The Inflation Reduction Act: what it means for clean energy15 December 2022
It is estimated the Inflation Reduction Act (IRA) could more than triple US clean energy production, with about 40% of the USA’s energy coming from renewables by 2030, with some 550 GW of renewable capacity added in less than ten years. It also provides a more stable 10-year window for incentives and marks a move away from the “boom and bust” nature of the previous support regime
The US Inflation Reduction Act of 2022 (IRA), a bill that envisages some $369 billion in energy and climate spending, was passed in the Senate on 7 August by a vote of 51-50 without any major alterations to the climate provisions. It was signed into law by President Biden on 16 August.
The Inflation Reduction Act contains elements of the Build Back Better Act, a larger bill addressing climate change and social policies, which was stalled and never enacted, and builds on measures included in the Bipartisan Infrastructure Law.
The IRA represents the single largest clean energy and climate investment in US history. According to Oded J. Rhone, Edison Energy’s CEO, “this legislation provides critical tools for the private sector to address climate change. This includes tax credits to support the deployment of renewable energy projects, energy storage, and electric vehicles, among other provisions. History shows that mobilising the private sector is an effective way to implement policy and achieve results.”
In the short-term, the IRA provides much needed clarity to the clean energy industry through a 10-year extension of tax credits, along with the creation of new tax credits for emerging technologies, which will lower the cost and increase projects available for corporate offtakers in the mid-term. New incentives for commercial electric vehicle purchases and the accompanying charging equipment will help continue the transition to a cleaner transportation sector and support fleet electrification for companies.
Long-term, the IRA will strengthen US energy security and drive down costs through the combination of the tax credits and billions of dollars invested to bolster the domestic supply chain and advanced manufacturing of clean energy technologies.
Combined with other climate provisions like investments in offshore wind, a methane reduction programme, funding for critical transmission projects, and $27 billion in federal investments through the Greenhouse Gas Reduction Fund, the bill has the potential to reduce US greenhouse gas emissions by over 40% by 2030 (relative to 2005).
The IRA extends both the production tax credit (PTC) and investment tax credit (ITC) for clean energy projects placed in service from 2021 to 2024. Clean energy projects can achieve tax credit rates higher than the current market allows by meeting requirements for bonus adders. The bonus adders are meant to incentivise developers to pay prevailing wages, create jobs through apprenticeships, and develop projects in communities that have been disproportionately impacted by emissions and climate change. The range of ITC value a project can qualify for under the IRA is 6-50% for utility scale projects, reaching up to 70% for projects under 5 MW, compared to 26% under current law. The range of PTC value a project can qualify for is approximately $5-30/MWh compared to the $26/MWh PTC today.
Energy storage systems (ESS) are also eligible to receive the ITC and bonuses under the IRA, including energy storage paired with renewable generation and standalone ESS. The tax credits for standalone ESS will strengthen the financial attractiveness of battery storage deployment at commercial and industrial facilities.
Starting in 2025, the tax credits will transition from their current form to a new technology-neutral tax credit that is based on emissions. Renewable projects with zero emissions would qualify for the same PTC or ITC tax credit value as the 2021-2024 projects.
Two new tax credits are included in the IRA – a Clean Hydrogen ITC/PTC and a Carbon Capture and Storage or Direct Air Capture Credit (CCS/DAC). These are separate from the technology-neutral tax credit structure.
Also included in the IRA is provision for funding to increase domestic manufacturing, strengthen the supply chain, and ultimately lower the cost of critical components of the clean energy transition. These additions to the bill are meant to decrease reliance on imports and ensure the USA can increase energy independence while lowering emissions.
Advanced manufacturing tax credits are available for production and sale of qualifying components such as inputs for batteries, solar panels, and wind turbines, with separate funding available for retrofitting auto manufacturing facilities to produce electric vehicles. Additionally, the IRA provides funding for President Biden’s Executive Order authorising use of the Defense Production Act to increase domestic manufacturing of critical minerals, heat pumps, electrolysers, transformers, and insulation.
A transmission tax credit originally in the bill did not make it into the final version, but the IRA provides the Department of Energy with funding to help support transmission buildout. This includes $2 billion in loans for transmission deemed as a “national interest corridor” and $760 million to help plan, permit, and facilitate interstate transmission lines.
The IRA will have far-reaching repercussions for pretty much every sector in the USA, from transport and energy to buildings and agriculture. For example, included in the IRA’s expansion of the Section 48 ITC is increased credit value for waste energy recovery property and new eligibility for combined heat and power (CHP) systems. Both systems are now eligible for a 6% base credit that increases to 30% if labour requirements are met and includes the stackable domestic content and energy community 10% bonus adders, potentially reaching a 50% total credit. “The increased tax credit for waste-to-energy recovery projects provides a new pathway for both industrial facilities and commercial properties to address resiliency concerns and reduce their emissions,” says Matt Donath, senior policy analyst at Edison Energy. “In addition, the inclusion of these cogeneration systems under the ITC at the same credit level as renewable and other clean energy projects shows the importance placed on moving the industrial sector towards lowering emissions.”
Public input and implementation
The US Department of Treasury, Department of Energy, and Environmental Protection Agency have begun implementation of the new and expanded programmes in the IRA by soliciting public input to aid in creation of programme guidelines.
We anticipate these guidelines, which are needed to fully rollout the law, will be released by the second half of 2023.
With Republicans securing a slim majority in the US House of Representatives in the midterm elections, it is expected that they will conduct oversight investigations of the federal agencies responsible for IRA implementation. While these investigations could cause headaches for the agencies and slow down programme rollout, the Republicans lack the votes in either chamber to repeal the IRA or pass legislation that materially impacts programme funding. If a change in administration occurs after the 2024 election, the IRA could be at risk, but it is widely thought that many of the tax provisions in the IRA will be safe from full repeal. This is largely because new clean technology manufacturing plants and renewable generators made possible by IRA tax incentives are planned in Republican-led states and will benefit the states’ economies with job growth, tax revenue and improved infrastructure.
IRA: why it is transformational – a UL Solutions perspective
“Historically, the US renewables industry has relied on tax credits that required reauthorisation from Congress every few years, which created boom-bust cycles and significant challenges in terms of planning for long-term growth,” says Gillian Howard, global director of sustainable energy and infrastructure at UL Solutions. In contrast, the IRA establishes a 10-year policy in terms of tax credits for wind, solar and energy storage projects. “We expect the IRA to both significantly accelerate and increase the deployment of new renewable energy projects in the USA over the next decade,” Howard says. “This will be transformational.”
“Providing an investment tax credit for standalone storage is the single-most important policy change in the IRA — period,” said David Mintzer, energy storage director at UL Solutions. “This one change sets up all of the other energy storage advantages gained from the new law. Those of us in the BESS industry have been waiting for this to happen for more than 10 years, and this is the most significant legislation to accelerate the transition to clean energy and smart grids.”
The IRA allows placement of battery energy storage systems where energy demand is highest and removes longstanding requirements that storage systems must be paired to solar sources.
Author: Shannon Weigel head of policy, Edison Energy, Irvine, CA, USA
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