A Milestone Day for Energy
Yesterday, President Biden signed the Inflation Reduction Act of 2022 (IR Act) into law. The IR Act aims to address inflation and the federal deficit through healthcare and tax reforms, alongside incentives to promote clean energy and climate change.
The Act includes $369 billion in funding for climate and clean energy investments that will shape the US energy landscape for decades. This historic funding includes financial incentives for companies pursuing clean energy and climate change mitigation including long-term solar and storage tax incentives, investments in domestic solar manufacturing and other critical provisions that will help decarbonize the electric grid.
The passage of this legislation puts the US on track to reduce greenhouse gas emissions by up to 44% below 2005 levels by 2030. The Act also includes steps to secure US energy security by boosting oil and gas production on public lands and the Gulf of Mexico.
As the name suggests, The IR Act aims to address inflation through policies that bring down clean energy and healthcare costs while relieving supply chain bottlenecks. Economists predict the overall impact on inflation will be minimal in the short term and take years to be felt.
Here are additional details on the energy provisions of the Act.
Extension of Tax Credits
Extensions of the investment and production tax credits for renewable energy that begin construction before 2034 (and possibly beyond) are expected to spur expansion of utility scale wind and solar farms, as well as energy storage projects and other clean energy activities. These expanded tax credits will provide certainty for clean energy developers who have faced regulatory incentive uncertainty in the past. There are additional bonus credits for purchasing domestically produced hardware (up to 10%) or locating a facility in an “energy community” (up to 10%). The Act provides for an election for direct payment in lieu of a tax credit for many of the credits it establishes or extends. The election must be made separately for each facility, project or item of eligible equipment.
- Investment Tax Credits (ITC): The ITC is extended for 10+ years. The Act will extend the ITCs through 2034, including projects installed in 2022. Qualifying projects include solar, fiber-optic solar, qualified fuel cell, qualified microturbine, combined heat and power system, qualified small wind, and waste energy recovery properties. For projects more than 1 MW, an increased credit amount of 30% is available if prevailing wage and apprenticeship requirements are met (see below).
- Production Tax Credits (PTC): PTC applies to solar, wind, closed and open loop biomass, geothermal, landfill gas, trash, qualified hydropower, marine and hydrokinetic facilities beginning construction before January 1, 2025. Production tax credits aim to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing. The new base credit amount for the PTC would be 0.3 cents per kWh. This credit would increase up to 2.5 cents per kWh, adjusting for inflation, if certain prevailing wage and apprenticeship thresholds are met for the first 10 years of the project (see below).
Wage and Labor Provisions
In order to receive the 30% ITC or PTC tax credit, projects with a net output over 1 MW must satisfy newly added prevailing wage and apprenticeship requirements. Otherwise, the base credit amount defaults to 6%. The Treasury will release additional guidance on the prevailing wage and apprenticeship requirements, with companies required to comply 60 days after the guidance is released to receive the full tax credits.
- Apprenticeships: The apprenticeship provisions require that no fewer than the “applicable percentage” of total labor hours of construction work prior to the project being placed in service be performed by “qualified apprentices.” The applicable percentage is between 10% and 15%, depending on the year in which construction of the relevant project began. Additionally, there are requirements for the ratio of apprentices to journeyworkers, which are specified by the Department of Labor or the applicable State apprenticeship agency. Contractors or subcontractors who employ more than four individuals performing construction, alteration, or repair work must employ at least one qualified apprentice to perform such work. However, the apprenticeship requirement will still be satisfied if there is a good faith effort to comply based on specific standards set forth in the Act, or pays a penalty to the Secretary of Treasury of $50 multiplied by the total labor hours not in compliance with this requirement [efn_note]Foley & Lardner LLP[/efn_note].
- Prevailing Wage: The prevailing wage provisions require that laborers, mechanics, contractors and subcontractors must be paid wages at least at prevailing wage rates, during the construction, alteration and repair of the facility and for ten years thereafter. Financial penalties will be given for non-compliance and intentional disregard. The prevailing wage and apprenticeship requirements are the same for ITCs and PTCs, except for ITCs the prevailing wage requirement applies for a period of five years after the facility has been placed in service, rather than ten.
Increasing Fossil Fuel Production on Public Lands
The Act contains measures to open avenues for drilling and fast-tracking pipeline construction, specifically the embattled Mountain Valley Pipeline, to increase the available supply and boost US energy security. The Bureau of Land Management (BLM) will be prohibited from issuing wind and solar developments on federal lands unless an onshore oil and gas lease sale has occurred 120 days before the wind and solar lease issuance. Offshore wind is similarly impacted, offshore wind leases will be prohibited unless the BLM completed onshore oil and gas lease sales covering 2 million acres or 50% of the acres parties have expressed interest, whichever is lower.
Carbon Capture Credits
Extends tax credits for carbon capture and sequestration investments to 2033, while renewing several existing incentives, including credits for alternative fuels, carbon capture facilities and energy efficient improvements. The Act substantially amends section 45Q of the tax code, designed to drive corporate investments in carbon capture, boosting credits from $50 per ton to up to $85 per ton if the carbon is stored at industrial facilities and power plants. Capturing carbon from the air would increase from $50 to $180 per ton if stored, and $35 to $130 per ton if used. For the first five years after the carbon capture equipment is put in place the projects will receive direct pay. Currently there are 5,000 miles of carbon dioxide pipelines in the US, and it’s projected 65,000 miles would be needed to store enough carbon to reach net zero emissions by 2050.
The Act’s Methane Emissions Reduction Program seeks to reduce oil and gas sector methane emissions by providing up to $1.55 billion in grants, rebates and loans to help reduce methane emissions, as well as, implementing a methane emission charge. The charge will only apply to specific facilities subject to annual greenhouse gas reporting. Starting in calendar year 2024 there will be a fee of $900 per ton of methane, increasing to $1200 per ton in 2025 and up to $1500 per ton in 2026 and beyond.
Job Creation Potential
This Act sets the stage for businesses to hire hundreds of thousands of new workers in every community to manufacture and deploy energy projects across the US. The more than 100 climate, energy, and environmental investments included in the IR Act are projected to create over 9 million jobs over the next decade - an average of nearly 1 million jobs each year BlueGreen Alliance.
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