For solar developers, there is more good news - Solar energy has been added back onto the list of technologies eligible for production tax credits, along with wind energy, hydropower, geothermal power and other previously eligible resources.
Another notable change is that standalone energy storage facilities are now eligible to qualify for the ITC. Certain battery storage systems that are co-located with renewable energy generation systems were already eligible for the ITC. But industry advocates have long sought for standalone storage systems to be eligible because optimal locations for integrating battery storage into the grid are often remote from the generation source. Additionally, biogas will become eligible for the ITC.
Hydrogen, another technology with massive potential to provide energy storage capacity and accelerate the energy transition, is now eligible for a new tax credit under Section 45V of the Internal Revenue Code. For qualified hydrogen production projects placed in service in 2023 and subsequent years, a choice of a production tax credit or investment tax credit will be available. This credit will continue to be available for hydrogen projects that begin construction before the end of 2032. Notably, facilities that use ITC or PTC-eligible electric generating systems to power the production of clean hydrogen will be eligible for the Section 45V credit in addition to the ITC or PTC. The new Section 45V tax credit, paired with the potential to stack the credit with the ITC or PTC, is expected to jumpstart the burgeoning clean hydrogen industry by expanding financing options and reducing production costs.
Finally, the Inflation Reduction Act extends the duration—and increases the amount—of carbon capture tax credits under section 45Q of the Internal Revenue Code. The amount paid varies depending on the technology in question, but in general, companies can qualify for double or even triple the tax credit offered under previous law. The new Act also significantly reduces the minimum amount of carbon capture required to qualify for tax credits. This should spur more players to enter the carbon capture market, which certainly may help with the energy transition and could play a role in expanding the use of hydrogen, for example.
For renewable energy projects that begin construction after 2024, the Inflation Reduction Act creates a new round of tax credits, which will effectively replace the traditional ITC and PTC. Eligibility for these new credits will be available for zero-emission electricity generation, without a requirement for any specific generation technologies to be used. Such credits will be available for projects that produce carbon-neutral electricity, at a base rate of 0.3 cents/kWh base rate and an increased rate of 1.5 cents/kWh of electricity generated, or at a rate ranging from six percent (base rate) to 30 percent (increased rate) of the taxpayer’s cost of the energy property. These credits will remain available for eligible facilities that begin construction any time prior to the end of 2032.
Further, the bill allows early investors and developers to transfer renewable energy tax credits to other taxpayers, which is a significant change from the current rules that require a taxpayer have an interest in the energy property before it is placed in service to claim the ITC or PTC. This change permits the tax credits to be sold to third parties in exchange for cash, after the associated project is operational, beginning in 2023, which may have an impact on how the construction of renewable projects is financed, given renewable developers frequently use capital contributions from tax equity investors to finance a portion of project construction costs. Now that the tax credits are transferable, it will be key to monitor how those deal structures evolve in response. It is important to note, however, that depreciation of project assets, is a benefit to tax equity investors that remains unaffected by the transferability of tax credits. Traditional tax equity investment structures that allow investors to receive the depreciation benefits, along with the tax credits, are unlikely to disappear.
Industry Reaction to the Climate Change Plan
Clean energy trade groups generally have praised the passage of the in the Inflation Reduction Act.
“This is the vote heard around the world. It puts America on a path to creating 550,000 new clean energy jobs while reducing economy-wide emissions 40% by 2030. This is a generational opportunity for clean energy after years of uncertainty and delay. This unprecedented investment in clean energy will supercharge America’s clean energy economy and keep the United States within striking distance of our climate goals,” said American Clean Power in a statement.
With the Inflation Reduction Act, the federal government is putting significant money on the table for clean energy production and emissions reduction. There is likely to be significant interest in new opportunities to obtain funding and take advantage of incentives. The earlier companies begin working on their green energy plans, the more benefits they are likely to reap from these expanded