New clean energy bill mirrors Build Back Better, but direct pay and transmission incentives left out of latest draft

The Inflation Reduction Act of 2022 might collectively contemplate less spending for clean energy then the stalled Build Back Better Act, but its aim remains consistent with incentivizing renewable energy production, energy transition strategies and growing the domestic supply chain.

Senators Manchin and Schumer reached a compromise on July 27th after a long standoff. The IRA2022 bill will contemplate USD 369bn in spending for clean energy, while BBBA proposed USD 555bn. There are reports that the bill, which also includes USD 64bn for a three-year Affordable Care Act extension, could go to the Senate floor as early as next week.

A lot of the key provisions remained, with notable exceptions including direct pay getting reduced drastically and the omission of an investment tax credit for transmission property, according to industry lawyers interviewed for the story. What changed was the ability to transfer tax credits and provisions to address the energy transition, global supply chain instability and domestic job growth, noted Elizabeth Crouse, tax partner and co-lead of power for K&L Gates.

“These would be accomplished not only by key credit provisions for domestic manufacturing of items such as module components, wind turbines, tracker components, and recycling of the same, but also wage and apprenticeship requirements,” said Crouse.

Renewable developers, for the large part, got what was provided in BBBA as solar and wind saw their ITC and PTC tax credits get a 10-year extension and standalone storage got its own ITC tax credit and no longer has to be co-located with solar and wind to get the tax benefits.

Amongst energy transition strategies, there were favorable changes to section 45Q for carbon sequestration and a PTC for hydrogen, of which both were included in BBBA.

“There would be a production tax credit of USD 3.00 per kilogram for producing clean hydrogen. That is likely to cause the nascent hydrogen industry in the US to experience tremendous growth,” notes David Burton, a tax partner at Norton Rose Fulbright.

In recent months, Apex Clean Energy, Invenergy and Intersect Power have all started to outline their green hydrogen plans.

Direct pay, as expected, was reduced and reshaped under IRA2022 and it appears will not have a direct benefit to developers who were looking, under the guidance provided under BBBA, to direct pay to potentially replace pricier tax equity.

“There is limited direct pay options for tax-exempt entities, states and local governments, the Tennessee Valley Authority and Indian tribes,” said Burton, adding that taxpayers will have a direct pay option for carbon capture tax credits, PTC for hydrogen and tax credits for manufacturing of equipment used in renewable energy.

The nuance is that tax credits would be transferrable, only for cash, the buyer and seller would have to be unrelated, and it would be for all, or a portion of the tax credits generated by a particular project.

“This provides some of the same flexibility the industry as hoping to achieve with direct pay and will make credits valuable to a much wider base,” said Lauren Collins, a partner in the tax practice for Vinson & Elkins.

Burton added this might work best in the example of a PTC tax credit, because its more linear, then ITC, which relies on certain intangibles, such as a PPA priced about current market conditions. However, the “drawback of a PTC is that the credits are generated over a longer period of time—10 years for the PTC and 12 years for carbon capture credits—while the ITC is fully available in the first year of the project’s operations,” cautions Burton.

Another addition included a proposal from Senator Wyden to extend credits indefinitely based on Greenhouse Gas Emissions (GHG). This was expected to be added to the BBBA, but never was included after the bill lost momentum.

“These provisions are extremely important because they provide the industry with critical assurance of the stabile government support needed to complete the energy transition,” said K&L’s Crouse adding that this assurance will prompt increased private investment.

*This story was originally published exclusively for NPM subscribers last month.


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