Guidehouse Guide to the Inflation Reduction Act for Energy Providers

Guidehouse discusses the applicability of the Inflation Reduction Act to large energy providers

Summary

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.

Tax Credit Provisions

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

 

  • Emissions factor is calculated by: 1 minus the emissions rate divided by 50
  • Emissions rate is kg CO2eq per 1mmBTU calculated by GREET model

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.

 

 

Methane Fees and Funding

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

  • Offshore petroleum and natural gas production
  • Onshore petroleum and natural gas production

0.20%

Nonproduction Petroleum and Natural Gas Systems

  • Liquefied Natural Gas (LNG) storage
  • LNG import and export equipment
  • Onshore petroleum and natural gas gathering and boosting
  • Onshore natural gas processing

0.05%

Natural Gas Transmission

  • Onshore natural gas transmission pipeline
  • Onshore natural gas transmission compression
  • Underground natural gas storage

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.”

Implications for Energy Providers

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

  • Carbon Capture – With the added incentives for sequestering carbon capture, the economics for carbon capture have shifted. Energy providers with existing power plants now have an opportunity to extend the runway for these plants, reducing stranded cost risk. This would allow for supporting resilience and reliability metrics while also increasing the profitability of aging power plants.
  • Hydrogen – The IRA’s maximum incentives of $3.00/kg will make green hydrogen a much more attractive option. Estimates of green hydrogen costs range from $3 to $6.55 per kg, thus the tax incentive could reduce green hydrogen to a very competitive level. Indeed, the incentive also makes blue hydrogen (H2 from natural gas, coupled with carbon capture) cost-competitive with current (gray) hydrogen production. However, companies cannot pursue hydrogen and carbon capture credits for the same facility. With hydrogen becoming cost-competitive, energy providers have greater certainty around the potential demand for utilizing hydrogen in lieu of natural gas.

Forecasting and Planning 

  • IRP Load Forecasting – Many of the demand scenarios and assumptions in Integrated Resource Planning (IRPs) will need to be re-examined. The focus on energy efficiency and credits for heat pumps and direct home and commercial building improvements will accelerate adoption and shift the load profile. Many systems that peak in summer could see shifts to winter peaking as the electrification of heating increases. The reduction in the price for electrification will accelerate the predicted growth of demand in the electricity sector. EV adoption is also expected to accelerate because of favorable incentives, further modifying the demand curve. The IRA will also impact any existing energy efficiency programs, as well as demand response initiatives. With added federal incentives, it is unlikely consumers will adopt utility programs that are unable to compete with federal incentives.
  • Demand Management and Customer Programs: The energy efficiency provisions of the IRA create a tremendous opportunity for energy providers to work with state agencies administering the energy efficiency incentives to maximize the value of energy providers' complementary energy efficiency, demand response, and electrification programs to ratepayers and program participants.
  • Integrated Resource Plans – The extension of the PTC and ITC credits, as well as credits related to carbon capture, will impact utilities’ existing Integrated Resource Planning process. Deployment of renewable assets may accelerate to ensure credit eligibility, while select thermal asset retirements may be deferred if the carbon capture technology is installed to benefit from the carbon capture credits. PTC and ITC credits will impact whether energy providers pursue power purchase agreements or decide to build their own. These credits may reduce the customers’ bill, enhancing current customer affordability initiatives.
  • Regulatory Environment – Prior to the IRA, many energy providers were setting ambitious goals of net-zero greenhouse gas emissions by 2050. These were not prompted by any US standards, but rather proactive stances the businesses decided to pursue. With the advent of the IRA, energy providers now have incentives at a federal level that align with their net-zero ambitions. Furthermore, the development of a technology-neutral set of credits allows energy providers more flexibility and creativity to pursue other avenues. These credits simplify the already existing complex law and allow for the deployment of more capital.

Increased Fees and Taxes

  • Methane Fees – Most energy providers already report methane emissions to the US Environmental Protection Agency. However, the new methane fees will provide extra incentive to invest in leak-detection technology and more closely monitor leaks. Energy providers will need to carefully understand which facilities the new methane fees apply to and understand the emissions risks at these facilities. There are several new sources of federal funding that may allow for new investments and pilots in methane-detection technology. Energy providers will have to also understand if the pending Clean Air Act applies to them and how that may eliminate the impact of the methane fee.
  • Bonus Credit Maximization – The IRA provides heavy incentives to use domestic content, perform work in energy communities, and pay prevailing wages paired with an apprenticeship program. These are all very specific incentives that not everyone will be able to maximize. Energy Providers should start to look at talent pipelines, locations, and supply chains to carefully evaluate whether all these credits can be achieved, and which projects will decide to pursue them.

Remaining Constraints

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.

Conclusion

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.

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