerating the Energy Transition

The Act renews the production tax credit (PTC) and investment tax credit (ITC) for existing renewable energy technologies through 2024. The credit system then transitions to “technology-neutral” tax credits to provide incentives for zero-emissions energy production and innovation through at least 2032. There are also new credits to promote multiple sources of clean energy and energy transition technologies.

Additionally, the Act replaces the current energy tax credit system with a system of base credits and bonus credits to support domestic wages, domestic manufacturing, and investment in disadvantaged communities and “energy communities” impacted by the energy transition. It also expands the potential financial resources for renewable energy investment by allowing the transfer of credits along with some direct pay options.

Support for Existing Renewable Energy

In its support for existing renewable energy technology, the Act extends the IRC Section 45 PTC by three years to projects that begin construction by January 1, 2025. This includes wind facilities, biomass, solar, landfill gas, municipal solid waste, hydropower, marine and hydrokinetic renewable energy facilities, and geothermal energy. The Act removes the PTC phase-out for projects that began construction before the end of 2021 and are placed in service after December 31, 2021. (The PTC phase-out still applies to projects placed in service before January 1, 2022.) This PTC extension will allow certain projects already placed in service during 2022 to claim the full PTC retroactively.

Similarly, the Act eliminates the rate reduction of one half for open-loop biomass, small irrigation power, municipal solid waste, qualified hydropower, marine, and hydrokinetic power to bring the credit to full value.

The Act also extends the IRC Section 48 ITC for solar, wind, geothermal, fuel cell, combined heat and power systems, and waste energy recovery for projects that begin construction by January 1, 2025. Equipment that uses the ground or ground water as a thermal energy source have until January 1, 2035. As with the PTC, the Act ends the ITC phase-out for projects placed in service after January 1, 2022. This allows projects that previously began construction to receive an immediate capital increase in their credit amount.

Solar and Wind

The extensions are particularly valuable to solar energy, as the PTC previously applied only to facilities placed in service before January 1, 2006. Solar project owners can also elect to receive the PTC in lieu of the ITC. A new 10 percent bonus credit is also available under IRC Section 48(e) for solar and wind facilities, including storage, that are placed in service in low-income communities (as defined in IRC Section 45D(e)), or on Indian land.

Reshoring the Supply Chain

The Act also adds a new IRC Section 45X advanced manufacturing PTC to provide an incentive to build clean energy supply chains domestically. This PTC applies to solar and wind energy equipment produced in the United States and sold between December 31, 2022, and December 31, 2032. This credit is designed to promote innovation and efficiency, and the amount of the credit depends on the type of component that is manufactured. For example, the credit for specific components depends on the capacity of the equipment or the quantity of the equipment that is manufactured.

The eligible energy components include photovoltaic cells, photovoltaic wafers, solar grade polysilicon, polymeric backsheet, solar modules, wind energy components, torque tubes, structural fasteners, inverters, electrode active materials, battery cells, battery modules, and critical minerals. The credit begins to phase out in 2030 and completely phases out by December 31, 2032 (but there is no phase-out for production credits for critical minerals).

The Act also extends the IRC Section 48C advanced energy project tax credit. The Section 48C credit applies to investments in manufacturing facilities used for the production or recycling of clean energy equipment, including solar, wind, and carbon capture technologies. The IRA expands eligible facilities to include those that manufacture: (i) energy storage systems; (ii) grid modernization equipment or components; (iii) electric and hybrid vehicles; (iv) property used to produce energy conservation technologies; and (v) equipment that re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse emissions by at least 20 percent.

The credit has a base credit of six percent and a bonus credit of 30 percent if wage and apprenticeship requirements are met. There are no additional credits for meeting domestic content requirements or for investments in an “energy community.” Also, taxpayers are not eligible for the credit if they received prior credits under IRC Sections 48, 48A, 48B, 48E, 45Q or 45V.

Energy Storage and New Technologies

With a growing need for energy storage to support intermittent renewable energy resources, the Act extends the ITC to stand-alone energy storage with a capacity of at least 5 kilowatt hours. It also extends the ITC to qualified biogas, microgrid controllers, and certain interconnection property that are placed in service after December 31, 2022, and begin construction by January 1, 2025.

Transition to Zero-Emissions Technology

With the relatively short timeframe for the PTC and ITC extensions to 2024, the Act provides new “technology neutral” credits for zero-emissions energy projects that are placed in service after December 31, 2024. With this timing, projects dependent on the PTC and ITC will shift to this new credit for long-term credit support. This also allows projects that begin construction after 2024 to qualify for renewable energy tax credits.

The new IRC Section 45Y Clean Electricity Production Tax Credit (CEPTC) is designed to provide long-term support for emissions-free electricity generation, and the new IRC Section 48E Clean Electricity Investment Tax Credit (CEITC) is designed to promote investment in emissions-free electricity generation and storage. The credits will remain in effect until the later of 2032 or when the annual U.S. greenhouse gas emissions from the production of electricity is equal to or less than 25 percent of greenhouse gas emissions for 2022. The credits will then phase out over four years.

New Incentives for Hydrogen and Nuclear Power

The IRA makes a significant move to support hydrogen, which is viewed as a potential fuel for energy-intensive industries, with a new PTC for clean hydrogen facilities. It also recognizes nuclear energy as a zero-emissions energy source and helps to maintain production from existing facilities with a new nuclear PTC.

The Clean Hydrogen Production Tax Credit (CHPTC) under IRC Section 45V applies to clean hydrogen production after December 31, 2022, at a facility that began construction before January 1, 2033. The base credit is 60 cents per kilogram produced multiplied by a percentage determined by the applicable lifecycle greenhouse gas emissions rate for the first 10 years of operation. There is a bonus credit of five times the base credit if prevailing wage and apprenticeship requirements are met along with additional credits for meeting domestic content requirements and investments in an “energy community.” The IRC Section 45V credit is not allowed, however, if the facility includes carbon capture equipment for which an IRC Section 45Q credit (discussed below) is allowed. Retrofitted facilities are eligible for the credit.

The Act also establishes a new IRC Section 45U PTC for power produced at qualified nuclear power facilities and sold to an unrelated person. It provides a base credit of 0.3 cents per kilowatt hour and a bonus credit of up to 1.5 cents per kilowatt hour if the facility satisfies the prevailing wage and apprentices requirements. The new PTC applies to electricity produced and sold after December 31, 2023, meaning that existing facilities that are in service in 2024 are eligible. The credit ends for taxable years beginning after December 31, 2032. The credit amount is reduced if the price of electricity increases. A qualified nuclear power facility is one that is not an advanced nuclear power facility under IRC Section 45J and was not placed in service prior to enactment of the Act. Unlike other energy credits, there are no additional credits for meeting domestic content requirements or for investments in an “energy community.”

Expansion of Climate Technology: Carbon Capture and Sequestration

To mitigate emissions from the continued use of carbon-intensive power production, the Act extends the IRC Section 45Q carbon capture and sequestration tax credit to projects that begin construction before January 1, 2033, and expands the credit by increasing the tax credit and lowering the qualification threshold. This credit is available for a carbon capture, direct air capture, or carbon electricity generation project. The Act significantly reduces the yearly threshold amount of carbon oxide that must be captured for a facility to qualify for the credit.

The Act also increased the credit amount from $50 per metric ton to a base credit rate of $17 per metric ton and a bonus credit rate of $85 per metric ton of carbon oxide captured and sequestered in geological formations. The Act increased the credit amount from $35 per metric ton to a base credit rate of $12 per metric ton and a bonus credit rate of $60 per metric ton for carbon oxide captured and used in an enhanced oil recovery project or other use.

For direct capture facilities, the Act increased the credit amount from $50 per metric ton to a base rate of $36 per metric ton and a bonus rate of $180 per metric ton of carbon oxide captured for storage in geological formations. For carbon captured and used by the taxpayer, the Act increased the credit amount from $35 per metric ton to a base rate of $26 per metric ton and a bonus rate of $130 per metric ton of carbon captured and used by the taxpayer.

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