September 22, 2022
The Inflation Reduction Act: America’s New Green Industrial Policy
By Matt Donath, Senior Policy Analyst
Part 5: 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.
The massive reach of the Inflation Reduction Act (IRA) touches nearly every sector in the U.S., from transportation and energy to buildings and agriculture, which will all see impacts from various programs within the new law. With multiple provisions designed to target hard-to-abate emissions from manufacturing, along with requirements meant to strengthen domestic supply chains, it is possible that no other sector will be impacted more – both directly and indirectly – than the industrial sector.
In this week’s Pulse on Policy, Carly Heissenbuttel, former Director of Business Development for Edison Energy’s Energy Optimization team, shares highlights and key takeaways to help industrial energy users maximize benefits from the IRA.
Advanced Industrial Programs
Through several provisions targeted specifically to the industrial sector, the IRA focuses on revamping the U.S. manufacturing landscape by targeting hard-to-abate sectors with emissions reductions programs and incentivizing the production of clean energy components and related technologies. These IRA programs, along with requirements or bonuses for nearly every tax credit to include domestically-produced content, aim to increase the production of American-made clean energy projects while concurrently tackling emissions.
The IRA launches the Advanced Industrial Facilities Deployment Program, which will be managed by the Department of Energy’s Office of Clean Energy Deployment (OCED). Through this program, nearly $6 billion in competitive funding will be available for industrial facilities to deploy clean technologies to reduce greenhouse gas emissions, with a focus on hard-to-abate sectors such as iron, steel, concrete, glass, paper, ceramics, and chemicals.
OCED will provide financial assistance, such as grants and loans, for these projects, with emissions reductions being one of the main criteria for project selection. Funding can be applied to projects that reduce emissions and lower costs through energy optimization, operational improvements, electrification of processes, or switching to low-carbon fuels, along with the engineering studies needed to complete such work.
“The Advanced Industrial Facilities Deployment program is a great incentive program for the industrial market to adopt new technologies at a rapid pace to decrease carbon emissions while maintaining their critical operations,” said Carly Heissenbuttel, Director of Business Development for Edison Energy’s Energy Optimization team. “Technologies such as carbon capture and waste-to-energy onsite or offsite can help accelerate this decarbonization pathway, and the industrial sector now has access to new funding to offset upfront project costs.”
The IRA not only provides funding for facilities to lower emissions, but also for facilities to produce the technologies necessary for the clean energy transition. With the expansion of the Section 48C Investment Tax Credit (ITC), $10 billion will be available through an up to 30% credit of the cost to build new manufacturing facilities or to retrofit existing facilities that produce clean energy technologies.
The definition of what qualifies as clean technology was also expanded to make the credit available for more products that will help reduce emissions in other areas. It now includes recycling facilities; components used to produce energy from water, the sun, wind, geothermal and other renewable sources; and components of grid modernization, carbon capture, electrolyzers, electric vehicles, and electric vehicle charging equipment.
For manufacturing facilities that are already built, a first-of-its-kind Section 45X Advanced Manufacturing Production Tax Credit (PTC) was created as part of the IRA. Under Section 45X, manufacturing of clean technologies will be eligible for a credit per component produced. Components eligible for the credit include inputs for solar panels, wind turbines, batteries, and critical minerals.
Clean Energy Tax Credits
As industrial facilities are generally among the largest energy users, they are deeply connected to changes in the prices of electricity and natural gas. Industrials that are heavily dependent on fossil fuels for power and manufacturing processes are held hostage by volatile global markets that – as the last 10 months have shown – cannot always be predicted.
Clean energy tax credits within the IRA may provide an opportunity for industrial facilities to gain some level of control over their energy spend. As covered in previous installments of the Pulse on Policy series, extension of renewable energy tax credits with increased value, along with new credits for energy storage and hydrogen production, should help lower the costs of renewable energy and energy storage, and potentially make hydrogen a viable alternative for industrial thermal processing. The changing economics of these clean energy projects could make it more financially attractive for industrial facilities to invest in behind-the-meter systems, electrification, and fuel switching.
Included in the IRA’s expansion of the Section 48 ITC is the increased credit value for waste energy recovery property and new eligibility for combined heat and power (CHP) systems. Waste energy recovery and CHP systems are both forms of cogeneration that utilize otherwise wasted thermal energy to generate power and increase systems efficiency, which lowers utility costs. Both systems are now eligible for a 6% base credit that increases to 30% if labor requirements are met and includes the stackable domestic content and energy community 10% bonus adders, potentially reaching a 50% total credit.
“With the increased tax credit for waste-to-energy recovery projects, we see a new push towards more circular economies focused on solving environmental and resiliency concerns,” continued Heissenbuttel. “In addition, the inclusion of these cogeneration systems under the ITC at the same credit level as renewable and other clean energy projects shows the importance placed on moving the industrial sector towards lowering emissions.”
Carbon Capture, Utilization, And Storage
Another existing tax credit was expanded under the IRA that provides industrial facilities with a potentially new pathway to reduce emissions through carbon capture, utilization, and storage (CCUS). CCUS involves capturing emissions from the source that is then either transported for use in another process, or injected underground for permanent geological storage, thus stopping it from reaching the atmosphere.
The Section 45Q tax credit for carbon sequestration was altered under the IRA to increase the credit value and lower the size of projects eligible to qualify. If labor requirements are met, the 45Q credit is now increased to $60-$85 per metric ton of captured carbon – up from $35 per metric ton. The range is determined by storage method, with secured geological storage eligible for $85 per metric ton, while captured carbon used as a tertiary injectant in natural gas project is credited at $60 per metric ton.
Notably, the size threshold for eligible projects – measured by tons of CO2e emitted per year – was greatly reduced under the IRA. Under the new law, the threshold is lowered from 500,000 tons for power generators and 100,000 tons for industrial facilities – down to 18,750 tons and 12,500 tons, respectively. This change should drastically increase the number of energy producers and industrial facilities that would be eligible for credit, providing a major boost to the CCUS industry.
“The increased value of the 45Q tax credit will work in conjunction with many industrial companies, enabling them to become early adopters and to incorporate multiple value stacking on incentives,” Heissenbuttal said. “This will make their robust emissions and ESG targets attainable.”
It is clear that the IRA’s emphasis on leading the U.S. industrial sector towards a clean energy economy will be done with carrots, rather than sticks. Through these historic investments, the IRA incentivizes early adopters to embrace emission-reducing technologies, while simultaneously encouraging more domestic production. As other provisions around domestic content requirements take effect, the U.S. stands to onshore more manufacturing and vault American-made clean energy technologies to the top of global competitiveness.
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.
Join Our Mailing List
Download Edison Energy’s Q4 Renewables Market Report
Learn about the trends shaping the global renewable energy market.Read More