The Inflation Reduction Act of 2022 (the “Act”) was signed into law on August 15, 2022. The Act aims to reduce carbon emissions by approximately 40 percent by 2030 and promote investment in domestic energy production and manufacturing. The Act secures approximately $370 billion toward tackling climate change, curbing harmful emissions and promoting green technology through various incentives, including the extension and expansion of existing key energy-related tax credit provisions and the creation of new tax credits to promote carbon capture, clean hydrogen and investment in clean energy technologies and to mitigate greenhouse gas emissions.
This note sets forth a summary of some of the key energy-related tax credit provisions contained in the Act. The Act includes other provisions that target clean energy investment and reduction of greenhouse gas emissions that are not covered in this note, including tax credits for the production of alternative fuels, renewable fuels and sustainable aviation fuels, provisions relating to the federal leases of land for wind and solar, and grants, loans and funding for clean energy technology and environmental justice. Please do not hesitate to reach out to one of our key contacts should you have any queries.
Structure of Clean Energy Tax Credits
The Act extends and expands the existing clean energy tax credits through 2024, then transitions those incentives to a “technology-neutral” clean electricity credit commencing in 2025. The Act establishes a new tax credit structure which will apply to most of the clean and renewable energy tax credit programs (except for the new Advanced Manufacturing Production Credit available under Section 45X for which credits will vary with respect to the eligible clean energy component and no increased tax credit exists). The new structure consists of a base tax credit and an increased tax credit equal to five times the base credit if a project meets the applicable Prevailing Wage and Apprenticeship Requirements (as defined below). In some cases, additional bonus credits are available if the project contains domestic content or is located in certain energy communities. From December 31, 2022, a three-year carry-back (instead of the current one-year carry-back) will also be applicable for certain tax credits.
In order to comply with the prevailing wage requirement (the “Prevailing Wage Requirement”), a taxpayer must ensure that all mechanics and laborers are paid prevailing wages during the construction of a project and for any alternation and repair of such project during the relevant credit period. In order to comply with the apprenticeship requirement (the “Apprenticeship Requirement”), a taxpayer must ensure that no less than the applicable percentage of total labor hours for the project’s construction is undertaken by certified apprentices. The Prevailing Wage Requirement and Apprenticeship Requirement will generally only apply for projects that commence construction 60 days or more after the Secretary of the Treasury (the “Secretary”) publishes guidance on the topic; otherwise the project will be deemed to have satisfied the Prevailing Wage Requirement and Apprenticeship Requirement.
The Act also aims to promote the use of domestic products and the placement of clean and renewable energy projects in certain communities. Generally, taxpayers are eligible for a bonus credit of 10 percent if the project: (i) certifies that it meets a domestic content requirements for the use of steel, iron or manufactured products (20 percent for offshore wind facilities and 40 percent for all other facilities) (the “Domestic Content Requirement”); or (ii) is located in an energy community, such as brownfield sites or areas that previously had significant employment relating to coal, oil or natural gas (the “Energy Community Requirement”). If the project meets both requirements, then the taxpayer could be eligible for both the bonus credits. These bonus credits are generally only available for projects that are “placed in service” after December 31, 2022.
Energy Production Tax Credits
1. Production Tax Credits (Section 45)
The Act expands the application of the production tax credits (“PTC”) for electricity produced from certain renewable energy sources to include, among others, wind (onshore and offshore), solar, geothermal, biomass and hydropower. The Act applies retroactively to projects which “began construction” after January 1, 2022 and applies for projects that “begin construction” before January 1, 2025. Under the revised PTC, a taxpayer may claim a base tax credit of 0.3 cents per kilowatt-hour of electricity produced and sold by a qualifying facility to an unrelated party. In order to qualify for an increased credit of 1.5 cents per kilowatt-hour, the taxpayer must meet the Apprenticeship and Prevailing Wage Requirements (unless the project “begins construction” within 60 days of the date the Secretary publishes guidance on the Apprenticeship Requirement or certain exceptions for small projects). Taxpayers would also be eligible for a bonus tax credit of 10 percent if they meet the Domestic Content Requirement or the Energy Community Requirement.
2. Investment Tax Credits (Section 48)
The Act extends the investment tax credits (“ITC”) for solar energy and most other ITC-eligible property until January 1, 2025, and for geothermal energy projects until January 1, 2035. The Act also broadens the scope of the types of equipment eligible for ITC to include standalone energy storage (which may include batteries, compressed air, and pumped storage), biogas property, microgrid controllers, dynamic glass, and small interconnection facilities (excluding transmission lines). The base tax credit is six percent; however, a taxpayer may claim an increased tax credit of 30 percent if the Prevailing Wage and Apprenticeship Requirements are satisfied (unless the project “begins construction” within 60 days of the date the Secretary publishes guidance on the Apprenticeship Requirement). A bonus tax credit of 10 percent is available for projects that satisfy the Energy Community or the Domestic Content Requirement. There is also an additional 10 percent bonus tax credit available for small-scale solar and wind facilities located in low-income communities, or alternatively a potential 20 percent bonus credit for small-scale solar and wind facilities that are part of a qualified low-income residential building project or a low-income economic benefit project.
3. Carbon Capture Tax Credit (Section 45Q)
The Act extends the carbon capture tax credit to projects that “begin construction” before January 1, 2033 and substantially lowers the minimum capture thresholds required for carbon capture projects. The new carbon capture tax credit will be available for carbon capture projects that are “placed in service” after December 31, 2021. In order to be considered a qualifying facility under the Act, the carbon capture equipment must be designed to capture at least 75 percent of the facility’s carbon oxide output and the facility must meet the following annual thresholds of carbon capture: 18,750 tons for power plants, 12,500 tons for industrial facilities and 1,000 tons for direct air capture facilities. The base credit per metric ton of carbon are as follows: $12 for carbon captured and used for enhanced oil recovery or utilization; $17 for carbon captured and sequestered; $26 direct air captured and used for enhanced oil recovery or utilization; and $36 for direct air captured and sequestered. If the taxpayer satisfies the Prevailing Wage and Apprenticeship Requirements, it will be entitled to claim five times the base credit. Taxpayers may elect to receive their tax credits via the Direct Pay (see below) option for the first five years.
4. Clean Electricity Production Tax Credit (Section 45Y)
A new clean electricity PTC (“CEPTC”) is available for clean energy produced at a qualified facility after December 31, 2024, for which the greenhouse gas emission rate is not greater than zero and which is sold to an unrelated person or sold, consumed or stored by the taxpayer (as long as the facility is equipped with a metering device owned and operated by an unrelated person). The CEPTC is technology-neutral and the eligibility for the tax credits will be determined by an emissions table to be published by the Treasury Department, which will set forth different categories of power production facilities and the CO2 equivalent emissions of each. The CEPTC base tax credit is $0.003 per kilowatt-hour (adjusted for inflation) of electricity produced, with an increased tax credit of $0.015 per kilowatt-hour (adjusted for inflation) if the Prevailing Wage and Apprenticeship Requirements are satisfied, and another 10 percent bonus credit if the Domestic Content Requirement or Energy Community Requirement are met. The tax credits are available until the later of December 31, 2032, and the first year that the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the US are equal to or less than 25 percent of the emissions produced in 2022, after which the tax credits will phase out over four years. During the phase-out, the amount of tax credits will be equal to the product of the amount of tax credit the taxpayer would have normally received multiplied by the applicable phase-out percentage (100 percent during year one, 75 percent during year two, 50 percent during year three and 0 percent after that). A qualified facility that claims a CEPTC may not also claim a CEITC (see below), a PTC under Section 48, an ITC under Section 45, a carbon capture tax credit under Section 45Q, or a nuclear power PTC under Section 45U, among other credits.
5. Clean Electricity Investment Tax Credit (Section 48E)
A clean electricity ITC (“CEITC”) is available for qualified investments in an electric generating facility or energy storage property placed into service after December 31, 2024 and for which the greenhouse gas emission rate is not greater than zero. Like the CEPTC, the CEITC is technology-neutral and eligibility for the tax credits is based on an emissions table to be published by the Treasury Department. The CEITC base tax credit is six percent of the qualified investment, which increases to 30 percent if the Prevailing Wage and Apprenticeship Requirements are satisfied. Taxpayers may be eligible for another 10 percent bonus credit if the Domestic Content Requirement or Energy Community Requirement are met. The ITC can be recaptured if the greenhouse gas emissions rate for the project is greater than 10 grams per CO2 equivalent per kilowatt-hour. The tax credits are available until the later of December 31, 2032, and the first year that the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the US are equal to or less than 25 percent of the emissions produced in 2022, after which the tax credits will phase out over four years. During the phase-out, the amount of tax credits will be equal to the product of the amount of tax credit the taxpayer would have normally received multiplied by the applicable phase-out percentage (100 percent during year one, 75 percent during year two, 50 percent during year three and 0 percent after that). A qualified facility that claims a CEITC may not also claim a CEPTC, a PTC under Section 48, an ITC under Section 45, a carbon capture tax credit under Section 45Q, or a nuclear power PTC under Section 45U, among other credits.
6. Nuclear Power PTC (Section 45U)
The Act creates a new PTC for the production of electricity from a nuclear facility (other than an advanced nuclear power facility under Section 45J). A qualified facility, which must have been “placed into service” prior to the enactment of the Act, is eligible if the electricity produced by the facility is produced and sold to an unrelated person after December 31, 2023. The base credit for the nuclear PTC is $0.003 per kilowatt-hour (adjusted for inflation), with an increased tax credit of $0.015 per kilowatt-hour if the Prevailing Wage and Apprenticeship Requirements are satisfied. The nuclear PTC is also reduced as a facility sells power at prices above $0.025 per kilowatt-hour (adjusted for inflation), with excess over such price resulting in a 16 percent reduction to the amount of the credit, but not below zero. The nuclear PTC is available until December 31, 2032.
Clean Hydrogen Tax Credits
1. Clean Hydrogen (Section 45V & 48(a)(15))
The Act creates a PTC and an ITC for facilities that produce clean hydrogen (including both blue and green hydrogen sources) which “begin construction” before January 1, 2033 and are “placed in service” after December 31, 2022. In order to qualify for a clean hydrogen PTC or ITC, the hydrogen must be produced through a process resulting in a lifetime greenhouse gas emissions rate of no more than four kilograms of CO2 equivalent per kilogram of hydrogen. The taxpayer has the option of claiming either a PTC or an ITC; however, the amount of tax credit available varies based on the volume of CO2 equivalent per kilogram of hydrogen produced. To be eligible for the full base tax credit, the lifecycle greenhouse gas emission rate must be less than 0.45 kilograms of CO2 equivalent per kilogram of hydrogen, which would entitle the taxpayer to a base tax credit of $0.60 per kilogram of hydrogen (adjusted for inflation) for PTC, increased to $3.00 per kilogram of hydrogen (adjusted for inflation) if the Prevailing Wage and Apprenticeship Requirements are met, or to a base tax credit of six percent for ITC, increased to 30 percent if the Prevailing Wage and Apprenticeship Requirements are met. The base tax credit and increased tax credit are adjusted downward as the lifecycle greenhouse gas emission rate increases above 0.45 kilograms of CO2 equivalent per kilogram of hydrogen. Taxpayers may elect to receive their tax credits via the Direct Pay (see below) option for the first five years. However, a clean hydrogen ITC or PTC cannot be claimed with respect to a facility that also includes carbon capture equipment for which any taxpayer was allowed a carbon capture tax credit under Section 45Q for the taxable year or any prior taxable year.
Advanced Manufacturing Tax Credits
1. Advanced Energy Project Credit (Section 48C)
The Advanced Energy Project Credit is available for projects that equip or expand manufacturing facilities that produce specified renewable energy equipment, including wind, solar, and geothermal energy, fuel cells, microgrids, and carbon capture and sequestration technology. The Act expands the Advanced Energy Project Credit to apply to facilities which manufacture electric and hybrid vehicles, property used to produce energy conservation technologies, energy storage systems and components, electric grid modernization equipment or components, and equipment that re-equips a manufacturing facility with equipment designed to reduce CO2 emissions by at least 20 percent. The base tax credit is six percent, which increases to 30 percent if the facility meets the Prevailing Wage and Apprenticeship Requirements. The Advanced Energy Project Credit is an allocated tax credit and is subject to a cap of $10 billion in tax credits, of which at least $4 billion must be allocated to investments which satisfy the Energy Community Requirement.
2. Advanced Manufacturing Production Credit (Section 45X)
The Act creates a new PTC for the production of components related to clean energy such as solar PV cells, wind energy components, and battery cells, provided those products are both produced in the United States (which includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the US and over which the US has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources) and sold to an unrelated person after December 31, 2022. The credit amount varies according to the applicable eligible component, such as $0.07 per watt for solar modules or $35 per kilowatt-hour for battery cells. The Advanced Manufacturing Production Credit will phase out with respect to certain components beginning on January 1, 2030 and will not be available for any component sold after December 31, 2032.
Electric Transmission
The Act invests approximately $2.9 billion in programs related to electric transmission. However, we note that no separate ITC for transmission lines was included in the Act, which had been proposed in the Build Back Better Act (which was ultimately not passed by Congress).
1. Transmission Facility Financing
The Act appropriates $2 billion through September 30, 2030 for the Department of Energy to provide direct loans to non-federal borrowers that apply for loan guarantees for the construction and modification of electric transmission facilities which are designated by the Secretary to be necessary and in the national interest. Loans made under this program must: (i) have a term which does not exceed the lesser of 30 years and 90 percent of the projected useful life of the eligible transmission facility; (ii) not exceed 80 percent of the project costs; and (iii) on the first issuance, be senior to all other financings.
2. Grants to Facilitate the Siting of Interstate Electricity
The Act appropriates $760 million through September 30, 2029 for a new grant program which will provide grants to a state, local or tribal governmental entity with authority to make a final determination regarding the siting and permitting of a Covered Transmission Project (as defined below) for communities that may be affected by the construction and operation of a high-voltage interstate or offshore electricity transmission line: (i) that is proposed to be constructed and operated at a minimum of 275 kilovolts or, with respect to offshore lines, 200 kilovolts; and (ii) for which such entity has applied, or informed a siting authority of such entity’s intent to apply, for regulatory approval (a “Covered Transmission Project”).
3. Interregional and Offshore Wind Electricity Transmission Planning, Modeling and Analysis
The Act appropriates $100 million through September 30, 2031 toward paying the expenses associated with the development of interregional electricity transmission and transmission of electricity that is generated by offshore wind and to conduct planning, modeling and analysis regarding such transmission projects.
Clean Vehicles
1. Alternative Fuel Refueling Property Credit (Section 30C)
The Act extends and revises the existing tax credits available for alternative refueling projects (e.g., electric vehicle charge stations) by increasing the maximum credit available, providing for a 30 percent tax credit on alternative fuel refueling property up to $100,000. Further, the Act allows for the tax credit to be calculated per single unit rather than per location. However, the credit was modified to require the alternative fuel refueling property be “placed in service” in a low-income community or nonurban area. If the alternative fuel vehicle refueling project is depreciable property, the tax credit is six percent unless such project satisfies the Prevailing Wage and Apprenticeship Requirements, in which case the tax credit available increases to 30 percent. The tax credits will be available for projects “placed in service” before December 31, 2032.
2. Clean Vehicle Credit (Section 30D)
The Act extends and revises the existing credit for qualified plug-in electric drive motor vehicles to one for new “clean” vehicles. Taxpayers may be able to claim a tax credit of up to $7,500 if they purchase an electric vehicle which is placed into service after December 31, 2022 but before December 31, 2032 and satisfies the following criteria: (i) the percentage of the vehicle’s battery which is manufactured or assembled in North America is equal or greater than the then-applicable percentage set forth in the Act; and (ii) the percentage of the critical mineral in the vehicle’s battery which is recycled in North America or extracted or processed in the United States or in a country which has a free trade agreement with the United States is equal or greater than the then-applicable percentage set forth in the Act. Each satisfied criterion is equal to a $3,750 tax credit. Certain vehicles are excluded from claiming this tax credit, such as any vehicles placed into service after December 31, 2024 with respect to which any of the applicable minerals contained in the battery were extracted, processed or recycled by a foreign entity of concern and those vehicles over a certain retail price. Additionally, final assembly of the vehicle must occur in North America. Only one credit may be claimed per vehicle. Further, a tax credit cannot be claimed by taxpayers with a modified gross income of more than $300,000 for those married and filing jointly, $225,000 for those filing as a head of household and $150,000 for single filers. No credit is allowed if the manufacturer’s suggested retail price exceeds $80,000 for a van, SUV or pickup or $55,000 for any other vehicle. The clean vehicle tax credit may be transferred to a dealer under certain conditions.
3. Previously Owned Clean Vehicles Credit (Section 25E)
The Act creates a new tax credit worth the lesser of $4,000 and 30 percent of the sale price of previously owned clean vehicles which were purchased before December 31, 2032 and are at least two years old. Clean vehicles whose sale price is greater than $25,000 are excluded. Further, a tax credit cannot be claimed by taxpayers with a modified gross income of more than $150,000 for those married and filing jointly, $112,500 for those filing as a head of household and $75,000 for single filers.
4. Qualified Commercial Clean Vehicles (Section 45W)
The Act creates a new tax credit for qualified commercial clean vehicles, including electric vehicles, placed into service after December 31, 2022 through December 31, 2032, provided that such vehicle is acquired for use or lease by the taxpayer and not for resale, among other requirements. A taxpayer may claim a tax credit which is equal to the lesser of (i) 15 percent of the cost of the qualified clean vehicle (or 30 percent if the vehicle is not powered by gas or diesel) and (ii) the incremental cost for such vehicle as compared to one of similar size and use that relies solely on gasoline or diesel. The maximum credit available per vehicle is $7,500 for vehicles with a gross weight less than 14,000lbs and $40,000 for all others.
5. Domestic Manufacturing Conversion Grant Program
The Act appropriated $2 billion, to be available from fiscal year 2022 through September 30, 2031, toward a program which will provide grants for the domestic production of efficient hybrid, plug-in electric hybrid, plug-in electric drive and hydrogen fuel cell electric vehicles. The grant would require that the recipient of such grant provide not less than 50 percent of the cost of the project carried out using the grant.
Direct Pay and Transferability of Tax Credits
The Act establishes two alternative methods for taxpayers to monetize tax credits outside of traditional tax equity financings: direct pay and transfers to third parties.
1. Direct Pay
In limited circumstances, a taxpayer can elect for the “direct pay” option by applying for a tax refund in an amount equal to the value of their tax credits, effectively making the applicable tax credits “refundable tax” credits for such taxpayers. Direct pay is only available for “applicable entities” which include (i) tax-exempt entities, states or political subdivisions thereof, the Tennessee Valley Authority, Indian Tribal Governments or Alaska Native Corporations; and (ii) through December 31, 2032, owners of projects claiming an Advanced Energy Production Credit (Section 45X), Clean Hydrogen Tax Credit (Section 45V), or Carbon Capture Tax Credit (Section 45Q), for the first five years of the applicable tax credit.
2. Transferability
After December 31, 2022, a taxpayer can transfer all or a part of its clean energy tax credits for certain clean energy projects to an unrelated taxpayer in exchange for cash. The buyer of tax credits must pay cash for the credits and cannot take a tax deduction for the purchase. The seller of tax credits does not include the cash consideration in gross income. In addition, the tax credits may only be transferred once.
For further information, please contact:
Andrew Compton, Partner, Linklaters
andrew.compton@linklaters.com
