Tag: Inflation Reduction Act

Reinventing the American Road Trip: What the Inflation Reduction Act Means for Electric Vehicle Infrastructure

The Inflation Reduction Act of 2022 (“IRA”) signifies a turning point in domestic efforts to tackle climate change. Within the multibillion-dollar package are robust investments in climate mitigation initiatives, such as production tax credits, investment tax credits for battery and solar cell manufacturers, tax credits for new and used electric vehicles (“EV”)1, automaker facility transition grants, and additional financing for the construction of new electric vehicle manufacturing facilities.2 One thing is abundantly clear, the IRA’s focus on stimulating domestic production of electric vehicles means that the marketplace for electric vehicles will see a dramatic change. The Biden Administration has set an ambitious target of 50% of EV sale shares in the U.S. by 2030. However, if electric vehicles are going to achieve mass market adoption, a central question remains — where is the infrastructure to support them?

Addressing gaps in EV Supply and EV Infrastructure

As it stands, the shortage of charging infrastructure is a substantial barrier in the push for mass consumer adoption of EVs.3 Experts estimate that in order to meet the Biden Administration’s EV sale target by 2030, America would require 1.2 million public EV chargers and 28 million private EV chargers by that year.4 Department of Energy data shows that approximately 50,000 EV public charging sites are currently operational in the United States.5 In comparison, gasoline fueling stations total more than 145,000.6 However, federal legislation such as the Bipartisan Infrastructure Law (“BIL”) passed earlier this year signifies a clear commitment to remedying this disparity. The BIL establishes a National Electric Vehicle Infrastructure Formula Program (“NEVI”) to provide funding to States and private entities to deploy EV-charging infrastructure and to establish an interconnected network to facilitate “data collection, access and reliability.”7 The Federal Highway Administration, the federal agency charged with implementing NEVI, proposed minimum standards and requirements that states must meet to spend NEVI funds:

  • Installation, operation and maintenance by qualified technicians of EV infrastructure

  • Interoperability of EV charging infrastructure

  • Network connectivity of EV charging infrastructure

  • Data collection pertaining to pricing, real-time availability and accessibility8

The goal of the proposed rule is to secure EV charging infrastructure that works seamlessly for industrial, commercial and consumer drivers. Combining the historic investments in clean energy and climate infrastructure in the BIL and IRA, the federal government has jumpstarted what will be a fundamental shift in how consumers use transportation. Earlier this week, the Biden Administration announced more than two-thirds of EV Infrastructure Deployment Plans from States, the District of Columbia and Puerto Rico have been approved ahead of schedule under NEVI.9 With this early approval, these states can now unlock more than $900 million in NEVI funding from FY22 and FY23 to help build EV chargers across highways throughout the country.10

Section 13404’s Alternative Fuel Refueling Property Credit

Building up the U.S. capacity to build EVs, and then ensuring people can use said vehicles more easily by shoring up EV infrastructure is a crucial facet of the Inflation Reduction Act. Section 13404 of the IRA provides an Alternative Fuel Refueling Property Credit that targets the accelerated installation of EV charging infrastructure and assets.11 Section 13404 extends existing alternative fuel vehicle refueling property credit through 2032, and significantly restructures the credit by allowing taxpayers to claim a base credit of 6% for expenses up to $100,000 (for each piece refueling property located at a given facility) so long as the property is placed in service before Jan. 1, 2033.12 However, the alternative fuel property must be manufactured for use on public streets, roads and highways, but only if they are (1) intended for general public use, or (2) intended for exclusive use by government or commercial vehicles and (3) must be located in a qualifying census tract (i.e., low-income communities or non-urban areas).13 From a job creation standpoint, the IRA also provides an alternative bonus credit for taxpayers that meet certain wage requirements during the construction phase.14

The Future of EV Infrastructure

EV stations in city streets, parking garages and gas stations will become a prominent part of the nation’s infrastructure as it moves towards a green future. The effort will require coordination among municipal, state and federal policymakers. Even more, electric utilities must ensure that local infrastructure can support the additional strain on the grid. Utilities also have a direct interest in a cleaner, efficient, and less overburdened grid. Federal tax incentives, like the IRA, and subsides from states and local ordinances are integral to the implementation and construction of these networks. The private sector has already taken steps to do its part. In a recent study conducted by consulting company AlixPartners, as of June 2022, automakers and suppliers expect to invest at least $526 billion to fund the transition from gasoline powered vehicles to EVs through 2026.15 This is double the five-year EV investment forecast of $234 billion from 2020-2024.16 Even more, according to Bloomberg, not including deals that have disclosed financials, more than $4.8 billion has already been invested in the EV charging industry this year in the form of debt financing and acquisitions.17 Driven by fast growth and robust availability of government funds, financiers and large companies seeking to acquire EV charging companies, sense immense opportunity.18

FOOTNOTES

1“Electric Vehicle” is used interchangeably with the acronym “EV” throughout this article.

2 Isaacs-Thomas, I. (2022, August 11). What the Inflation Reduction act does for green energy. PBS. https://www.pbs.org/newshour/science/what-the-inflation-reduction-act-do…

3 Consumer Reports (2022, April). Breakthrough Energy: A Nationally Representative Multi-Mode Survey. https://article.images.consumerreports.org/prod/content/dam/surveys/Cons…

4 Kampshoff, P., Kumar, A., Peloquin, S., & Sahdev, S. (2022, August 31). Building the electric-vehicle charging infrastructure America needs. McKinsey & Company. https://www.mckinsey.com/industries/public-and-social-sector/our-insight…

5 U.S Department of Energy. (2022). Alternative Fueling Station Locator. Alternative Fuels Data Center: Alternative Fueling Station Locator. https://afdc.energy.gov/stations/#/find/nearest?fuel=ELEC&ev_levels=all&…

6 American Petroleum Institute. (n.d.). Service station FAQs. Energy API. https://www.api.org/oil-and-natural-gas/consumer-information/consumer-re…

7 U.S. Department of Transportation/Federal Highway Administration. (n.d.). Bipartisan Infrastructure Law – National Electric Vehicle Infrastructure (NEVI) formula program fact sheet: Federal Highway Administration. U.S. Department of Transportation/Federal Highway Administration. https://www.fhwa.dot.gov/bipartisan-infrastructure-law/nevi_formula_prog…

8 The Office of the Federal Register of the National Archives and Records Administration and the U.S. Government Publishing Office. (2022, June 22). National Electric Vehicle Infrastructure Formula Program. Federal Register. https://www.federalregister.gov/documents/2022/06/22/2022-12704/national…

9 United States Department of Transportation. (2022, September 14). Biden-Harris Administration announces approval of First 35 state plans to build out EV charging infrastructure across 53,000 miles of Highways. United States Department of Transportation. https://highways.dot.gov/newsroom/biden-harris-administration-announces-…

10 See Id.

11 As a note, “refueling property” is property used for the storage or dispensing of clean-burning fuel or electricity into the vehicle fuel tank or battery.  Clean-burning fuels include CNG, LNG, electricity, and hydrogen.

12 Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. § 13404 (2022); See also Wells Hall III, C., Holloway, M. D., Wagner, T., & Baldwin, E. (2022, August 10). Nelson Mullins tax report–Senate passes Inflation Reduction Act. Nelson Mullins Riley & Scarborough LLP. https://www.nelsonmullins.com/idea_exchange/alerts/additional_nelson_mul…

13  Id.

14  Id.

15 AlixPartners, LLP. (2022, June 22). 2022 Alixpartners global automotive outlook. AlixPartners. https://www.alixpartners.com/media-center/press-releases/2022-alixpartne… See also Lienert, P. (2022, June 22). Electric vehicles could take 33% of global sales by 2028. Reuters. https://www.reuters.com/business/autos-transportation/electric-vehicles-…

16 Id.

17 Fisher, R. (2022, August 16). Electric car-charging investment soars driven by EV Growth, government funds. Bloomberg. https://www.bloomberg.com/news/articles/2022-08-16/car-charging-investme…

18 Id.

Article By Lawrence L. Ostema and Jeffrey E. Joseph of Nelson Mullins

For more utilities and transportation legal news, click here to visit the National Law Review.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLP

The Inflation Reduction Act: How Do Tribal Communities Benefit?

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“IRA”), ushering in substantial changes for tax law, climate resilience, healthcare, and more in the United States. According to the Biden administration’s press release, the new $750 billion legislation aims to lower everyday costs for families, insist that corporations pay their fair share, and combat the climate crisis. During the signing ceremony, President Biden stated, “With this law, the American people won and the special interests lost […] For a while people doubted whether any of that was going to happen, but we are in a season of substance.”

Notably, the legislation provides significant provisions for tribal communities and the Bureau of Indian Affairs. Once the funding is appropriated by Congress, it will be directed toward drought mitigation programs, fish hatcheries, modernization of electric systems, and more for Native communities, including ones in Alaska and Hawaii.

How the Inflation Reduction Act of 2022 Supports the Environment and Tribal Communities

The Inflation Reduction Act of 2022 contains an array of provisions, including the reduction of drug prices, the lowering of energy costs, and, notably, federal infrastructure investments that benefit Native communities. Andrew M. VanderJack and Laura Jones, Co-Coordinators of Van Ness Feldman’s Native Affairs Practice, highlight the most significant facets of the bill: “This legislation provides some opportunities specifically for tribes and tribal entities, including programs related to climate resiliency and adaptation, electrification, and drought relief. For example, the Emergency Drought Relief program for Tribes extends direct financial assistance to tribal governments to address drinking water shortages and to mitigate the loss of tribal trust resources.”

Pilar Thomas, Partner in Quarles & Brady’s Energy, Environment & Natural Resources Practice Group, expanded on the most significant inclusions for Tribes: “[…] the creation of a Direct Pay tax credit payment program that allows Tribes to receive a payment equal to the clean energy technology tax credits – especially for solar, wind, storage, geothermal and EV charging stations; […] direct funding for electrification and climate resiliency through DOI and USDA; […] access to the greenhouse gas reduction fund, environmental and climate justice grants; and expanded energy efficiency tax benefits and rebates for tribes and tribal members.”

“Tribal governments are also eligible to apply for other programs such as the Clean Vehicle Credit program, the Energy Efficient Commercial Buildings Deduction, and the State and Private Forestry Conservation Programs,” noted Mr. VanderJack and Ms. Jones.

How the 2022 Inflation Reduction Act Has Been Received by Tribal Communities

The 2022 Inflation Reduction Act has received a warm reception from groups such as the National Indian Health Board and Native Organizers Alliance, who laud the bill’s potential to improve environmental, medical, and economic conditions for tribal communities, some of whom still lack access to electricity or clean water. The increase in funding will allow tribes to use green energy technology to increase climate resilience and decrease individual energy costs, while reducing the effects of environmental racism with risk assessments for drinking water and climate hazards. These infrastructural changes will stimulate economic development by creating new jobs. “With critical investments in the Inflation Reduction Act, we’re making sure the federal government steps up to support Native-driven climate resilience, advance tribal energy development, and fulfill its trust responsibility to Native communities,” said Senator and Senate Committee on Indian Affairs Chairman Brian Schatz.

“This legislation will result in hundreds of millions of funding available for Tribes, and non-profits that work with tribes and tribal communities to support the clean energy transition for tribal communities, reduce energy costs for tribal members, and create jobs,” said Ms. Thomas of Quarles & Brady. “The IRA will provide a substantial down payment for every tribe to take advantage of clean energy technologies, energy efficiency and energy savings, and climate resilient solutions for their communities and tribal members individually.  The new projects, technology implementation and economic development opportunities are substantial and will create long term community and economic development sustainable improvements in tribal communities.”

Some groups feel that the new legislation does not go far enough. In an open letter to President Biden, Senate Majority Leader Chuck Schumer, and House Speaker Nancy Pelosi, Indigenous-led advocacy organization NDN Collective argued that Congress’ hesitance to fully reject fossil fuels undermines the stated goals of addressing climate change, a misstep that could disproportionately affect tribal communities at the frontlines of the environmental crisis. “We believe that moving away from investments in the fossil fuel and other extractive industries and reallocating the funding to further research and development will help us find the solutions we need for true decarbonization and large-scale equitable carbon emissions reductions,” the collective stated. “We are already aware of innovative, Indigenous-led solutions that just need the proper funding and support to be scaled and replicated.”

Challenges in Getting the 2022 Inflation Reduction Act Passed

Up to this point, the Inflation Reduction Act has faced significant challenges in Congress. The legislation is the product of extensive compromise over the Build Back Better Act within the Democratic party. The Build Back Better Bill was initially estimated to cost over $3 trillion, and ultimately, the Inflation Reduction Act was passed with a budget of $750 billion. Senator Joe Manchin of West Virginia held back his support of the bill until late July, and Republicans successfully blocked an aspect of the bill that would have capped the price of insulin for Americans with private health insurance. When presented to Congress, the vote was split by party lines with every Republican voting against the bill. Biden has criticized Republicans for this decision, saying at the signing of the Inflation Reduction Act, “every single Republican in the Congress sided with the special interests in this vote — every single one.”

Challenges for tribal governments remain as well, specifically concerning the IRA’s implementation. “Despite the incredible opportunity for tribes, major barriers remain including tribal internal capacity and capabilities, [and] federal regulatory hurdles (such as BIA leasing and easement approvals),” said Ms. Thomas.

“[…] Navigating the complexities of each program and actually obtaining funding is always the challenge,” said Mr. VanderJack and Ms. Jones of Van Ness Feldman. “Tribes and tribal entities should engage directly, whenever possible, with the grant funding agencies to make sure proposals are tailored to fit both program requirements and community needs.”

Early Assessment of How the IRA will Impact Tribal Communities

The Inflation Reduction Act, ultimately, provides meaningful resources and investments for tribal communities in a variety of ways. While the provisions are not as significant as COVID-19 relief and infrastructure funding that tribal governments have received in previous years, the new legislation is nonetheless beneficial. “While the federal grant funding is relatively small, the potential major impact is the ability to access funding through tax credit payments and rebates,” said Ms. Thomas. “This mechanism is critical as it is simplifies tribes’ access to funding (rather than, for example, seeking to obtain funding through the competitive grant programs).”

Article By Chandler Ford, Casey Karthaus, Crissonna Tennison, and Shelby Garrett of The National Law Review / The National Law Forum LLC.

For more tribal law / indigenous peoples legal news, click here to visit the National Law Review.

Copyright ©2022 National Law Forum, LLC

Relief Arrives for Renewable Energy Industry – Inflation Reduction Act of 2022

On August 12, 2022, Congress passed the Inflation Reduction Act of 2022 (“Act” or “IRA”), a $400 billion legislative package containing significant tax and other governmental incentives for the energy industry, in particular the renewable energy industry. The bill will have an immediate impact on the wind and solar industries, along with other clean energy projects and businesses.

SUMMARY

The IRA is a slimmed down substitute for the Build Back Better bill resulting from a compromise with Senator Joe Manchin (D-WV), whose support was necessary for the bill to pass the Senate.

The IRA comes as welcome news to the renewable energy industry as important tax incentives for wind, solar and other renewable energy resources are set to expire or wind down. Existing law also did not provide any federal tax incentives for the rapidly growing stand-alone energy storage and clean hydrogen industries.

The IRA fixes that, and more. The Act extends the investment tax credit (ITC) for solar, geothermal, biogas, fuel cells, waste energy recovery, combined heat and power, small wind property, and microturbine and microgrid property for projects beginning construction before January 1, 2025. It also extends the production tax credit (PTC) for wind, biomass, geothermal, solar (which previously expired at the end of 2005), landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic resources for projects beginning construction before January 1, 2025. The IRA also allows taxpayers to include their interconnection costs as part of their eligible basis for the ITC.

The Act now allows the ITC to be taken for stand-alone energy storage (previously storage was only allowed an ITC if it was part of another project, e.g., solar). Other technologies are also benefitted from the IRA, including carbon capture and sequestration (CCS) (tax credit extended and modified), clean hydrogen (a new credit of up to $3.00 per kilogram of clean hydrogen produced), nuclear power (a new credit of up to 1.5c/kWh) and biofuel (existing credit extended).

The ITC and PTC now come with strings attached. To qualify for the restored 30% ITC and the 2.6c/kWh PTC (adjusted for inflation), projects must pay prevailing wages during construction and the first five years (in the case of the ITC) and 10 years (in the case of the PTC) of operation, while also meeting registered apprenticeship requirements. Projects that fail to satisfy the prevailing wage and apprenticeship requirements will only receive an ITC of 6% or a PTC of .3c/kWh (adjusted for inflation). The prevailing wage and apprenticeship requirements apply to employees of contractors and subcontractors as well as the company. These requirements are effective for projects that begin construction 60 days after the IRS issues additional guidance on this issue. Certain exceptions apply, including for certain small (less than 1 MW) facilities.

On the flip side, the Act includes enhancements that, in the case of the ITC, can increase the credit percentage if a project satisfies certain additional criteria. Bonuses are available for projects that (1) satisfy certain U.S. domestic content requirements (10%) or (2) are located in an “energy community” (10%) or an “environmental justice” area (10% or 20%). An “energy community” is defined as a brownfield site, an area which has or had significant employment related to oil, gas, or coal activities, or a census tract or any adjoining tract in which a coal mine closed after December 31, 1999, or in which a coal-fired electric power plant was retired after December 31, 2009. An “environmental justice” area is a low-income community or Native American land (defined in the Energy Policy Act of 1992) (10%) or a low-income residential building or qualified low-income economic benefit project (20%).

The Act also creates two new methods for monetizing the ITC, PTC, and certain other credits. Tax-exempt organizations will be permitted to elect a “direct pay” option in lieu of a tax credit. In a dramatic change that may have substantial impacts on renewable project finance, the Act permits most taxpayers to transfer the ITC, PTC, and certain other tax credits for cash.

For the first time, the Act includes a tax credit, known as the Advanced Manufacturing Production Credit, for companies manufacturing clean energy equipment in the U.S. such as PV cells, PV wafers, solar grade polysilicon, solar modules, wind energy components, torque tubes, structural fasteners, electrode active materials, battery cells, battery modules, and critical minerals.

The Act also contains major tax incentives, in the form of credits and enhanced deductions to spur electric and hydrogen-fueled vehicles, alternative fuel refueling stations, nuclear power, energy efficiency, biofuels, carbon sequestration and clean hydrogen. Additional grants are available for interregional and offshore wind and electricity transmission projects, including for interconnecting offshore wind farms to the transmission grid.

Additional detail regarding these provisions follow below.

KEY ENERGY PROVISIONS OF THE INFLATION REDUCTION ACT OF 2022

Investment Tax Credit (ITC)

The ITC is extended for projects beginning construction prior to January 1, 2025. The ITC starts at a base rate of 6%. The ITC increases to 30% if a project (1) pays prevailing wages during the construction phase and for the first five years of operation and (2) meets registered apprenticeship requirements. The ITC applies to solar, fuel cells, waste energy recovery, geothermal, combined heat and power, and small wind property, and is now expanded to include stand-alone energy storage projects (including thermal energy storage), qualified biogas projects such as landfill gas, electrochromic glass, and microgrid controllers. For microturbine property the base rate is 2%, which increases to 10% if the prevailing wage and apprenticeship requirements are met.

Projects under one megawatt (AC) and projects that begin construction prior to 60 days after the Secretary of the Treasury publishes guidance on the wage and registered apprenticeship requirements do not have to meet the prevailing wage and apprenticeship requirements to qualify for the 30% ITC.

PREVAILING WAGE REQUIREMENT

The new prevailing wage requirement is intended to ensure that laborers and mechanics employed by the project company and its contractors and subcontractors for the construction, alteration or repair of qualifying projects are paid no less than prevailing rates for similar work in the locality where the facility is located. The prevailing rate will be determined by the most recent rates published by the U. S. Secretary of Labor. Prevailing wages for the area must be paid during construction and for the first five years of operation for repairs or alterations once the project is placed in service. Failure to satisfy the standard will result in a significant penalty, including an 80% reduction in the ITC (i.e., an ITC of 6%), remittance of the wage shortfall to the underpaid employee(s) and a $5,000 penalty per failure. For intentional disregard of the requirement the penalty increases to three times the wage shortfall and $10,000 penalty per employee.

The prevailing wage requirement takes effect for projects that begin construction after December 31, 2022, but not before 60 days after the Secretary publishes its guidance. Projects under 1 MW (AC) are exempt from the requirement.

APPRENTICESHIP REQUIREMENT

For projects with four or more employees, work on the project by contractors and subcontractors must be performed by qualified apprentices for the “applicable percentage” of the total number of labor hours. A qualified apprentice is an employee who participates in an apprenticeship program under the National Apprenticeship Act. The applicable percentage of labor hours phases in and is equal to 10% of the total labor hours for projects that begin construction in 2022, 12.5% for projects beginning construction in 2023, and 15% thereafter. Similar penalties to the prevailing wage penalties apply for failure to satisfy the apprenticeship requirement. A “good faith” exception applies where an employer attempts but cannot find apprentices in the project’s locality.

The apprenticeship requirement takes effect for projects that begin construction after December 31, 2022, but not before 60 days after the Secretary publishes its relevant guidance. Projects under 1 MW (AC) are exempt from the requirement.

Credit Enhancements

Domestic Content. Assuming a project meets the prevailing wage and apprenticeship requirements, a qualifying project can earn a 10% ITC bonus (i.e., bringing the ITC to 40%), if it satisfies the domestic content requirement. To satisfy the domestic content requirement a project must use 100% U.S. steel and iron, and an “adjusted percentage” of the total costs of its manufactured components with products that are mined, produced or manufactured in the U.S. The applicable percentage for projects other than for offshore wind facilities initially is set at 40%, increasing to 45% in 2025, 50% in 2026, and 55% in 2027. For offshore wind facilities the adjusted percentage initially is 20%, and phases up to 27.5% in 2025, 35% in 2026, 45% in 2027, and 55% in 2028 and after. The initial domestic content bonus for projects failing to meet the prevailing wage and apprenticeship requirement is 2%, which percentage similarly phases up.

Two exceptions exist to the domestic content requirement: (1) if the facility is less than 1 MW (AC) and (2) if satisfying the requirement will increase the overall cost of construction by more than 25 percent, or if the relevant products are not produced in the U.S. in sufficient and reasonably available quantities or quality. Under these circumstances, the unavailability of the product is counted 100% against the adjusted percentage, that is, the adjusted percentage is calculated as if 100% U.S. content was supplied for the unavailable items.

The domestic content bonus is only available for projects placed in service after December 31, 2022.

Energy Community Bonus. A project can earn an additional 10% ITC bonus if it is built in an energy community. An energy community is defined as (a) a brownfield site (as defined under CERCLA), (b) an area that has or had significant employment related to the coal, oil, or gas industry and has an unemployment rate at or above the national average, or (c) a census tract or adjoining tract in which a coal mine closed after December 31, 1999 or a coal-fired electric power plant was retired after December 31, 2009.

The Energy Community Bonus is only available for projects placed in service after January 1, 2023.

Environmental Justice. An additional 10% and, in some cases, 20% ITC bonus, is available for solar and wind projects of 5 MW AC or less where the project is located in, or services, a low-income community. The environmental justice bonus is limited to a maximum of 1.8 gigawatts of solar and wind capacity in each of calendar years 2023 and 2024, for which a project must receive an allocation from the U.S. Treasury Secretary. The 10% bonus is for projects located in a low-income community or on Native American land (defined in the Energy Policy Act of 1992). The 20% bonus is available for projects that are part of a qualified low-income residential building project or a qualified low-income economic benefit project. A qualified low-income residential project is a residential rental building that participates in a housing program such as those covered under the Violence Against Women Act of 1994, a housing assistance program administered by the Department of Agriculture under the Housing Act of 1949, a housing program administered under the Native American Housing Assistance and Self-Determination Act of 1996, or similar affordable housing programs. A qualified low-income economic benefit project is one where at least 50% of the households have income at less than 200% of the poverty line or at less than 80% of the area’s median gross income.

Storage projects installed in connection with a solar project also qualify for the environmental justice bonus, but not stand-alone storage projects. A project receiving an allocation for the environmental justice credit must be placed in service within four years of the date it receives the allocation.

Stand-Alone Storage. The Act now provides a tax credit for stand-alone energy storage projects. To qualify, the storage project must be capable of receiving, storing and delivering electrical energy and have a nameplate capacity of at least 5 kWh. Thermal storage projects and hydrogen storage projects qualify under the new provision. Like the ITC for other technologies, the base ITC for stand-alone storage is 6%, and increases to 30% for projects that satisfy the prevailing wage and apprenticeship requirements or if they are placed into service prior to 60 days after the Treasury Secretary issues guidance on prevailing wage and apprenticeship standards.

Interconnection Equipment. Qualifying projects under 5 MW (AC) now may claim an ITC on their interconnection costs. The credit applies even if the interconnection facilities are owned by the interconnecting utility, so long as they were paid for by the taxpayer. This is not a stand-alone tax credit, but rather an additional cost added to a project’s basis eligible for the ITC.

Production Tax Credit (PTC)

The Act extends the production tax credit (PTC) for projects beginning construction before January 1, 2025. The PTC is set at an initial Base Rate of .3c/kwh. Like the ITC, the credit increases to 1.5c/kwh for projects satisfying the prevailing wage and apprenticeship requirements. The 1.5 c/kWh, with the inflationary adjustment provided for the PTC, brings the PTC up to 2.6c/kWh in 2022. In addition to wind projects, the PTC is available to solar, closed-loop and open-loop biomass, geothermal, landfill gas, municipal solid waste, qualifying hydropower, and marine and hydrokinetic facilities. Thus, solar projects may now choose either the PTC or the ITC. They cannot receive both.

CREDIT ENHANCEMENTS

Like the ITC, a project can receive an enhanced PTC similar in degree to those under the ITC for satisfying the domestic content, energy community and/or environmental justice requirements. For projects meeting the prevailing wage and apprenticeship requirements the increase for each applicable bonus is generally 10% of the underlying credit and, for projects failing to satisfy those requirements, 2%.

Clean Electricity Investment Tax Credit

The Act creates a new clean electricity tax credit (ITC and PTC) that replaces the existing ITC and PTC once they phase out at the end of 2024. The successor ITC/PTC is technology neutral. Any project producing electricity can qualify for the tax credit if its greenhouse gas emissions rate is not greater than zero. The successor ITC is 30% and the PTC is 1.5c/kWh, escalated annually with inflation. The Clean Energy ITC/PTC will phase out the later of 2032 or when emission targets are achieved (i.e., the electric power sector emits 75% less carbon than 2022 levels). Once the target is reached, facilities will be able to claim a credit at 100% value in the first year, then 75%, then 50%, and then 0%.

Clean Hydrogen Production Credit

This Act for the first time provides a tax credit for qualifying clean hydrogen projects. The credit is available for clean hydrogen produced at a qualifying facility during the facility’s first 10 years of operation. The base credit amount is $0.60 per kilogram (kg) times the “applicable percentage,” adjusted annually for inflation. For projects meeting the prevailing wage and apprenticeship requirements the credit amount is five times that base amount, or $3.00/kg times the applicable percentage, adjusted annually for inflation.

The applicable percentage for hydrogen projects achieving a lifecycle greenhouse gas emissions rate of less than 0.45 kilograms of carbon dioxide equivalent (CO2e) per kg is 100%. The applicable percentage falls to 33.4% for hydrogen projects with an emissions rate between .45kg and 1.5kg, and to 25% for hydrogen projects with an emissions rate between 1.5 kg and 2.5 kg. For hydrogen projects with a lifecycle greenhouse gas emissions rate between 4 kg and 2.5 kg of CO2e per kg, the applicable percentage is 20%.

To qualify for the credit, the facility must begin construction before January 1, 2033. Facilities existing before January 1, 2023 can qualify for a credit based on the date that modifications to their facility required to produce clean hydrogen are placed into service. Taxpayers may also claim the PTC for electricity produced from renewable resources by the taxpayer if the electricity is used at a clean hydrogen facility to produce qualified clean hydrogen. The Direct Pay option, discussed below, is available for clean hydrogen projects.

Taxpayers can elect to claim the ITC in lieu of the clean hydrogen production credit. However, taxpayers claiming the clean hydrogen credit cannot also claim a tax credit for carbon capture under Section 45Q, and vice versa.

Carbon Capture and Sequestration (CCS) Credit

Under prior law, industrial carbon capture or direct air capture (DAC) facilities that began construction by December 31, 2025, could qualify for the Section 45Q tax credit for carbon oxide sequestration. This credit could be claimed for carbon oxide captured during the 12-year period following the facility being placed in service. The per metric ton tax credit for geologically sequestered carbon oxide was set to increase to $50 per ton by 2026 ($35 per ton for carbon oxide that is reused, such as for enhanced oil recovery) and adjusted for inflation thereafter.

The Act extends the deadline for construction to January 1, 2033 and increases the credit amount. The base credit amount for CCS is $17 per metric ton for carbon oxide that is captured and geologically sequestered, and $12 per metric ton for carbon oxide that is reused. For facilities that meet the prevailing wage and apprenticeship requirements during construction and for the first 12 years of operation, the credit amounts are $85 per ton and $60 per ton, respectively.

The credit amount for carbon oxide captured using DAC and geologically sequestered is also increased under the Act to a base rate of $36 per metric ton, and to $180 per metric ton for projects that meet prevailing wage and apprenticeship requirements. The rates are indexed for inflation beginning in 2026.

The Act reduces the minimum plant size required to qualify for the credit:  from 100,000 to 1,000 tons per year for DAC; from 500,000 to 18,750 metric tons per year for electric generating facilities paired with qualifying CCS equipment, and from 25,000 to 12,500 metric tons per year for any other facility. A CCS project paired with an electric generating unit will be required to capture at least 75% of unit (not facility) CO2 production.

Advanced Energy Project Credit

The Act provides a 30% credit for investments in projects that re-equip, expend, or establish certain domestic manufacturing or industrial facilities to support the production or recycling of renewable energy property. Examples of such facilities include those producing or recycling components for:

  • Energy storage systems and components;
  • Grid modernization equipment or components;
  • Equipment designed to remove, use, or sequester carbon oxide emissions;
  • Equipment designed to refine, electrolyze, or blend any fuel, chemical, or product which is renewable or low-carbon and low-emission;
  • Property designed to produce energy conservation technologies (residential, commercial and industrial);
  • Electric or fuel-cell vehicles, including for charging and refueling infrastructure;
  • Hybrid vehicles weighing less than 14,000 pounds and associated technologies, components, or materials;
  • Re-equipping industrial and manufacturing facilities to reduce their greenhouse gas emissions by at least 20%;
  • Re-equipping, expanding, or establishing an industrial facility for the processing, refining or recycling of critical materials.

Projects not satisfying the prevailing wage and apprenticeship requirements will only receive the base ITC credit of 6%.

The Act makes $10 billion available for qualifying advanced energy projects. Of that amount, at least $4 billion must be allocated to projects located in energy communities. The Treasury Secretary will establish a program to award credits to qualifying advanced energy projects. Applicants awarded credits will have two years to place the property in service. The provision goes into effect on January 1, 2023.

Advanced Manufacturing Production

The Act creates a new production tax credit that can be claimed for the domestic production and sale of qualifying solar and wind components, such as inverters, battery components and critical minerals needed to produce these components.

Credits for solar components include:

  • for thin film photovoltaic cell or crystalline photovoltaic cell, 4 cents per DC watt of capacity;
  • for photovoltaic wafers, $12 per square meter;
  • for solar grade polysilicon, $3 per kilogram;
  • for polymeric backsheet, 40 cents per square meter; and
  • for solar modules, 7 cents per DC watt of capacity.

For wind energy components, if the component is an offshore wind vessel, the credit is equal to 10% of the sales price of the vessel. Otherwise, the credits for various wind components vary as set forth below, which amount is multiplied by the total rated capacity of the completed wind turbine on a per watt basis for which the component is designed.

The applicable amounts for wind energy components are:

  • 2 cents for blades
  • 5 cents for nacelles
  • 3 cents for towers
  • 2 cents for fixed platform offshore wind foundations
  • 4 cents for floating platform offshore wind foundations
  • for torque tubes and longitudinal purlin, $0.87 per kg
  • for structural fasteners, $2.28 per kg
  • for inverters, the credit is an amount multiplied by the inverter’s AC capacity, with different types of inverters eligible for specified credit amounts ranging from 1.5 cents to 11 cents per watt
  • for electrode active materials, the credit is 10% of the production cost
  • for battery cells the credit is $35 per kilowatt hour of battery cell capacity. Battery modules qualify for a credit of $10 per kilowatt hour of capacity (or $45 in the case of a battery module which does not use battery cells).

A 10% credit is also available for the production of critical minerals. Critical minerals include aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium and yttrium.

For purposes of the credits for battery cells and modules, to qualify the capacity-to-power ratio cannot exceed 100:1. The term ‘capacity-to-power ratio’ means the ratio of the capacity of the cell or module to the maximum discharge amount of the cell or module.

The advanced manufacturing credit phases out for components sold after December 31, 2029. Components sold in 2030 are eligible for 75% of the full credit amount. Components sold in 2031 and 2032 are eligible for 50% and 25% of the full credit amount, respectively. No credit is available for components sold after December 31, 2032. The phase-out does not apply to the production of critical minerals.

DIRECT PAY

The Act contains a valuable cash payment option that allows certain organizations to treat certain tax credit amounts including, among others, the ITC, PTC, clean hydrogen, and carbon capture credits, as payments of tax and then receive a refund for that tax that is deemed paid. Under the so-called “direct pay” option, in lieu of receiving a tax credit, an eligible entity will be treated as if it had paid taxes in the amount of the credit, for which it can then receive a cash refund. Entities eligible for the direct pay option include tax-exempt organizations, state and local governments, Indian tribes (as defined in the Act), the Tennessee Valley Authority, and any Alaska Native Corporation. The direct pay option is subject to an annual election and must be claimed by a partnership or S corporation rather than its partners or S corporation shareholders. Refunds under the direct pay provisions are treated the same as tax credits for purposes of basis reduction, depreciation rules, and recapture.

For qualifying facilities electing direct pay that do not meet the domestic content requirements, a reduction applies for projects beginning construction in 2024 (90%) and 2025 (85%). Thereafter, the direct pay option will not be available for projects that do not satisfy the domestic content requirement.

TRANSFERRABLE CREDITS

The IRA allows eligible taxpayers that do not elect the direct pay option to transfer certain credits to unrelated taxpayers including, among others, the ITC, PTC, clean hydrogen, and carbon capture credits. The transferred credit must be exchanged for cash. Credits may only be transferred once. Carryforwards or carrybacks are not transferable. Payments made to the transferor of the credit are not taxable to the transferor, nor is the payment by the transferee to the transferor deductible to the transferee.

The credit period for transferred credits is 23 years (including three years for carrybacks). The credit must be used in earliest possible year of transferee. A 20% penalty may apply for both direct payments and transfers where excessive payments have occurred.

Zero Emission Nuclear Power Production Credit

The Act includes a new PTC for the production of electricity from an existing nuclear facility that was placed in service before the date of enactment of the Act. To qualify, the electricity from the facility must be produced and sold to an unrelated person after December 31, 2023. The credit terminates on December 31, 2032. The base PTC amount is 3 cents per kWh, but is increased five times if wage and apprenticeship requirements are met (to 1.5 cents per kWh), in each case adjusted annually for inflation and reduced by a reduction amount to the extent electricity from the plant is sold at a price over $0.025/kWh.

Electric Vehicles and Hydrogen-Fueled Cars

The Act includes a $7,500 credit for taxpayers purchasing new electric vehicles and a $4,500 tax credit for used ones. The Act eliminates the previous “per-manufacturer” limits that applied to the new vehicle credit, but imposes new domestic content and assembly requirements, as well as caps on the retail price of new vehicles, and the income of the taxpayers purchasing the vehicle.

The Act also sets aside financing and credits to promote electric vehicle manufacturing. It calls for $2 billion in grants to help convert existing auto manufacturing factories into ones that make electric vehicles and $20 billion of loans for new clean vehicle manufacturing facilities. The Act extends the credits to hydrogen-fueled cars in addition to EVs.

Alternative Fuel Refueling Property Credit

The Act revives the expired credit for alternative fuel refueling property (i.e., electric vehicle chargers), allowing it for property placed in service before December 31, 2032. The base credit is 6% of the cost of property, and is increased to 30% if wage and apprenticeship requirements are met. The previous $30,000 cap is also increased to $100,000.

OFFSHORE WIND

The IRA puts in place a 10-year window in which a lease for offshore wind development cannot be issued unless an oil and gas lease sale has also been held in the year prior and is not less than 60 million acres. The Act also withdraws the Trump administration’s moratorium on offshore wind leasing in the southeastern U.S. and eastern Gulf of Mexico.

GREEN BANK

The Act includes $27 billion toward a clean energy technology accelerator to support deployment of emission-reduction technologies, especially in disadvantaged communities. The EPA Administrator would be permitted to disburse $20 billion to “eligible recipients,” which are defined as non-profit green banks that “provide capital, including by leveraging private capital, and other forms of financial assistance for the rapid deployment of low- and zero-emission products, technologies, and services.

Clean Fuel Production Credit

The Act creates a new tax credit for domestic clean fuel production starting in 2025 and expires for transportation fuels sold after December 31, 2027. The tax credit is calculated as the applicable amount multiplied by the emissions factor of the fuel. The base credit is $0.20 per gallon of transportation fuel produced at a qualified facility and sold, which increases to $1.00 if prevailing wage requirements are met. The base credit is $0.35/gallon for sustainable aviation fuel, $1.75 if labor and wage requirements are satisfied. The emissions factor of the fuel may reduce the credit amount. The credits are adjusted for inflation. The credit cannot be claimed if other clean fuel credits are claimed, including clean hydrogen production.

Article By Kris J. Eimicke and Merrill Kramer of Pierce Atwood LLP

For more energy and environmental legal news, click here to visit the National Law Review.

©2022 Pierce Atwood LLP. All rights reserved.

A Summary of Inflation Reduction Act’s Main Energy Tax Proposals

On August 7, the Senate passed the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a significant number of climate and energy tax proposals, many of which were previously proposed in substantially similar form by the House of Representatives in November 2021 (in the “Build Back Better Act”).

Extension and expansion of production tax credit

Section 45 of the Internal Revenue Code provides a tax credit for renewable electricity production. To be eligible for the credit, a taxpayer must (i) produce electricity from renewable energy resources at certain facilities during a ten-year period beginning on the date the facility was placed in service and (ii) sell that renewable electricity to an unrelated person.[1] Under current law, the credit is not available for renewable electricity produced at facilities whose construction began after December 31, 2021.

The IRA would extend the credit for renewable electricity produced at facilities whose construction begins before January 1, 2025. The credit for electricity produced by solar power –which expired in 2016—would be reinstated, as extended by the IRA.

The IRA would also increase the credit from 1.5 to 3 cents per kilowatt hour of electricity produced.

A taxpayer would be entitled to increase its production tax credit by 500% if (i) its facility’s maximum net output is less than 1 megawatt, (ii) it meets the IRA’s prevailing wage and apprenticeship requirements,[2] and (iii) the construction of its facility begins within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, the IRA would add a 10% bonus credit for a taxpayer (i) that certifies that any steel, iron, or manufactured product that is a component of its facility was produced in the United States (the “domestic content bonus credit”) or (ii) whose facility is in an energy community (the “energy community bonus credit”).[3]

Extension, expansion, and reduction of investment tax credit

Section 48(a) provides an investment tax credit for the installation of renewable energy property. The amount of the credit is equal to a certain percentage (described below) of the property’s tax basis. Under current law, the credit is limited to property whose construction began before January 1, 2024.

The IRA would extend the credit to property whose construction begins before January 1, 2025. This period would be extended to January 1, 2035 for geothermal property projects. The IRA would also allow the investment tax credit for energy storage technology, qualified biogas property, and microgrid controllers.

The IRA would reduce the base credit from 30% to 6% for qualified fuel cell property; energy property whose construction begins before January 1, 2025; qualified small wind energy property; waste energy recovery property; energy storage technology; qualified biogas property; microgrid controllers; and qualified facilities that a taxpayer elects to treat as energy property. For all other types of energy property, the base credit would be reduced from 10% to 2%.

A taxpayer would be entitled to increase this base credit by 500% (for a total investment tax credit of 30%) if (i) its facility’s maximum net output is less than 1 megawatt of electrical or thermal energy, (ii) it meets the prevailing wage and apprenticeship requirements, and (iii) its facility begins construction within fifty-nine days after the Secretary publishes guidance on these requirements.

In addition, a taxpayer would be entitled to a 10% domestic content bonus credit and 10% energy community bonus credit (subject to the same requirements as for bonus credits under section 45). The IRA would also add a (i) 10% bonus credit for projects undertaken in a facility with a maximum net output of 5 megawatts and is located in low-income communities or on Indian land, and (ii) 20% bonus credit if the facility is part of a qualified low-income building project or qualified low-income benefit project.

Section 45Q (Carbon Oxide Sequestration Credit)

Section 45Q provides a tax credit for each metric ton of qualified carbon oxide (“QCO”) captured using carbon capture equipment and either disposed of in secure geological storage or used as a tertiary injection in certain oil or natural gas recovery projects.  While eligibility for the section 45Q credit under current law requires that projects begin construction before January 1, 2026, the IRA would extend credit eligibility to those carbon sequestration projects that commence construction before January 1, 2033.

The IRA would increase the amount of tax credits for projects that meet certain wage and apprenticeship requirements. Specifically, the IRA would increase the amount of section 45Q credits for industrial facilities and power plants to $85/metric ton for QCO stored in geologic formations, $60/metric ton for the use of captured carbon emissions, and $60/metric ton for QCO stored in oil and gas fields.  With respect to direct air capture projects, the IRA would increase the credit to $180/metric ton for projects that store captured QCO in secure geologic formations, $130/metric ton for carbon utilization, and $130/metric ton for QCO stored in oil and gas fields.  The proposed changes in the amount of the credit would apply to facilities or equipment placed in service after December 31, 2022.

The IRA also would decrease the minimum annual QCO capture requirements for credit eligibility to 1,000 metric tons (from 100,000 metric tons) for direct air capture facilities, 18,750 metric tons (from 500,000 metric tons) of QCO for an electricity generating facility that has a minimum design capture capacity of 75% of “baseline carbon oxide” and 12,500 metric tons (from 100,000 metric tons) for all other facilities.  These changes to the minimum capture requirements would apply to facilities or equipment that begin construction after the date of enactment.

Introduction of zero-emission nuclear power production credit

The IRA would introduce, as new section 45U, a credit for zero-emission nuclear power production.

The credit for a taxable year would be the amount by which 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year exceeds the “reduction amount” for that taxable year.[4]

In addition, a taxpayer would be entitled to increase this base credit by 500% if it meets the prevailing wage requirements.

New section 45U would not apply to taxable years beginning after December 31, 2032.

Biodiesel, Alternative Fuels, and Aviation Fuel Credit

The IRA would extend the existing tax credit for biodiesel and renewable diesel at $1.00/gallon and the existing tax credit for alternative fuels at $.50/gallon through the end of 2024.  Additionally, the IRA would create a new tax credit for sustainable aviation fuel of between $1.25/gallon and $1.75/gallon.  Eligibility for the aviation fuel credit would depend on whether the aviation fuel reduces lifecycle greenhouse gas emissions by at least 50%, which corresponds to a $1.25/gallon credit (with an additional $0.01/gallon for each percentage point above the 50% reduction, resulting in a maximum possible credit of $1.75/gallon). This credit would apply to sales or uses of qualified aviation fuel before the end of 2024.

Introduction of clean hydrogen credit

The IRA would introduce, as new section 45V, a clean hydrogen production tax credit. To be eligible, a taxpayer must produce the clean hydrogen after December 31, 2022 in facilities whose construction begins before January 1, 2033.

The credit for the taxable year would be equal to the kilograms of qualified clean hydrogen produced by the taxpayer during the taxable year at a qualified clean hydrogen production facility during the ten-year period beginning on the date the facility was originally placed in service, multiplied by the “applicable amount” with respect to such hydrogen.[5]

The “applicable amount” is equal to the “applicable percentage” of $0.60. The “applicable percentage” is equal to:

  • 20% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 2.5 and 4 kilograms of CO₂e per kilogram of hydrogen;

  • 25% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 1.5 and 2.5 kilograms of CO₂e per kilogram of hydrogen;

  • 4% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate between 0.45 and 1.5 kilograms of CO₂e per kilogram of hydrogen; and

  • 100% for qualified clean hydrogen produced through a process that results in a lifecycle greenhouse gas emissions rate of less than 0.45 kilograms of CO₂e per kilogram of hydrogen.

A taxpayer would be entitled to increase this base credit by 500% if (i) it meets the prevailing wage and apprenticeship requirements or (ii) it meets the prevailing wage requirements, and its facility begins construction within fifty-nine days after the Secretary publishes guidance on the prevailing wage and apprenticeship requirements.

FOOTNOTES

[1] All references to section are to the Internal Revenue Code.

[2] The IRA would require new prevailing wage and apprenticeship requirements to be satisfied in order for a taxpayer to be eligible for increased credits. To satisfy the prevailing wage requirements, a taxpayer would be required to ensure that any laborers and mechanics employed by contractors or subcontractors to construct, alter or repair the taxpayer’s facility are paid at least prevailing local wages with respect to those activities. To satisfy the apprenticeship requirements, “qualified apprentices” would be required to construct a certain percentage of the taxpayer’s facilities (10% for facilities whose construction begins before January 1, 2023 and 15% for facilities whose construction begins on January 1, 2024 or after). A “qualified apprentice” is a person employed by a contractor or subcontractor to work on a taxpayer’s facilities and is participating in a registered apprenticeship program.

[3] An “energy community” is a brownfield site; an area which has (or had at any time after December 31, 1999) significant employment related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and a census tract in which a coal mine closed or was retired after December 31, 1999 (or an adjoining census tract).

[4] A “qualified nuclear power facility” is any nuclear facility that is owned by the taxpayer, that uses nuclear energy to produce electricity, that is not an “advanced nuclear power facility” as described in section 45J(d)(1),  and is placed in service before the date that new section 45U is enacted.

“Reduction amount” is, for any taxable year, the amount equal to (x) the lesser of (i) the product of 3 cents multiplied by the kilowatt hours of electricity produced by a taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year and (ii) the amount equal to 80% of the excess of the gross receipts from any electricity produced by the facility (excluding an advanced nuclear power facility) and sold to an unrelated person during the taxable year; (y) over the amount equal to the product of 2.5 cents multiplied by the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year.

[5] “Qualified clean hydrogen” is hydrogen that is produced (i) through a process that results in a lifecycle greenhouse gas emissions rate of no more than 4 kilograms of CO₂e per kilogram of hydrogen, (ii) in the United States, (iii) in the ordinary course of the taxpayer’s trade or business, (iv) for sale or use, and (v) whose production and sale or use is verified by an unrelated party. The IRA does not explain what “verified by an unrelated party” means.

Article By David S Miller, Amanda H Nussbaum, Martin T Hamilton, J. Tyler Moser, and Rita N. Halabi of Proskauer Rose LLP

For more tax law legal news, click here to visit the National Law Review.

© 2022 Proskauer Rose LLP.