The road to net zero received a green light on August 18 when President Joe Biden signed the Inflation Reduction Act of 2022.
This new law includes a number of incentives for investment in clean energy technologies to reduce American reliance on fossil fuels and provide organizations operating in America significant cost reductions to achieve their own net zero goals.
Relevant provisions of the Inflation Reduction Act increase credits for renewable energy and storage equipment; extend traditional tax incentives to clean fuels, hydrogen, nuclear and microgrid technologies; expand electric vehicle tax credits to include charging stations; and make such incentives directly available to entities that may not otherwise have the tax obligations required to use them.
According to the White House, this bill represents the largest single investment in climate and energy investment to lower energy costs, increase clean energy production and reduce carbon emissions significantly by 2030. If your organization already has announced its own net zero goals, or is exploring whether it should begin planning an expedition, the Inflation Reduction Act offers multiple paths forward towards decarbonization.
Energizing energy efficiency
Does your organization own buildings that need a retrofit or new investment in energy-intensive equipment? The Inflation Reduction Act expands tax credits to encourage energy-efficient improvements by more than doubling the 179D Energy Efficient Buildings Tax Deduction to $5 per square foot. Reduce your energy usage and save on operating costs while decarbonizing your building envelope.
Renewing renewable resource credits
The new law extends existing tax credits for renewable resources at more lucrative rates. The Production Tax Credit (PTC) for wind was first implemented in 1992, creating an additional revenues stream for each unit of renewable energy produced during the first ten years of a project’s life.
The Investment Tax Credit (ITC), a long-standing capital investment tool, was first applied to solar projects in 2006 and simplified the incremental revenue stream with an upfront credit for capital investment realized at the start of project life as opposed to a multi-year operational period. Most of these incentives either were expiring or ratcheting down when the pandemic hit.
The new incentives embodied in the Inflation Reduction Act are even better than before and extend traditional tax credits for solar and wind to include a growing set of clean technologies. Now is the time to accelerate your renewable energy purchase and acquisition program.
Expanding clean energy incentives
Under the Inflation Reduction Act, incentives have expanded to include a number of new technologies. Aiming to be technology-neutral, the Act specifically includes credits for clean hydrogen, nuclear power production, advanced manufacturing production, and clean fuel production.
Such incentives generally are available through the later of 2032 or when targeted emissions thresholds are achieved. An organization going net zero can take advantage of these incentives either through direct investment or through a developer that can build out the entire project in exchange for a long-term contract for the clean energy output.
Even if your physical location is not conducive for solar or wind, your organization can decarbonize its energy sources.
Recharging energy storage and battery cells
The new law recognizes that increased renewable integration requires energy storage solutions and offers associated incentives to bring those solutions to market. In the past, tax credits were not available to batteries on a stand-alone basis, but required an associated renewable build-out.
The Inflation Reduction Act modifies this requirement slightly by offering incentives to energy storage facilities, advanced energy projects, qualified facilities, and batteries, so long as they produce zero carbon emissions. Companies looking to shape their clean energy supply or achieve backup power through energy storage resources can now do so for a significant reduction in the total investment cost for such projects.
Better hurry, because credits in 2025 and later will only continue if broader carbon reduction goals have not been met.
Modernizing the grid and mitigating interconnections
Transmission investments and interconnection costs now can benefit from federal incentives. A key uncertainty to any renewable project has been the timing and costs of interconnecting to the system. Incumbent utilities and system operators need to run analyses to ensure the project does not jeopardize the system.
Project investors generally do not know transmission and interconnection costs until those studies are complete. This uncertainty in total costs can make or break a potential project. The Inflation Reduction Act now mitigates some of the uncertainty by offering credits for transmission system upgrades and interconnection costs.
Recognizing microgrids
For the first time in clean energy tax incentive history, the Inflation Reduction Act explicitly recognizes technological advances in microgrid technology and offers incentives for microgrid equipment. Microgrids are self-contained power generation and delivery systems that are either stand-alone systems in remote areas or embedded within a traditional system to promote reliability and resiliency.
Microgrid software and operational equipment can be used to optimize renewable generation output, energy storage, demand response and grid support to the grid. Coordination of these systems requires switches, operational controls and monitoring technology, all of which already exists. For the first time, such equipment is eligible for the investment tax credit, allowing organizations a reduced cost for microgrid controls that can optimize the use of clean energy resources.
Cleaner commercial vehicles
Transportation can be a significant contributor to an organization’s carbon emissions, and is a critical part of any plan to achieve net zero. The Inflation Reduction Act extends existing credits for qualified commercial clean vehicles, creating incentives for companies to convert their fleets to electric vehicles while also promoting “Made-in-America” inputs and outputs.
Potential credits aim to cover the incremental cost to a company of choosing electric vehicles above and beyond the equivalent gasoline or diesel vehicle. A credit for charging facilities also is included. Advanced manufacturing facilities for light-, medium-, or heavy-duty electric or fuel cell vehicles and associated charging infrastructure also may receive incentives. The decision to convert your commercial fleet to clean energy alternatives may be the economically rational choice.
Direct payments vs. tax credits
Is your organization a non-tax paying entity and unable to realize traditional tax credits? Fear not. The Inflation Reduction Act redesigns the traditional investment tax credit that supported renewables to be available as a direct credit versus only a tax credit. Previously, renewable incentives required tax-paying entities with an appetite for tax credits to be involved in the development of every project.
An entire industry was built around tax equity financing where funding agents effectively purchased the future stream of production tax credits, allowing developers to realize future government support as part of their financing. Municipalities and non-profits that did not pay taxes could not realize tax credits directly and usually had to partner with an entity that could.
The structure of credits in the Inflation Reduction Act relaxes this limitation, allowing non-profits, government entities and rural electric cooperatives to realize these incentives directly to help achieve their net zero goals.
Achieving net zero
The Inflation Reduction Act makes it easier for businesses, government and non-profits to achieve their net zero goals. Costs for renewables, clean energy alternatives and energy storage may be offset by either an ITC or PTC. Microgrid equipment required to optimize those investments and increase reliability and resiliency now can receive an explicit incentive to offset costs.
If your organization is a non-profit, government entity, tribal territory or rural electric cooperative, the Inflation Reduction Act allows direct realization of the benefits. Commercial fleet conversion includes new incentives. With all of these new opportunities for cost reductions, it may be time to reassess your net zero path and go full speed ahead.
The Inflation Reduction Act aims to reduce the cost of energy while improving the environment. Your carbon-free chariot awaits.
Tanya Bodell is a Partner at StoneTurn Group LLC, a global advisory firm that assists companies, their counsel and government agencies on regulatory, risk and compliance issues, investigations and business disputes. She is a leader in StoneTurn’s energy practice and helps businesses, non-profits and governments to achieve their net zero goals.