US climate package contains 'robust' clean energy tax incentives

The new climate investment deal reached between top U.S. Senate Democrats contains substantial clean energy tax incentives.

But the bill, which proposes $369 billion in climate and energy spending over the next decade, excludes some tax breaks added to other proposals from Congress in the past year, including a credit for large electric transmission lines.

"The green energy tax package released [July 27] is robust and similar to the Senate Democrats' December [2021] proposal," according to a presentation from Whitney Stanco, a senior energy analyst at independent research firm Washington Analysis LLC.

The bill, called the Inflation Reduction Act, would restore federal tax credits to their full value for renewable energy projects completed in 2022 or later and remain at that level for at least 10 years, according to Keith Martin, a tax and project finance lawyer with Norton Rose Fulbright. As an example, Martin said that solar projects completed in 2022 would qualify for a 30% investment tax credit, or ITC, assuming they meet prevailing wage and apprenticeship requirements or are exempt from them. The credit could go as high as 50% depending on the location and if the projects use domestic content.

Projects that do not fulfill the wage and apprenticeship requirements could still receive a 6% ITC.

Solar developers would also have the option to claim production tax credits, or PTCs, instead of ITCs on projects placed in service in 2022 or later, he added. Wind and geothermal projects completed in 2022 should qualify for a PTC of $26 per MWh, Martin said, with the credit adjusted each year for inflation.

Mirroring provisions of the defunct Build Back Better Act and a separate proposal from the Senate Finance Committee, the new bill would eventually shift renewable energy ITCs and PTCs to technology-neutral credits for zero-carbon electricity resources starting in 2025.

The clean electricity production credits would start to phase down after annual U.S. greenhouse gas emissions from electricity production have dropped by at least 75% from 2022 levels, or 2032, whichever is later.

Turning to other provisions, the bill provides a new 30% investment tax credit for standalone energy storage and rebates of $7,500 for new electric vehicles and $4,000 for used EVs, with the cap raised on the number of qualifying purchases. Along with encouraging clean energy production, the bill provides $60 billion to support domestic clean energy and transportation manufacturing.

The package would also provide a tax credit for existing nuclear plants and extend and modify the credit for carbon oxide sequestration. For the carbon storage credit, the modifications would be in line with the amounts in the House-passed Build Back Better Act.

The legislation also includes a direct pay option for clean energy credits, although the provision is limited "essentially to tax-exempt and government entities," Martin said. However, direct payments would be available for section 45-Q credits for carbon capture and PTCs for clean hydrogen production and advanced manufacturing of renewable energy components.

Utilities favor bill's contents

Rural electric cooperatives praised the measure. Rural utilities have said the lack of a direct pay option has inhibited their ability to invest in clean energy.

"Direct access to energy innovation tax incentives is absolutely critical," said Jim Matheson, CEO of the National Rural Electric Cooperative Association. "This bill creates direct incentives for co-ops to bolster investments in carbon capture, grid modernization, renewables, battery storage and other energy technologies."

The Edison Electric Institute, which represents U.S. investor-owned utilities, applauded the bill's energy tax provisions.

"We are pleased that the proposed legislation includes a robust clean energy tax package that will provide significant long-term benefits to the customers and communities that we serve," Edison Electric Institute President Tom Kuhn said in a statement.

President Joe Biden endorsed the Senate agreement during a July 28 press briefing and said he expected the House to pass the bill after the Senate is expected to vote on it the week of Aug. 1.

"It will be the most important investment — not a hyperbole — the most important investment that we've ever made in our energy security, and developing cost savings and job-creating clean energy solutions for the future," Biden said.

Hydrogen PTC

The legislation preserved a $3/kg hydrogen production tax credit, or 60 cents/kg if the project does not meet labor requirements. It also maintained the preference for green hydrogen produced from zero-carbon power by allowing 100% of the credit to be claimed only by production that emits less than 0.45 kg of CO2-equivalent emissions per kilogram of hydrogen.

The latest version set a higher hurdle than the original Build Back Better bill for blue hydrogen production, which uses natural gas as an input and carbon capture technology to mitigate emissions. Hydrogen production that emits between 0.45 kg and less than 2.5 kg of emissions per kilogram of hydrogen would qualify for a smaller percentage of the total credit — 25%-33.4% — compared to the first version. The bill also eliminates a tier that allowed higher-emitting hydrogen producers to claim 15% of the total credit under the House-passed version of Build Back Better.

Buildings boost

The bill bolsters energy efficiency tax credits for commercial and residential buildings. It expands a tax deduction for commercial buildings, increases and extends Energy Star credits and increases the dollar cap and cost recovery percentage for residential energy efficiency credits. It additionally extends a 30% residential solar tax credit through 2032, expands qualification to battery storage systems and implements a phase-down period through 2034.

The Inflation Reduction Act allocated $9 billion to a suite of programs to support a priority for Biden and Democrats: electrifying buildings that currently run on fossil fuels. That amount is down from $18 billion originally proposed in the budget reconciliation process and $12.3 billion in the House-passed Build Back Better bill.

The bill allocates $4.5 billion through fiscal year 2031 for the U.S. Department of Energy to fund a rebate program for purchases and installations of electric appliances and systems in single-family homes and multifamily buildings. The funding is half of what was originally proposed in the budget reconciliation process. The rebate amounts range from $840 to purchase an electric stove or clothes dryer to $8,000 to buy a heat pump for space heating and cooling.

The bill appropriates $4.3 billion for energy-saving home retrofits, which would be awarded through grants to state energy offices to establish rebates under the Home Owner Managing Energy Savings Act, known as the HOMES rebate program. The bill also allocates $200 million for the DOE to award grants to states to establish programs that provide training courses and other opportunities to bolster the workforce needed to retrofit buildings.

Clean fuels

The legislation extends the $1 per gallon tax credit for biodiesel, renewable diesel and alternative fuels through 2024 and creates a new tax incentive through 2024 for sustainable aviation fuel, or SAF.

The Biden administration in September 2021 announced an initiative to cut U.S. aviation emissions by 20% by spurring production of 3 billion gal/year of SAF by 2030. The administration further set a target of meeting all U.S. aviation fuel demand with SAF by 2050, requiring an estimated 35 billion gal/year of the low-carbon fuel.

The SAF credit in the Senate deal would be at $1.25/gal plus an additional 1 cent/gal for every percentage point by which the lifecycle greenhouse gas emissions reduction of the fuel compared with petroleum-based jet fuel exceeds 50%, granting producers a maximum incentive of $1.75/gal.

After 2024, the Senate deal lays out a new clean fuel production credit for 2025 through 2027 that would apply to all low-carbon fuels, starting at 20 cents/gal for on-road transportation and 35 cents/gal for aviation.

On-road transportation fuels could receive up to a $1/gal credit while SAF would again be eligible for a maximum credit of $1.75/gal if certain labor requirements are met. Those amounts would be adjusted for inflation each year.

What was left out

The legislation did not include some key clean energy tax credits contained in prior proposals. The bill left out an investment tax credit for regionally significant electric transmission lines, a measure called for by supporters of a U.S. grid buildout.

But the bill allocates $2 billion in direct loan guarantees from the DOE for "national interest" electric transmission facilities.

"It's not what the industry ordered or said was their preferred way to help get infrastructure built," Rob Gramlich, president of Grid Strategies LLC, said in an interview. "It's what the waiter brought back to the table, and we have to decide whether we want to use it."

The bill also contains $760 million to aid states with electric transmission siting, one of the main challenges associated with building new power lines. Academic studies estimate the U.S. will need to double or even triple its electric transmission capacity to achieve Biden's goal of a net-zero economy by midcentury.

"Congress, again, in this bill sent a signal that transmission is important," Gramlich said.

The bill also includes $9.7 billion for the long-term resiliency, reliability and affordability of rural electric systems. That money could be used to bolster existing wires, backup power generation, and develop microgrids.

Turning to other tax measures, the new bill excluded language to allow more clean energy providers to form master limited partnerships, according to Stanco. The legislation also skipped a 30% ITC to protect the existing U.S. hydropower fleet.

"The Inflation Reduction Act recognizes that new generation from hydropower and pumped storage is essential to a reliable, clean energy grid, yet it fails to include incentives to preserve and expand the existing fleet," National Hydropower Association CEO Malcolm Woolf said in a statement. As a result, Woolf said the bill "jeopardizes" the 17.5 GW of installed hydroelectric capacity up for relicensing by 2035.

Commodity Insights reporter Jasmin Melvin writes for S&P Platts Dimensions Pro. S&P Global Commodity Insights is owned by S&P Global Inc.

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