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On August 16, 2022, President Biden signed the historic Inflation Reduction Act (IRA). The bill covers energy policy, tax reform, and prescription drug prices. This article focuses on the impact of the energy policy portion of the bill and its applicability to large energy providers.
The bill provides more than $360 billion dollars for domestic energy security and climate change. The REPEAT Project predicts the spending will reduce US greenhouse gas (GHG) emission levels 42% by 2030, over 2005 levels, and REPEAT estimates that, compared to current policy, this policy accelerates emissions reductions by an extra 15%. The Energy Innovation center’s modeling predicts that 1.5 million new jobs concentrated in manufacturing, construction, and service could be created by 2030 with an increase of 0.84% to GDP by 2030.
A significant portion of the bill is the expansion, extension, and creation of tax credits. These tax credits promote domestic manufacturing, with a focus on ensuring prevailing wages are paid. Additional incentives are added for facilities built in energy communities that are brownfield sites, areas which have or had significant employment related to oil, gas, or coal activities, or a census tract or any adjoining tract in which a coal mine closed after December 31, 1999, or in which a coal-fired electric power plant was retired after December 31, 2009.
Some credits are available as direct payments from the US Treasury Department, with tax-exempt entities eligible to receive all credits as direct payments. Credits are also able to be transferred, which will allow companies to work with a broader range of financiers. The bonus credit is available to those meeting prevailing wages and apprenticeship requirements. It is available for both Production Tax Credit (PTC) and Investment Tax Credit (ITC) .
In the tables below, we highlight the tax credits that will most benefit large-scale energy providers. These tables provide high-level summaries of some of the key opportunities, but do not attempt to summarize every opportunity.
Clean Hydrogen Facility (Construction before January 1, 2033)
The IRA provides credits for manufacturing clean hydrogen. The credit is available at varying levels based on the carbon intensity of the hydrogen, assessed through a Lifecycle Assessment (LCA), which is computed using the Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET) model. Clean hydrogen facilities may be able to gain a PTC or an alternative ITC.
Emissions Threshold Based on LCA (kg CO2/kg H2) |
Production Tax Credit ($/kg) |
Bonus Credit ($/kg)* |
ITC Credit |
<0.45 |
$0.60 |
$3.00 |
6.0% |
0.45 to <1.50 |
$0.20 |
$1.00 |
2.0% |
1.50 to <2.50 |
$0.15 |
$0.75 |
1.5% |
2.50 to <4.00 |
$0.12 |
$0.60 |
1.2% |
* If meeting prevailing wage and apprenticeship requirements
Fuel Credit (January 2025 – December 2027)
Fuel credits are available for any alternative fuel mixtures like biodiesel, renewable diesel, and other alternative fuels. In addition to extending current fuel credits, the IRA develops a new fuel credit, active for two years, for fuels based on the emissions rate multiplied by a base credit rate.
Maximum Base Credit |
Maximum Credit with Bonus* |
Emissions Factor |
Final Credit |
$0.20/gallon
|
$1.00/gallon
|
|
Base/bonus credit x Emissions factor |
* If meeting prevailing wages and apprenticeship requirements
Generation
There are two primary credit types provided for electricity generation facilities: production and investment credits. Prior to 2025, there are specific credits for different types of technology. After 2025, there is the creation of a tech-neutral set of credits for all technologies with zero or negative GHG emissions. The tech-neutral attribute of the credits is particularly noteworthy since previous ITCs applied to solar, and PTCs applied to wind. This creates flexibility among asset developers and owners on how to best monetize the credits, given their financing structure.
Credit |
Credit Applicability |
Base |
Bonus* |
Start Date |
End Date |
|||
Section 45 Production Tax Credit |
Available to: Wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities, and solar facilities. |
$0.003/ kWh |
$0.015/ kWh |
1/1/2023 |
1/1/2025 |
|||
Section 48 Investment Tax Credit |
Available to: solar, fiber-optic solar, qualified fuel cells, qualified microturbines, combined heat and power systems, qualified small wind, waste energy recovery property, standalone energy storage, qualified biogas property, fuel cells using electromechanical processes, dynamic glass, and microgrid controllers. |
6.0% |
30% |
1/1/2023 |
1/1/2025 |
|||
Section 45U Zero-Emission Nuclear Power |
Taxpayer-owned facilities that use nuclear power to generate electricity that did not receive an advanced nuclear production tax credit allocation under Section 45J |
$0.003/ kWh |
$0.015/ kWh |
1/1/2024 |
12/31/2032 |
|||
Section 45Y Clean Electricity Production Credit |
Electricity produced and sold or stored at facilities placed into service after 2024 with zero or negative GHG emissions |
$0.003/ kWh |
$0.015/ kWh |
1/1/2025 |
1/1/2033** |
|||
Section 48E Clean Electricity Investment Credit |
6.0% |
30% |
1/1/2025 |
1/1/2033** |
||||
* If meeting prevailing wages and apprenticeship requirements. This can further be increased by 10% each for meeting domestic content and energy community requirements.
** Subject to early phaseout if emissions goals are met earlier.
Credit for CO2 Sequestration (Construction begins before January 1, 2033) Section 45Q
The IRA incentivizes carbon capture technology, with the credit differing based on the type of technology and each technology has specific capacity requirements. For direct air capture (DAC), the facility must capture at least 1,000 tonnes of CO2 per year. For electric generation facilities, the facility must capture at least 75% of the emissions that would have been released and the capacity must be at least 18,750 tonnes. All other facilities must capture 12,500 tonnes.
Type of Capture |
Base Credit ($/tonne) |
Bonus Credit ($/tonne)* |
Geological storage |
$17 |
$85 |
Capture and utilization |
$12 |
$60 |
Enhanced DAC applied to storage |
$36 |
$180 |
DAC that is utilized |
$26 |
$130 |
* If meeting prevailing wages and apprenticeship requirements.
Clean Vehicles Credit Section 30D (December 31, 2022, to December 31, 2032)
The IRA creates a new incentive for electric vehicle adoption. Each taxpayer can have one EV purchase per year under $55,000 with vans, SUVS, and pickup trucks having the limit increased to $80,000. There is an income limit of $300,000 for joint filers with $150,000 for single filers.
There is no automaker cap and credits can be transferred to dealers and applied at point of sale. After 2023, critical materials or batteries manufactured, assembled, or produced from entities of concern would be disqualified. This would heavily impact the current supply chain, as Chinese manufacturing is a major part of current battery supply chains.
Credit |
Amount |
Requirements |
|
Critical materials |
$3,750 |
Specified portion of the battery must be extracted or processed in North America and countries with which the US has a free-trade agreement. Starts at 40%, increases to 80% after 2026. |
|
Battery components |
$3,750 |
Specific portion starting at 50%, increasing to 100% of assembly after 2028. Minimum 7 kWh. |
|
In addition to the new tax credits, the IRA institutes a new fee for excess methane emissions, starting with emissions in 2024. This fee will apply to production, gathering, processing, transportation, and liquefaction facilities emitting more than 25,000 tonnes of CO2 annually, if the leakage rates exceed a certain threshold. The thresholds are summarized in the table below. Note that facilities that adhere to the Clean Air Act Section 111 requirements for methane emissions (which have not yet been finalized) will not be subject to this fee.
METHANE WASTE EMISSIONS FEE |
|
Facility Type |
Emission Threshold (% of natural gas volume) |
Petroleum and Natural Gas Production
|
0.20% |
Nonproduction Petroleum and Natural Gas Systems
|
0.05% |
Natural Gas Transmission
|
0.11% |
The methane emissions fee levels are summarized in the table below.
FEE (PER TONNE EXCEEDED) |
||
2024 |
2025 |
2026 and onward |
$900 |
$1200 |
$1500 |
While imposing fees for excess emissions, the IRA also provides needed funding and resources to combat methane leaks. These take the form of $850 million for monitoring and reducing methane for relevant oil and gas facilities, as well as an extra $700 million for “marginal conventional wells.”
The IRA bill is to date the largest climate bill the United States has passed and will have long-term effects on climate technology, electricity demand and generation, and emissions for energy providers, energy asset owners/developers, and, of course, customers. The intention behind these credits is to significantly accelerate the deployment of clean energy while driving newer technologies down the cost curve. With these new financial incentives, energy providers will need to revisit assumptions about their load/demand forecasting and asset planning. Further, energy providers will need to revamp and improve their methane tracking systems to reduce their exposure to these incremental fees.
Low-Carbon Technologies
Forecasting and Planning
Increased Fees and Taxes
While the IRA does a great job to incentivize clean energy, the bill is not a panacea and will require complex navigation to maximize its benefits to customers and utilities. Due to its nature as a budget reconciliation bill, the IRA does not solve a plethora of other challenges and constraints to move toward a low-carbon economy. For instance, the IRA does not solve the permitting problems, supply chain woes, or the cooperation and buy-in of state commissions.
The IRA bill is a historic bill that will rapidly accelerate the decarbonization of the energy sector. Energy providers will see huge benefits in increased project funding and clean energy capacity growth. The myriad tax credits will require careful understanding to implement properly, and the new methane fees will require a new focus and diligence in methane reporting and tracking. With foresight and planning, the IRA should prove to be the incentive to ensure that a net-zero emissions world is within reach.
Guidehouse is a global consultancy providing advisory, digital, and managed services to the commercial and public sectors. Purpose-built to serve the national security, financial services, healthcare, energy, and infrastructure industries, the firm collaborates with leaders to outwit complexity and achieve transformational changes that meaningfully shape the future.