August 12, 2022
Breaking News: House Passes Inflation Reduction Act, the Most Significant U.S. Climate Legislation in Decades
By Shannon Weigel, Director of Policy
Part 1: Breaking it Down – A Deep Dive into the Inflation Reduction Act
Stay in the know with Edison Energy’s Pulse on Policy series, a biweekly publication covering the latest in global legislation and regulation that impact corporate procurement plans and sustainability goals.
Today, the U.S. House of Representatives passed the Inflation Reduction Act of 2022 (IRA), a bill that includes approximately $370 billion in energy and climate spending, by a vote of 220-207. President Biden is expected to sign this historic bill into law next week. To briefly recap the journey of its passage-in late July, U.S. Senate Democrats announced an agreement on the IRA after negotiations stalled on the Build Back Better Act, a larger bill addressing climate change and social policies. The IRA passed in the Senate on August 7th by a vote of 51-50 without any major alterations to the climate provisions.
The Inflation Reduction Act of 2022 represents the single largest clean energy and climate investment in U.S. history.
According to Oded J. Rhone, Edison Energy’s CEO, “this legislation provides critical tools for the private sector to address climate change. This includes tax credits to support the deployment of renewable energy projects, energy storage, and electric vehicles, among other provisions. History shows that mobilizing the private sector is an effective way to implement policy and achieve results.”
In the short-term, the IRA provides much needed clarity to the clean energy industry through a 10-year extension of tax credits, along with creation of new tax credits for emerging technologies, which will lower the cost and increase projects available for corporate offtakers in the mid-term. New incentives for commercial electric vehicle purchases and the accompanying charging equipment will help continue the transition to a cleaner transportation sector and support fleet electrification for companies.
Long-term, the IRA will strengthen U.S. energy security and drive down costs through the combination of the tax credits and billions of dollars invested to strengthen the domestic supply chain and advanced manufacturing of clean energy technologies.
Combined with other climate provisions like investments in offshore wind, a methane reduction program, funding for critical transmission projects, and $27 billion in federal investments through the Greenhouse Gas Reduction Fund, the bill has the potential to reduce U.S. greenhouse gas emissions by over 40% by 2030.
“Moving forward with this bill shows that our federal government can be nimble when it comes to addressing our nation’s greatest challenges,” continued Rhone. “Climate change will not distinguish between red and blue, or China and the U.S. Given that, societies across the globe will be compelled to come together to tackle the increasing impacts of climate change.”
Clean Energy Tax Credits
The IRA extends both the production tax credit (PTC) and investment tax credit (ITC) for clean energy projects placed in service from 2021 through 2024. Clean energy projects can achieve tax credit rates higher than the current market allows by meeting requirements for bonus adders. The bonus adders are meant to incentivize developers to pay prevailing wages, create jobs through apprenticeships, and develop projects in communities that have been disproportionately impacted by emissions and climate change. The range of ITC value a project can qualify for under the IRA is 6-50% for utility scale projects, reaching up to 70% for projects under 5 MW, compared to 26% under current law. The range of PTC value a project can qualify for is approximately $5-30/MWh compared to the $26/MWh PTC today.
Energy storage systems (ESS) are also eligible to receive the ITC and bonuses under the IRA, including if they are paired with a renewable energy system or standalone ESS. The tax credits for standalone ESS will strengthen the financial attractiveness of battery storage deployment at commercial and industrial facilities.
Starting in 2025, the tax credits will transition from their current form to a new technology-neutral tax credit that is based on emissions. Renewable projects with zero emissions would qualify for the same PTC or ITC tax credit value as the 2021-2024 projects.
Two new tax credits are included in the IRA–a Clean Hydrogen ITC/PTC and a Carbon Capture and Storage or Direct Air Capture Credit (CCS/DAC). These are separate from the technology-neutral tax credit structure. These credits are available to facilities that begin construction after December 31, 2022, and through the end of 2032. Clean Hydrogen and the CCS/DAC credits help bring down the cost of these emerging technologies that are important tools for heavy industries looking to reduce their emissions.
Transportation Electrification
The IRA includes new and revised tax credits for the electric vehicle industry and companies looking to convert their fleets to electric vehicles. Starting in January 2023 and through the end of 2032, businesses will be eligible for a vehicle tax credit of up to $7,500 for vehicles under 14,000 lbs. or up to $40,000 for vehicles over that weight. The total value is calculated by 15% of the cost for hybrid vehicle, 30% for zero emission vehicles, or the incremental cost increase from a comparable internal combustion engine vehicle.
The tax credit for installation of electric vehicle charging equipment will increase from $30,000 per location up to 30% of the cost if labor requirements are met, with a cap of $100,000 per item if installed in a low-income community or non-urban census tract. These tax credits will reduce the cost of a fleet’s transition to electric vehicles.
Energy Security, Domestic Manufacturing and Transmission
An important piece of the IRA is funding to increase domestic manufacturing, strengthen the supply chain, and ultimately lower the cost of critical components of the clean energy transition. These additions to the bill are meant to decrease reliance on imports and ensure the U.S. can increase energy independence while lowering emissions.
Advanced manufacturing tax credits are available for production and sale of qualifying components such as inputs for batteries, solar panels, and wind turbines, with separate funding available for retrofitting auto manufacturing facilities to produce electric vehicles. Additionally, the IRA provides funding for President Biden’s Executive Order authorizing use of the Defense Production Act to increase domestic manufacturing of critical minerals, heat pumps, electrolyzers, transformers, and insulation.
A transmission tax credit that was originally in the bill did not make it into the final version, but the IRA provides the Department of Energy with funding to help support transmission buildout. This includes $2 billion in loans for transmission deemed as a “national interest corridor” and $760 million to help plan, permit, and facilitate interstate transmission lines.
Stay tuned for the next installments of our Pulse on Policy series, where we will dive deeper into the climate provisions in the IRA and share our insights on how these policy changes may impact companies’ energy and sustainability strategies.
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