The Inflation Reduction Act of 2022, not to be confused with an Individual Retirement Account, is a bill passed that aims to reduce the deficit, lower prescription drug costs, and invest in domestic energy production while promoting clean energy solutions. The Inflation Reduction Act or IRA modifies, extends and creates a variety of tax credits for green energy through 20331. It also raises a superfund tax on crude oil and imported petroleum to 16.4 cents per barrel. Proponents of the bill have shown model simulation2 output showing greenhouse gas emissions could decrease 24% to 35% by 2030 compared to 2005 levels.

There are eight areas within the entirety of the bill, with each area then broken down into subtitles and subsequently parts. We will take a brief look at the energy-related portions with a cost estimate of $369 billion dollars3, and how it could affect future decisions on investment for pursuing cleaner energy production.

Some highlights of the IRA include:

  • Tax credits for clean hydrogen production
  • Nuclear production tax credits
  • Extends existing energy investment tax credits (ITC) for solar, geothermal, micro turbine, small wind, offshore wind, combined heat and power, or waste energy recovery projects to 2034 when it is replaced by a technology-neutral Clean Electricity ITC
  • Extends existing production tax credits (PTC) for renewable energy to 2024 when replaced by a technology-neutral Clean Electricity PTC
  • Substantial tax credits for carbon capture and sequestration
  • Incentives for offshore wind
  • Loan Guarantee Program of $40 billion to eligible products
  • A methane emissions fee starts at $900/metric ton in 2024 that rises to $1500/mt by 2026 for facilities at emit over 25,000 mt of carbon dioxide equivalent
  • Tax credits for clean energy component manufacturers

The IRA is almost 300 pages, and the bill language can be tedious and difficult to read. In fact, its application is still being worked on by the Internal Revenue Service. In this article, we will focus on just the Investment and Production Tax Credits of the IRA. Each of these concepts are the most likely to be available to our current and future customers.

Investment Tax Credits

The Investment Tax Credit or ITC is a federal income tax credit for certain types of renewable projects including solar, geothermal, and fuel-cell energy. Before the IRA, owners of these facilities could historically claim a tax credit of up to 30% of their project’s capital costs, with phase down percentages each year depending on year of construction. For example, the ITC for solar facilities starting construction on or after January 1, 2024, was only 10%. The enactment of the IRA of 2022 now extends and makes available an ITC of 30% for solar facilities that begin construction before Jan 1, 2025. In addition to solar, the ITC also now includes standalone energy storage technology. The ITC is 30% through 2032, and subsequently becomes 26% in 2033, and 22% in 2034. As currently written, the ITC is not available after 2034.

There are two types of concepts within the new tax credits. There is a ‘base’ rate under certain conditions and then there are supplemental requirements that have the impact of being able to add additional tax credits. The base rate of ITC is 6% for solar, fuel cells, waste energy recovery, heat and power, and small wind properties. The ITC is 2% for micro turbine-based technologies. The ITC can be up to 30% and 10% respectively depending on whether the project meets some or all of the supplemental labor and apprenticeship requirements. In addition to the 30% credit, there are potential supplemental credits available. The supplemental or bonus tax credits are:

  • Tax credit enhancements related to domestic content bonus– any project otherwise eligible for the ITC can claim up to an additional 10 percent if the project meets certain domestic content percentages for content made in the U.S., including steel, iron, and other manufactured products that are components of the final construction. This could be difficult to gain, especially in the first years of the IRA due to current U.S. manufacturing capability.
  • Energy community bonus – a 10% incremental bonus for wind and solar facilities that satisfy certain requirements in an energy community, such as being located in a brownfield site or area of high unemployment due to the closing of a nearby coal, oil, or natural gas plant.
  • Low-income bonus—a 10-20% tax credit for qualifying projects that are less than 5 megawatt and with rates determined by paying prevailing wage and meeting apprenticeship or domestic content requirements allowing for an allocation for environmental justice solar and wind capacity credits in a low-income community or housing project. This is only for ITC and is subject to a 1.8 GW program cap per year and the IRS may not qualify a project for these adders if they already have qualified adders.

Production Tax Credits

Production Tax Credits or PTC’s is a technology-neutral, emissions-based clean energy production credit that enables project owners to receive a tax credit based on how much electricity is generated. The current credit, which is adjusted by an inflation adjustment factor is 2.75 cents per kWh4 for facilities coming online after December 31, 2021, and that have met prevailing wage and apprenticeship requirements. The PTC is dependent on electricity produced and is available for 10 years after project completion. Just like the ITC, the PTC includes the opportunity to garner additional tax bonus credits, which are described below:

  • Tax credit enhancements related to domestic content bonus – increase of 10% if the project meets certain domestic content percentages for content made in the U.S., including steel, iron, and other manufactured products that are components of the final construction. Just as in the case of the IRA, this could be difficult to gain, especially in the next few years due to current U.S. manufacturing capability.
  • Energy community bonus – a 10% incremental bonus for wind and solar facilities that satisfy certain requirements in an Energy Community, such as being located in a brownfield site or area of high unemployment due to the closing of a nearby coal, oil, or natural gas plant.

As you can see, the Inflation Reduction Act of 2022 allows you, as a potential project owner or off-taker, to potentially fund projects that would not have been economically viable without the program. The project owner can elect either the ITC or PTC, but not both.

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Sources
1Inflation Reduction Act Tax Changes: Details & Analysis | Tax Foundation
2Princeton University, Rapid Energy Policy Evaluation and Analysis Toolkit (REPEAT), Preliminary Report: The Climate and Energy Impacts of the Inflation Reduction Act of 2022, August 4, 2022
3Summary: The Inflation Reduction Act of 2022
4Renewable Electricity Production Credit Amounts for Calendar Year 2022