What the Energy Industry Should Know About the Inflation Reduction Act

Jackson Walker
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Jackson Walker

This article, originally published on August 15, 2022, has been revised after President Biden signed the act into law.

President Joe Biden is set to sign into law the Inflation Reduction Act of 2022 (the “Act”), which is estimated to reduce greenhouse gas emissions by around 40% by 2030 and to invest $369 billion in energy security and climate change, as estimated by the Joint Committee on Taxation. This article summarizes how the new law impacts new and existing investors, developers, and producers in the energy industry.

Related Insights: Significant Tax Changes Within the Inflation Reduction Act

Impacts on Renewable Energy

The new legislation generally supports energy security and aims to reduce greenhouse gas emissions through new and modified renewable energy tax credits, including:

  • a new zero-emission nuclear power production credit for qualified nuclear power facilities;
  • a new clean hydrogen production credit for qualified clean hydrogen facilities;
  • a new credit for the domestic production and sale of qualifying solar and wind energy components;
  • an extension of the energy credit for energy properties to energy storage technology, qualified biogas property and microgrid controllers.
  • an extension of the clean electricity investment credit to energy storage technology and other qualified facilities;
  • an extension of the carbon sequestration credit for projects beginning construction before January 1, 2033, and an increase in credit amounts for qualifying electricity generating facilities, direct air capture facilities and other industrial facilities;
  • an extension of the energy credit for investment in certain qualified energy properties beginning construction before January 1, 2025, including solar equipment, fuel cells, microturbines, combined heat and power systems, small wind energy, and waste energy recovery;
  • an extension of the energy credit for qualified facilities producing electricity from renewable resources for projects beginning construction before January 1, 2025, including, geothermal and solar, wind, biomass, hydropower, biodegradation of municipal solid waste, municipal solid waste, and marine and hydrokinetic sources; and
  • an extension of the energy credit for biodiesel, renewable diesel, and alternative fuels for any sale or use through 2024.

In addition, the Act intends to encourage offshore wind production by (i) allowing the Department of the Interior to conduct qualified wind lease sales for offshore wind development on federal lands and (ii) amending the Outer Continental Shelf Lands Act to expand the definition of the Outer Continental Shelf to include lands within the control or the exclusive economic zone of the United States and adjacent to any territory of the United States.

The Act also introduces an Advanced Industrial Facilities Program designed to reduce greenhouse gas emissions by providing financial assistance for eligible domestic, industrial, or manufacturing facilities that require energy intensive processes—including, but not limited to, the iron, steel, aluminum, cement, concrete, glass, and chemical industries. That financial assistance shall be granted for the purchase, installation, implementation, retrofitting, or upgrading of advanced industrial technologies or operational improvements that are designed to reduce greenhouse gas emissions.

Impacts on Fossil Fuels

While the Act invests significant amounts in renewable energy, the legislation also impacts the fossil fuel industry. In particular, the Act does the following on federal lands:

  • increases minimum royalty rates for onshore and offshore oil and gas leases;
  • adds a royalty requirement for methane gas extracted from onshore and offshore leases; and
  • eliminates non-competitive leasing.

There are some benefits for the fossil fuel industry under the Act. First, the Act revises the credit for carbon sequestration to reduce the required amount of carbon that must be captured by a direct air capture facility and a qualifying electricity generating facility, which may allow more facilities generating electricity from fossil fuels to take advantage of these credits. Second, the expanded definition of the Outer Continental Shelf under the Outer Continental Shelf Lands Act opens up additional federal lands for offshore leasing.

Conclusion

Once the Act is signed into law, it will have some of the most significant impacts on renewable energy investment, development and production in the country’s history. Actors in the energy industry should be ready to take advantage of the many opportunities provided by the Act.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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