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Judy Kwok is a partner at Troutman Pepper in New York, focused on all federal income tax aspects of investing in onshore and offshore wind, solar, and other types of renewable energy, as well as general M&A tax issues for the energy industry.
According to a recent report by the International Energy Agency (IEC), approximately 40 percent of cumulative CO2 emissions reductions needed to meet sustainability targets rely on technologies not yet commercially deployed on a mass-market scale.
A bipartisan energy tax proposal to encourage innovation across the clean energy sector could help move the needle. Earlier this year, U.S. Sens. Mike Crapo (R-Idaho) and Sheldon Whitehouse (D-Rhode Island) released the Energy Sector Innovation Credit (ESIC) Act, which would incentivize technology-wide clean energy innovation to help rapidly scale and diversify new technologies.
Identical legislation was recently introduced in the U.S. House of Representatives.
The legislation contains technology-inclusive, flexible investment tax credits (ITCs) and production tax credits (PTCs) designed to promote innovation across a range of clean energy technologies, including standalone storage, carbon capture, hydrogen production, and certain categories of electricity generation.
“While not directly related to the Infrastructure Investment and Jobs Act, the proposed legislation clearly complements the anticipated increase in infrastructure investment in the coming years,” said Judy Kwok, a partner at Troutman Pepper. “Clean energy solutions, including clean energy production and carbon capture, are a key part of the infrastructure sector.”
Earlier this month, Congress passed the bipartisan $1 trillion Infrastructure Investment and Jobs Act, which focuses on transportation infrastructure, clean water, and broadband internet.
The Act also calls for a first-ever national investment in EV charging infrastructure, along with a $73 billion power infrastructure investment to upgrade and build thousands of miles of new, resilient transmission lines to facilitate the expansion of renewable energy.
The ESIC legislation allows up to a 40 percent ITC or 60 percent PTC for low market penetration technologies across a range of energy sources including renewables, fossil fuels, and nuclear.
“A key aspect of the bill is its emphasis on supporting new and innovative technologies,” Kwok said. “This is accomplished in several different respects. First, an ITC under new Section 48D is given to standalone storage, carbon capture equipment, and a functionally defined category of ‘qualified production facilities,’ which use a broad range of novel and traditional technologies, from nuclear to natural gas and petroleum to wind, solar, and hydropower to generate electricity with carbon emissions beneath a specified threshold. Similarly, there are two new PTCs—one for qualified production facilities, and one for producers of clean hydrogen.”
Notably, the bill places an emphasis on carbon capture—a sector that already has a dedicated credit, determined based on the amount of carbon oxide removed from the atmosphere–which also receives an ITC under the proposed legislation.
Carbon capture equipment eligible for the ITC would include direct air capture, which must capture over 5,000 metric tons of carbon oxide annually; carbon capture retrofits to existing electric generating facilities; and carbon capture retrofits to existing manufacturing or industrial facilities that produce certain chemical compounds like ammonia and helium.
“The proposed legislation very clearly favors cutting-edge technologies that have not yet been widely adopted,” Kwok said. “Unlike the existing ITC and PTC regimes for wind and solar and Section 45Q for carbon capture, which have time-based phase-downs, these new tax credits phase down based on the relevant technology’s ‘market penetration.’ This is generally calculated as that technology’s share of total domestic electricity production capacity for the year, or, in the case of carbon capture equipment, as a ratio of carbon captured using that technology to total domestic carbon emissions for the year. In other words, the more widely the technology has been adopted, the lower the tax credit.”
Kwok also pointed to the new legislation’s inclusion of technologies that are not traditionally considered “clean” or “renewable.” For example, a PTC could also be applied to nuclear technologies such as traditional nuclear fission, nuclear fusion, and light and non-light water reactor-based advanced nuclear fission.
“It is very uncommon for proposed clean energy tax incentives to include nuclear energy—much less coal, petroleum, and natural gas–which are also listed as potentially qualifying technologies,” Kwok said. “It’s worth noting that the concept of a functional approach—where many technologies can potentially receive a tax credit so long as they facilitate the net reduction of greenhouse gas emission—is also taken by the Clean Energy for America Act. The Crapo proposal is premised on the idea that clean energy can be—or should be—a much broader category than the renewables industry, in which wind and solar are dominant.”
The bill groups technologies that are substantively different from one another as determined by the Department of Energy (DOE), national labs and other stakeholders, and provides flexibility for unforeseen clean energy technologies to be eligible for ESIC by including an expedited-consideration provision for Congress to take up new technology recommendations from the DOE.
“While the proposed bill is much more inclusive, this broader and more flexible approach requires a significant amount of technical and inter-agency administrative complexity to determine whether a given technology qualifies for tax credits,” Kwok said.
Central to the bill is an ITC for standalone storage, an incentive that has been broadly supported by national trade associations, public interest organizations, and companies.
Energy storage technologies eligible for the tax credit encompass lithium-ion based technologies, pumped hydropower technologies, and short-and long-duration storage technologies.
“An ITC for standalone storage has appeared in many other proposals before, and in most respects the storage proposal in this bill is not very different,” Kwok said. “Whereas other proposals simply cut off the ITC after a certain period of time, however, the ‘market penetration’ concept—where you count the total amount of energy storage capacity in operation in the U.S. as a percentage of total domestic electricity production capacity for the relevant year—also adds complexity to the paradigm.”
The legislation is supported by a number of industry and environmental groups, including the Environmental Defense Fund, Citizens’ Climate Lobby, The Nature Conservancy, and the Clean Hydrogen Future Coalition, among others.
“Regardless of whether you think the bill itself is going to be enacted, this proposed legislation is meaningful because it is part of an ongoing policy dialogue about how to encourage innovation in the clean energy sector, how to allocate resources in the country’s transition to clean energy, and the role of traditional renewables versus other low-carbon emission technologies in that transition,” Kwok said.