The Inflation Reduction Act of 2022, which President Biden signed into law in August, includes nearly $370 billion to fight climate change and underscores the administration’s continued commitment to advancing the renewable energy industry. While some are wondering what the Act does to reduce inflation, the investments this legislation outlines are meant to help reduce emissions from electricity production, transportation, industrial manufacturing, building and agriculture, and to decrease, by 2030, greenhouse gas (GHG) levels in the United States to 40% below 2005 levels.
Since the law passed, various mainstream and industry media outlets, including the National Law Review, have offered analysis of several major provisions outlined in the more than 270-page Act that impact the renewable energy industry. Following is a look at select aspects of some of these key provisions that renewable energy firms may want to evaluate as they outline their future business plans.
Extension and Expansion of Existing Tax Credits for Renewable Energy
The Inflation Reduction Act extends the production tax credit (PTC) and the investment tax credit (ITC) for renewable energy projects placed in service this year through 2024. Projects beginning construction in 2025 would see PTC and ITC credits replaced with technology-neutral, zero carbon emissions production or investment credits.
These credits would begin to phase out once annual greenhouse gas emissions (GHG) from U.S. electricity production are equal to or less than 25% of the GHG production for the 2022 calendar year. Credits also begin to phase out for projects started in the early 2030s.
The Act also extends credits for carbon capture projects beginning construction before 2033. Additionally, it provides critical updates to the 45Q tax credit, which incentivizes the use of carbon capture and storage.
Tax Credits for Domestic Production of Solar Cells, Modules and Components
Building American clean energy supply chains is one of the top aims of the Inflation Reduction Act, which also incentivizes domestic production in clean energy technologies like wind, clean hydrogen and solar. The Act creates advanced manufacturing production tax credits (aka “45X” credits) for a wide range of clean energy components, including solar grade polysilicon, solar modules, and solar cells.
Expansion of Advanced Manufacturing Tax Credits for Energy Storage
The Act also expands advanced manufacturing tax credits to help boost stand-alone energy storage (co-located or installed storage). The ITC will be extended for 10 years for projects that “begin construction” before 2025, including stand-alone energy storage with at least 5 kwh capacity. Combined heat and power system property and energy storage technology projects that begin construction before January 1, 2025, can benefit from the 30% energy tax credit.
Tax Credits for the Production of Green Energy Merchandise
Industrial and manufacturing facilities can take advantage of $10 billion in investment tax credits provided under the Act to produce green energy merchandise. This merchandise includes solar cells and related components, wind turbine components, and renewable fuel production equipment. The Act also extends the $7,500 consumer income tax credit for the purchase of a new electric vehicle and eliminates the per-manufacturer limit on these tax credits.
Upsizing of U.S. Department of Energy (DOE) Loan Programs
The Inflation Reduction Act increases existing DOE loan programs, including authorizing $40 billion for loan guarantees under Section 1703 of the Energy Policy Act of 2005. This new loan authority is open to all currently eligible Title 17 Innovative Clean Energy technology categories, including fossil energy and nuclear energy, according to the DOE.
The Act also creates a new Section 1706 loan guarantee program for energy infrastructure reinvestment financing. As explained in a recent legal industry article, this financing is intended for the cleanup of existing energy infrastructure used to generate or transmit electricity or produce, process and deliver fossil fuels (fuels derived from petroleum or petrochemical feedstocks).
“Direct Pay” to Sell Tax Credits for Renewable Energy
Under the Inflation Reduction Act, eligible taxpayers (e.g., tax-exempt entities, state and local governments, Indian tribal governments) can treat renewable energy credits as a direct payment for taxes due to the IRS. While most taxpayers can’t take advantage of the “direct pay” mechanism, the Act allows taxpayers to transfer certain tax credits, including the ITC and PTC, and make cash payments to third parties. Read more about key provisions for ITC and PTC here.
The upshot of this mechanism, as explained in a recent legal industry article about the Act, is that it “opens the door for projects to be owned by tax-exempt entities, financed by tax-exempt bonds and receive direct payments of tax credits.” Overall, the goal of the Act encourages increased participation in the development of renewable energy production by tax-exempt entities through the enhanced access to tax benefits.
10-Year Extension of Tax Credits for Residential Solar Systems
The Inflation Reduction Act should help drive demand in the United States for solar panels and related equipment with the “residential clean energy credit.” Residential property owners who installed solar energy equipment in their residence anytime in 2022 or who do so through the end of 2032 are entitled to a nonrefundable credit on their federal income taxes that is equal to about 30% of eligible expenses related to the installation of solar heating and other solar products for residential use.
These provisions and others introduced in the Inflation Reduction Act can help fuel growth and innovation for years to come in the renewable energy industry — an industry that has long been seeking more significant support and funding from the federal government to help companies get plans off drawing boards and into action.
As renewable energy firms look to take advantage of provisions in the Act most likely to benefit their business, they should consider reaching out to trusted advisers who can help them navigate this complex legislation — and offer guidance on how best to adapt their business strategy and model to seize new opportunities.
Protiviti’s energy consulting professionals partner with renewable energy providers to help them improve operational performance, and identify, measure and manage regulatory, financial, operational and technology-related risks. Learn more about our services here.
Aaron Ragusa, a Senior Manager in Protiviti’s Business Performance practice and Erin Tucker, an experienced Consultant in Protiviti’s Risk and Compliance practice, contributed to this content.