Impacts of the Inflation Reduction Act

The Inflation Reduction Act of 2022 would restore tax credits for solar and wind projects to their full rates and ensure they stay in effect at those levels for at least another decade, removing the ambiguity and unknowns that were bad for business. In addition, the act would introduce tax incentives for standalone storage and hydrogen projects as well as expanding and extending 45Q carbon capture credits. It also includes other measures that encourage energy efficiency, electric vehicle adoption, and investment in advanced manufacturing. If it passes Congress, it would provide a great boost to all things related to the energy transition.

So, what happened?

Ongoing efforts aimed at energy security and climate change since the Build Back Better plan failed have finally come to a head with the newly proposed legislation (this time supported by Sen. Joe Manchin, D-W.Va.) called the Inflation Reduction Act of 2022. Among other things, the legislation will invest nearly $370 billion in energy security and climate change programs over the next decade. This investment will aim to incentivize further renewable energy development, increase electric vehicle (EV) adoption, encourage energy efficiency, and even target emissions from oil and gas infrastructure and the agricultural sector.

To pay for the investment, the bill introduces tax and prescription drug reforms, which should result in a net $300 billion reduction in the deficit over the next 10 years. Most of the benefits of this plan come from tax breaks, meaning this proposal reduces the cost of renewable energy without burdening the cost of traditional energy. The bill has been submitted to the Senate and voting could be set to begin as early as next week. Thanks to the budget reconciliation process, the bill will be able to circumvent the Republican filibuster. It must then pass through the House before President Biden can sign it into law.

So, what does it say?

Within the 725-page legislative text, it is the Title 1, Subtitle D – Energy Security that is of interest to understand what is being proposed in terms of energy.

A few highlights (by no means an exhaustive list) of measures included in the act are:

○ The tax credit qualification for wind, solar and several other types of electricity producing facilities has been extended to those starting construction before Jan. 1, 2025 (previously Jan. 1, 2022).

○ Production Tax Credit (PTC), which is claimed by wind projects has been modified.

• The base PTC amount has been decreased to $0.003/kWh (previously $0.015/kWh). However, this is counteracted by the measure that the base production tax credit amount is multiplied by five (back to $0.015/kWh) should the facility meet prevailing wage and apprenticeship requirements. It is worth noting that this base credit is always adjusted for inflation. The base PTC for projects starting construction in 2022 is $0.026/kWh when adjusted for inflation.
• The phaseout clause which reduced wind project PTC over time has been removed (previously 40% reduction to the base PTC rate). The removal of the phaseout is not retroactive.
• There are new PTC uplift bonuses applicable to the calculated base rate based on meeting domestic content or energy community requirements. These credits can be stacked (10% uplift each).

○ Investment Tax Credit (ITC), which is claimed by solar projects has been modified.

• The base Investment Tax Credit (ITC) amount has been decreased to 6% (previously 30%). However, this is counteracted by the measure that the base ITC is multiplied by five (back to 30%) should the facility meet prevailing wage and apprenticeship requirements.
• The solar ITC phaseout clause is removed (previously 26% going to 22%). The removal of the phaseout is not retroactive.
• There are new ITC uplift bonuses added to the calculated base rate based on domestic content, energy community, and low-income community requirements. These credits can be stacked (10% uplift each).
• Solar projects now have the option to claim the PTC in lieu of the ITC.
• Energy storage projects now qualify for the ITC (previously not available for standalone storage). The ITC is available at the base 6% rate for any projects starting construction before Jan. 1, 2033. Afterwards, it starts phasing out (5.2% before Jan. 1, 2034 and 4.4% before Jan. 1, 2035).

In addition to the above amendments, solar and wind facilities (in fact, any electricity generating facility with greenhouse gas emission rate of 0) starting construction after Dec. 31, 2024, will be eligible for a new technology neutral PTC or ITC which will stay in effect until the latter of the below two options:

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