The Inflation Reduction Act (IRA) is the “biggest step forward on climate ever, and it’s going to allow us to boldly take additional steps towards meeting all of my climate goals” claimed President Joe Biden after signing it into law on 17 August.
Biden views the IRA — and its $369bn of funding for climate-related spending and clean-energy tax credits — as a down payment on an all-in political bet that the world’s most powerful industrial nation can transform its $22trn economy by 2050 to become carbon neutral, while remaining net self-sufficient in energy at a cost consumers can afford.
Winning that wager will be a massive undertaking, and a challenge that Biden has likened to the nation’s successful 1960s manned Moon mission.
The new climate law was the best Biden could hope for after 18 months of bitter intra-party disagreements over its language and scope. Left-wing Democrats rejected a national carbon tax as an “inadequate” solution and a federal clean-energy standard was too politically contentious.
The eventual compromise focuses on aggressive use of the federal tax code to supercharge supply and demand for clean electricity, clean fuels and electric vehicles (EVs), and promote energy efficiency. There are also tens of billions of dollars for emissions curtailment, environmental justice, and multiple other climate initiatives.
In exchange for their support, the two most rebellious Democrat senators — Joe Manchin and Kyrsten Sinema — won concessions on what taxes and other revenue would finance the package, including a provision that prevents new permits for wind and solar power being granted on federal lands unless the acreage is first offered for oil & gas leasing.
Climate activists are now looking for workarounds to prevent this retrograde part of the bill from being implemented, such as the Department of the Interior (DoI) only offering up leasing areas that are unattractive for the oil industry, but such moves would be likely to face considerable opposition and court action from the fossil fuels sector.
The IRA also puts solar and wind tax incentives in place for at least a decade, ending Congress’ cycle of short-term extensions — often after their expiration — while generous new ones for batteries, carbon capture and storage, hydrogen, and standalone storage have also been established on a multi-year basis.
Wind and solar projects are now eligible for production tax credits (PTC) of up to $26/MWh — and developers, in some cases, have new flexibility to sell or buy them — or take cash instead.
“It will be a monumental change. I think we have created a really long runway where people can make investments in renewable and clean energy and change behaviours [to become more] environmentally friendly,” said Lauren Collins, a partner at law firm Vinson & Elkins.
Clean energy manufacturing is a major beneficiary of the new legislation, said Collins, who is engaged in discussions with clients looking to either re-shore renewable technology production capacity or to purchase US-made components.
The Inflation Reduction Act of 2022 provides new and expanded tax credits that will play a central role in supporting President Joe Biden’s ambitious goals of a carbon-free grid by 2035 and a net-zero economy by mid-century. Here are some of the key tax provisions:
Solar:
Renews the investment tax credit (ITC) — which effectively provides subsidies of up to 30% of the upfront project capex, depending on apprenticeship and wage requirements — until at least 2032.
These provisions apply only for projects of 1MW or larger projects during construction and for any alteration or repair during the first five years, but not routine operations and maintenance.
A “bonus” additional 10% ITC is available from 1 January 2023 for using a certain percentage of domestic iron, steel, and manufactured products, while a further 10% is possible for placing qualified facilities in brownfield sites or areas with former high employment in fossil extraction or generation.
Solar projects are now eligible for the production tax credit (PTC) that has been available to the wind industry for many years — at the full $26/MWh for ten years, retroactive to 1 January this year.
Onshore wind:
Projects are eligible for the full PTC and ITC values, retroactive to the start of 2022. If new apprenticeship and wage requirements are not met starting 60 days after the IRS issues rules for their application, the base rates decline to $6/MWh and 6%, respectively.
Onshore wind is also eligible for the “bonus” 10% PTC increases.
Transferability:
Starting on 1 January 2023, solar and wind developers will be able to directly sell ITCs and PTCs to unrelated third parties (entities with tax liabilities) for cash.
Buyers cannot re-sell the credits. Presently, tax investors purchasing a credit are required to have an ownership stake in the facility.
Buyers will require indemnity in case the IRS later rules that the project did not qualify for the credits sold by the developer.
Standalone storage:
There is a new 30% ITC for projects placed in service starting in 2023. To qualify, a project must either satisfy new apprenticeship and prevailing wage requirements or be exempt from them by starting construction no more than 60 days after the IRS issues guidance.
Direct pay:
This is a new provision limited to new tax credits for carbon capture and storage and clean hydrogen in the power sector.
A project placed in service starting in 2023 can elect over a five-year period to receive 100 cents to the dollar in cash from the IRS in lieu of tax credits.
Investors can benefit from new credits for both new factory construction and upgrades, and production of each individual component.
In addition, the act gives the Department of Energy authority for up to $250bn in new loan guarantees for repurposing both active and retired energy infrastructure, such as fossil-fuel and nuclear power plants, including prolonging the commercial lives of the latter; $100bn more for its existing renewable-energy and EV-manufacturing loan programmes; plus $5bn to support administrative and other costs.
The IRA also amends the 1970 Clean Air Act, the country’s primary federal air quality law, that Democrats said clearly gives the Environmental Protection Agency (EPA) authority to regulate greenhouse gases as “air pollutants” from fossil combustion. But in June, the US Supreme Court restricted the EPA from broad regulation of power plant emissions (25% of the US total), citing absence of clear and expansive authority from Congress.
Democrats now believe that the new law does give the EPA expansive authority to broadly regulate power-sector fossil-fuel emissions — but this is likely to be tested in the courts in the months ahead.
Industry body American Clean Power Association (ACP) expects the law to spur 525-550GW of new utility-scale battery storage, solar, and wind power projects this decade, while creating 550,000 sector jobs.
Even ACP’s low-end forecast would require 66GW of new build annually over eight years, more than double the national record of 28.5GW in 2021.
Not to be outdone, counterpart Solar Energy Industries Association (SEIA) predicts the law will be “instrumental” in ensuring that the industry will meet its 50GW goal of domestic manufacturing capacity by 2030, a roughly tenfold increase.
The green miles ahead
While replete with spending and subsidies, federal agencies, notably the Internal Revenue Service (IRS) and DoE, will need to write guidance for the new policies in the law to clarify eligibility criteria, and how they will enact and enforce them. This is a huge exercise with no firm completion deadlines.
Tax lawyers expect the IRS to take four to six months to issue guidance, although this process could drag on much longer despite the agency facing lobbying and political pressure to act fast. Even if the agencies meet their own rulemaking timetables and investment takes off, achieving Biden’s emissions reduction goals largely depends on ramping supply of clean electricity and fuels, and EVs. Standing in the way are multiple obstacles, some of which the climate law doesn’t address.
Big missing puzzle pieces include domestic manufacturing supply chains, particularly for batteries, offshore wind, and solar modules, a 21st-century electric grid and regulatory governance, and effective federal and state permitting regimes for energy infrastructure and mining of critical minerals.
Take solar. The US lacks domestic solar ingot, wafer and cell manufacturing capacity and has modest ability to produce solar modules (about 7GW on a direct-current basis), inverters (about 1GW), and trackers. There are only three manufacturers of solar specialty glass in the US.
The country installed a record 23.6GW of capacity in 2021 with about 80% of the solar modules supplied from Cambodia, Malaysia, Thailand, and Vietnam. The risk of over-reliance on foreign sourcing was laid bare earlier this year.
Potential new US tariffs on Chinese-branded solar panels from those four nations froze most development activity here, prompting the SEIA to warn that 24GW of projects and 100,000 jobs could be lost.
In June, Biden issued a controversial 24-month tariff exemption even before his administration could complete an inquiry into whether those nations are using cheap components dumped by China to avoid existing US duties in place since 2012 on its own directly imported products.
SEIA now claims the climate law changes everything. “For the first time, the US has industrial policy in place that will usher in a new era of clean energy manufacturing,” said CEO Abigail Ross Hopper.
The IRA does not have a tax credit for long-haul transmission lines, a key shortcoming: the US brought less than 300 miles (483km) of high-voltage power lines into service in 2021 — and more than 900GW of clean-energy projects await interconnection.
The country also lacks measures to streamline permitting by federal agencies where bureaucratic delays can add years to project development. Democrats’ parliamentary procedure to pass it in the Senate did not allow their inclusion.
While Joe Manchin won a pledge from party leaders to introduce a permitting reform bill by 30 September, the outlook is tenuous. It would limit permitting reviews to two years for both clean energy and gas pipelines. The party’s left flank isn’t happy.
“We will be united in defeating the separate Manchin ‘permitting reforms’ that will accelerate climate change and pollute black, brown, indigenous, and low-income communities,” said Representative Rashida Tlaib, a leader of the 98-member House progressive caucus.
She added that after Manchin backed off a pledge to support a bigger climate and social spending package last year, “We owe him nothing now.”
Midterm dangers
The White House hopes Biden’s big political win on his signature issue — plus $64bn in the bill to subsidise certain healthcare and prescription drug costs — will strongly resonate with voters in the run-up to US midterm elections in November.
But despite its title, the law will do nothing this year to contain soaring prices. Biden is deeply unpopular in large part because of 40-year high inflation and a failure to keep repeated promises to “shut down” the Covid-19 virus.
This is hurting Democratic candidates in the upcoming 8 November midterms and threatens the party’s control of Congress.
If the result is divided government for his final two years in office, Republicans — who unanimously opposed the bill — would likely seek to leverage their majorities
to undermine parts of it.
For now, though, it is all triumph for Biden. Early modeling by independent researchers showed the new law would cut emissions at least 32% by 2030 from 2005 levels, and 42% in a best-case scenario.
The upper-end estimate, which Democrats were quick to cite as confirming their own 40% forecast, would get the US within striking distance of Biden’s pledge to cut US greenhouse gas emissions by 50-52% by 2030, from 2005 levels.
The spending and tax credits in the new climate law are a “historic step forward” in support of US offshore wind industry development, sector officials said. The key provisions for offshore wind are listed below.
The law, however, creates a potential risk with a new ten-year period in which offshore wind leases cannot advance if 60 million acres on the outer continental shelf are not offered to oil & gas leasing within the preceding year.
Permitting/siting:
$100m is allocated to the Department of Energy (DoE) to conduct inter-regional and offshore wind power transmission planning, modeling, and analysis.
$150m is allocated to Department of Interior (DoI) agencies to hire personnel to facilitate permitting of clean-energy projects on federal lands.
$950m is made available to the DoE for grants to states to help site interstate transmission lines.
Tax credits:
Manufacturers’ tax credit. The new law provides $10bn for this new credit for 30% of the amount invested in new or upgrade factories to build specified renewable energy components, with $4bn earmarked for those located in “energy communities” where job loss will be most impactful by the transition from fossil energy generation (both power from fossil fuels and the production of petrochemicals).
The IRS will allocate these credits; it has 180 days from climate law’s enactment to create a programme to consider and award certifications for qualified investments.
To qualify, construction of, or upgrade to this new tax credit, workers must be paid the equivalent of union wages and hire apprentices. This provision is effective even if construction begins within 59 days of the IRS publishing guidance addressing the new rules.
“Advanced” manufacturers’ tax credit. This is a new credit for each eligible component produced and sold to an unrelated party in the US, starting in 2023 until phase-out in 25% increments starting in 2030 and sunset at the end of 2032.
Sample credit amounts for offshore components include blade, ($20/kW); fixed ($20/kW) and floating ($40/kW) foundations; nacelle assembly ($50/kw), and tower ($30/kW). These amounts are multiplied by the rated capacity of the completed turbine. So a single 5MW turbine could be eligible for $700,000 of tax credits.
Shipyards can claim a credit on 10% of the sales price of a US-made vessel that is purpose-built or retrofitted for use in the development, transport, installation, operation, or maintenance of offshore wind energy components.
Both manufacturers’ tax credits can be sold to unrelated third parties for cash, but buyers cannot re-sell the credits.
Only advanced manufacturers’ tax credits for components are eligible for 100 cents to the dollar in cash from the IRS.
Investment tax credit/production tax credit. The ITC remains through 2024 at the full 30% of project capital cost and then transitions into a zero-carbon technology neutral credit at the same amount for projects that begin construction in 2026 or later. The PTC remains at the full $26/MWh for electricity sent to the grid over a project’s initial decade of operation and is inflation-adjusted annually.
To obtain the full credit rates, new apprenticeship and wage requirements must be met unless construction begins before 60 days after the IRS issues rules for their application.
A developer satisfying these two conditions can qualify for a 10% “adder” to raise values of the ITC to 40% and PTC to $28.60/MWh if domestic content requirements are met for iron, steel, and manufactured products that comprise a project at completion.
Iron and steel must be 100% made in the US.
For US manufactured products, the adjusted percentage for offshore wind is 20% for projects that start construction before 2025, increasing to 55% in 2028.
