On August 16th, President Joe Biden signed into law a bill proposed by Senator Joe Manchin and Majority Leader Chuck Schumer known as the Inflation Reduction Act of 2022. As expressed in the Statement of Administration Policy released by the president, “this legislation would lower health care, prescription drug and energy costs, invest in energy security, and make our tax code fairer–all while fighting inflation and reducing the deficit.” This bill is comprised of many parts, several of which are energy-related and are sure to have a substantial impact on the industry.
The most notable energy-associated bill item is the $369 billion set aside to fight climate change. The bill aims to encourage a 40% reduction in U.S. greenhouse gas (GHG) emissions (from 2005 levels) within the next ten years. Below is a chart detailing the breakout of funds.
The Extension of Production and Investment Tax Credits
The legislation envisions an expansion of the incentives associated with renewable energy, including an extension of the production tax credits (PTC) for wind, solar, geothermal, biomass, hydropower, municipal waste, and marine and hydrokinetic projects that begin construction before 2025. The credits will be offered for clean hydrogen produced after 2022 at a facility constructed before 2033. Under this bill, the current PTC phase-downs for wind projects will be removed as long as wage and apprenticeship requirements are met.
Another incentive, the investment tax credit (ITC), is now expanded to cover solar, combined heat and power, qualified fuel cell, microturbine, waste energy, small wind, biogas, storage technology, and microgrip controllers for projects starting before 2025 and geothermal for projects beginning before 2035. The previously reduced ITC for solar is restored to the original rate of 30% of eligible costs incurred during project completion.
While most of the PTCs and ITCs available terminate at the start of 2025, the government still intends to provide a similar incentive known as the technology neutral credit. This credit will follow the rules of the PTC and ITC but be accessible through the end of 2033 or the first year succeeding the time when U.S. GHG emissions reduce by at least 75% in comparison to 2022.
Furthermore, specific domestic projects are now eligible to earn an additional PTC and ITC equal to 10% of eligible costs. To satisfy the domestic content requirements, 40% of the total manufactured project products must be produced in the U.S. For offshore wind projects, the percentage drops to 20%. If a project is located in a low-income community or specific “energy community,” such as historically coal communities, specific brownfield sites, and areas of significant coal, oil, or natural gas employment, an additional 10% credit is available for award.
In summary, generation projects had existing subsidies expanded – which should drive continued investment in the space.
Extension of the 45Q Carbon Capture Credit
The legislation also includes a much-anticipated extension of the 45Q carbon capture credit for projects starting construction before 2033. The minimum requirement for carbon capture is now reduced, and an enhanced credit for direct air capture facilities has been added. Now, the minimum direct air capture is 1,000 metric tons. For an electricity generating facility, the minimum is 18,750 metric tons, and the equipment needs to to have a capture design capacity of 75% for total emissions. Overall, the wage and apprenticeship requirements have increased, as shown by the chart below.
Another notable action in this bill intended to thwart climate change is the $1.15 billion allocated towards grants and incentives to conserve private forests. This is an effort to protect the lands from development and manage them in ways that will capture more carbon.
This bill offers a 10-year PTC for up to $3/kg on clean hydrogen if the lifecycle GHG emissions are less than 0.45 kilograms (kg) of CO2 equivalent per kg of hydrogen. If this requirement is not met, but the hydrogen produces up to 4kg of CO2 per kg of hydrogen, the facility is eligible for a partial credit. Facilities that are already in operation and do not produce clean hydrogen, can be modified to become eligible for the credit. A facility is only be eligible to receive one credit type, either the ITC, PTC or 45Q credit.
A unique component of this bill is the concept of transferring tax credits to cash. Cash payments typically only apply to tax-exempt entities; however, this legislation has included the ability for the transfer payments to be applied to CCS credits, clean hydrogen PTCs, and some other PTCs. This was included in the legislation to remediate any overwhelming effect on the tax equity market. Our view is that this will significantly improve the financing available to CCS projects, particularly debt financing for sizeable interstate pipeline projects. Those projects will now have a federally funded cash credit as a revenue stream if they qualify under the 45Q program.
The IRA bill represents one of the most significant investments in energy infrastructure made historically. Its impacts will be far-reaching and have major implications, especially in the industrial decarbonization space, including CCS and hydrogen. These investment areas should be carefully monitored for new project announcements following the bill’s passage.
Andrew Schaper is a professional engineer and principal of Schaper Energy Consulting. His practice focuses on advisory in oil and gas, sustainable energy and carbon strategies.