Published: August 19, 2022
Prepared by Bill Davis, Assistant Vice President
Please contact Mr. Davis to learn about Concentric’s significant regulatory and future of energy experience, and how we will leverage that experience to assist you in navigating the impacts of this legislation. All views expressed by the contributors are solely the contributors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The contributors’ views are based upon information the contributors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.
Despite the title of the Inflation Reduction Act (the “IRA”), the legislation aimed at the energy sector has direct overall goals of reducing greenhouse gas (“GHG”) emissions and promoting energy justice. While the landmark legislation is broad and extensive, this overview was prepared from an investor-owned electric utility (“IOU”) perspective, and also includes key points applicable to other energy industry participants.
Decarbonization Incentives for Electricity Supply
The IRA includes sweeping expansions and extensions of the investment and production tax credits and other new clean energy tax incentives. For example, modified solar and wind tax credits have been extended through 2024 and, in 2025, will be replaced with a similar but technology-agnostic tax credit structure. Further, to recognize the zero carbon benefits of nuclear power, a new production tax credit was added for existing nuclear power plants.
While there are many decarbonization incentives to highlight, the most notable include the availability of clean electricity tax credits that continue until greenhouse gas emissions drop by 75% from 2022 levels, the ability to transfer tax credits to unrelated entities, requiring the use of prevailing wages on projects to achieve pre-IRA tax credit levels, a return of the solar production tax credit, and tax credit bonuses for domestic material and certain qualifying geographic sites.
Points to Consider:
- Long-term generation plans and siting of renewable energy resources will need to be revisited, possibly changing near-term generation expansion plans.
- Maximizing tax credits will need additional support as decision-makers evaluate trade-offs between investment and production tax credits, and understand the new financial opportunities to monetize the tax credits.
- Due diligence will need to expand to cover prevailing wage and apprenticeship requirements to achieve the pre-IRA tax credit levels (a 5X multiplier) without undue risk.
- Sourcing domestic material for projects will be challenging as the tax credit bonuses drive competition for supply.
Decarbonization Incentives for Electricity Demand
Energy efficiency has long been considered a foundational element of carbon reduction strategy. The IRA extends and expands individual tax credits for energy efficiency upgrades while adding billions of dollars in funding to state energy agencies to drive a whole home energy efficiency program—which incentivizes energy savings above 20%. In addition, the energy efficiency deduction limits for businesses were increased, and to qualify, businesses’ savings must exceed 25%. The legislation also includes $1 billion to fund energy efficient building codes for homes and businesses.
There is good news for electrification efforts too. Notably, funding to state agencies to electrify homes by providing rebates that cover major electric appliances and home wiring upgrades. The $7,500 individual clean vehicle tax credit has been extended under new qualifying criteria, and there is a new $4,000 tax credit for purchasing pre-owned clean vehicles. Businesses can also now partake in clean vehicle tax credits of their own.
Points to Consider:
- New federal funding for tax credits to reduce electricity demand will need to be incorporated into load forecasts as participating homes and businesses achieve 20%+ energy savings.
- Energy efficiency program operators will need to reassess free-ridership expectations and program offerings as tax credits expand and state energy agencies look to bring programs to market.
- Electrification incentives are meaningful, but the domestic manufacturing qualifiers, retail sales price limiters, and income thresholds could temper the effects on the market.
Energy Justice Incentives and Grants
Whether the legislation directly labels a component as “income eligible,” “disadvantaged community,” or “energy justice,” the effect is the same; additional dollars are available for qualifying individuals and communities. For example, one of the bonuses for clean energy investment and production tax credits could add a 10-20% bonus if the project benefits a qualifying community. The billions in energy efficiency rebates delivered by state energy agencies are double for qualifying individuals, while the eligible project cost for electrifying homes is also double. Billions of grant dollars are available to bring zero emission technologies, financial assistance, and technical assistance to disadvantaged communities.
Points to Consider:
- Utilities are often relied upon to help address energy burden challenges for individuals and communities.
- Energy assistance, efficiency, and electrification program operators will need to review their offers to help supplement and complement new state energy agency rebates.
- Utilities will need to revisit Corporate Environmental, Social, and Governance strategies as new grants come to communities.
- Renewable energy siting bonuses and zero emission technology grants will drive the deployment of distributed energy resources onto new parts of the grid.
Domestic Manufacturing Incentives and Grants
Part of decarbonization success in the energy sector will rely upon the expansion of domestic manufacturing. Production and investment tax credit bonuses and clean vehicle tax credits are directly linked to the amount of domestic components or domestic manufacturing/assembly.
The IRA provides new comprehensive manufacturing production tax credits for all the major components of wind, solar, and storage facilities. The legislation further provides direct loans and grants for manufacturing low or zero emission vehicles.
Points to Consider:
- The domestic content bonuses and qualifications increase over time, driving urgency for procurement efforts and project oversight to achieve in-service deadlines.
- Global manufacturing pipelines will likely shift and react, in addition to possible strains on domestic infrastructure for deliveries.
- Local economic development initiatives will compete for new manufacturing facilities where access to infrastructure, skilled labor, and reliable and affordable electricity will drive geographic location choices.
Below is a consolidated list of specific incentives and provisions related to the discussions above. Click on the titles to expand the content.
- Decarbonization Incentives for Electricity Supply
Solar
- Reopens Production Tax Credits (“PTC”) to January 1, 2025 (previously closed January 1, 2006)
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA PTC (e.g., Prevailing Wage & Apprenticeship)
- 5X Multiplier
- New Bonuses
- 10% for domestic content of the project components
- 10% for location in an Energy Community
- 10% for location in low-income community or Tribal land
- 20% for location in qualified low-income residential project or economic benefit (<5 MW)
- Tax credits are transferable to unrelated entities
- Replaced by new clean electricity tax credit framework in 2025
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA PTC (e.g., Prevailing Wage & Apprenticeship)
- Extension of Investment Tax Credit (“Extended ITC”) to January 1, 2025 (1 year)
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA ITC (e.g., Prevailing Wage & Apprenticeship)
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- 5X Multiplier
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- Added eligibility of storage and microgrid controllers
- Projects <5MW can include Interconnection Property
- New Bonuses
- 10% for domestic content of the project components
- 10% for location in an Energy Community
- 10% for location in low-income community or Tribal land
- 20% for location in qualified low-income residential project or economic benefit (<5 MW)
- Tax credits are transferable to unrelated entities
- Replaced by new clean electricity tax credit framework in 2025
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA ITC (e.g., Prevailing Wage & Apprenticeship)
Wind
- Extension of Production Tax Credits (“Extended PTC”) to January 1, 2025 (3 years)
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA PTC (e.g., Prevailing Wage & Apprenticeship)
- 5X Multiplier
- New Bonuses
- 10% for domestic content of the project components
- 10% for location in an Energy Community
- 10% for location in low-income community or Tribal land
- 20% for location in qualified low-income residential project or economic benefit (<5 MW)
- Tax credits are transferable to unrelated entities
- Replaced by new clean electricity tax credit framework in 2025
- Reduced base tax credit by 1/5th and added new requirements to receive full pre-IRA PTC (e.g., Prevailing Wage & Apprenticeship)
- Expanded potential locations for offshore wind leasing
- $100 Million for planning, modeling, and analysis of interregional transmission opportunities associated with offshore wind generation
Solar + Wind (Post 2024)
- In-Service After December 31, 2024—Production Tax Credit or Investment Tax Credit
- Applies to any technology with a greenhouse gas emissions rate not greater than zero
- Continues until the later of at or less than 25% of 2022 electricity greenhouse gas emissions or 2032
- Credits then begin phase out: 100%, 75%, 50%, 0%
- New Production Tax Credit
- Same setup as the Extended PTC (payout rates, 10 years, bonuses, 5X labor multiplier, transferability of credits, etc.)
- New Investment Tax Credit
- Same setup as the Extended ITC (payout rates, bonuses, 5X labor multiplier, transferability of credits, etc.)
Nuclear
- New tax credit for existing units
- 0.3 cents per kWh generated
- Minus lesser of 0.3 cents/kWh or 16% * (gross receipts – 2.5 cents/kWh)
- 5X Multiplier with Prevailing Wage & Apprenticeship requirements
- Reduced by Zero Emission Credit revenue, if applicable
- January 1, 2024 through December 31, 2032
- 0.3 cents per kWh generated
- In-Service After December 31, 2024—Production Tax Credit or Investment Tax Credit
- Applies to any technology with a greenhouse gas emissions rate not greater than zero
- Continues until the later of 1) at or less than 25% of 2022 electricity greenhouse gas emissions or 2) 2032
- Credits then begin phase out: 100%, 75%, 50%, 0%
- PTC of 1.5 cents/kWh; ITC of 30% with 5X Multiplier of Prevailing Wage & Apprenticeship requirement
- New Bonuses
- 10% for domestic content of the project components
- 10% for location in an Energy Community
- 10% for location in low-income community or Tribal land
- 20% for location in qualified low-income residential project or economic benefit (<5 MW)
- Tax credits are transferable to unrelated entities
Storage
- Optionally classified as Public Utility Property with respect to the Extended Investment Tax Credit
- Added eligibility for Investment Tax Credit
- Added eligibility for Residential Tax Credit
- New manufacturing incentives available to boost domestic production and assembly
Carbon Capture
- Extended tax credit to January 1, 2033 (7 years)
- Lowers the qualifying amount (tons)
- Adds a 75% capture baseline for electrical generators to qualify
- 70% increase in $/metric ton payment with new requirements (e.g., Prevailing Wage & Apprenticeship)
- Reopens Production Tax Credits (“PTC”) to January 1, 2025 (previously closed January 1, 2006)
- Decarbonization Incentives for Electricity Demand for Residential Customers
Energy Efficient and Electrified Homes
- Extends energy efficiency tax credits to December 31, 2032 (11 years)
- Increases amount to 30% for qualifying efficiency upgrades
- Increases lifetime maximum from $500 to $1200
- Limit increases to $2000 with heat pump water heaters and biomass stoves
- Credit expanded to cover:
- Air sealing
- Energy audits
- Electrical panel upgrades
- Extends clean energy tax credits through December 31, 2034
- 30% credit through December 31, 2032, then 2-year phase out (26%, 22%)
- Adds Battery Storage
- Extended New Efficient Home credits to December 31, 2032 (12 years)
- Replaces energy savings requirements with Energy Star Certified Homes National Program guidelines (single- and multifamily)
- $2,500 for Energy Star Homes and $5,000 for Zero Energy Ready Homes
- Multifamily must meet Prevailing Wage & Apprenticeship requirements—no multiplier
- $4.3 billion through September 2031: HOMES (Homeowners Managing Energy Savings)
- Allocated to State energy offices (allowed up to 20% for administration)
- Federal allowed 3% maximum allowed for administration expenses
- Rebate levels
- 20-35% savings—rebate up to $2,000
- >35% savings—rebate up to $4,000
- Rebates 2X for low/moderate income (>50% multifamily building residency to qualify)
- States are authorized to increase grants or rebates to low/moderate income dwellings
- $4.5 billion through September 2031: high-efficiency electric home rebates
- Allocated to state energy offices (allowed up to 20% for administration)
- Federal allowed 3% maximum for administration expenses
- Maximum rebate of $14,000:
- Up to $1,750 for heat pump water heater
- Up to $8,000 for heat pump space heating/cooling
- Up to $840 for cooking appliances or heat pump clothes dryer
- Up to $4,000 for load center service upgrades
- Up to $1,600 for air sealing and insulation
- Up to $2,500 for wiring
- Rebate cap based on eligible project cost: Area Median Income (AMI) limitations
- 50% cost cap if income >80% and <150% AMI
- 100% cost cap if income <80% AMI
- Multifamily cost caps are required to have >50% in defining income categories
- $1 billion for grants to assist states and units of government to adopt zero energy and/or energy efficient building codes
Clean Vehicles
- Maintains $7,500 total tax credit with changes to the basis of the credit amount
- $3,750 to be based on critical minerals source
- Increasing threshold of minerals sourced from North America must be met to qualify
- Increases annually from 40% to 80%
- $3,750 to be based on battery components source
- Increasing threshold of battery assembled in North America must be met to qualify
- Increases annually from 50% to 100%
- Expires December 31, 2032
- Increases battery capacity eligibility from 4kWh to 7kWh
- Eliminates limitation of numbers of eligible vehicles
- Adds income threshold for the credit—$150k single, $300k joint
- Adds vehicle retail price threshold—$80k (vans, SUVs, trucks), $55k others
- Tax credits may be transferred to the car dealer
- $3,750 to be based on critical minerals source
- Adds pre-owned clean vehicle tax credit
- $4,000 or 30% of price
- Sale by a dealer, under $25,000, at least 2-year-old model, and first transfer after the Act is passed
- Income threshold for the credit—$75k single, $150k joint
- Extends energy efficiency tax credits to December 31, 2032 (11 years)
- Decarbonization Incentives for Electricity Demand for Commercial and Industrial Customers
Energy Efficient Buildings
- Change in maximum allowed energy efficiency tax deduction
- Increasing deduction allowance after certified 25% reduction of energy costs
- Starts at $0.50/square foot increasing to $1.00/square foot
- 25% savings threshold is lower than current 50% fixed requirement
- 5X multiplier for meeting Prevailing Wage & Apprenticeship requirement
- Allows tax deduction for tax-exempt entities to go to the person primarily responsible for designing the property
- Eliminates existing partial deduction and adds provisions for deductions following a Qualified Retrofit Plan when it is expected to reduce energy intensity by 25% or more.
- Increasing deduction allowance after certified 25% reduction of energy costs
- $1 billion for grants to assist states and units of government to adopt zero energy and/or energy efficient building codes
Clean Vehicles
- Adds tax credit for qualified vehicle
- Lesser of 1) 15% of cost (30% if no combustion engine) and 2) incremental cost compared to fully combustion engine version
- $7,500 for under 14,000 gross weight (7 kWh battery requirement)
- $40,000 for over 14,000 gross weight (15 kWh battery requirement)
- Fuel cell vehicles can qualify
- Must be subject to depreciation
- Expires December 31, 2032
- Change in maximum allowed energy efficiency tax deduction
- Incentives and Grants for Energy Justice
- Driver of 10-20% PTC and ITC bonuses
- Additional ~$1 billion to administer up to $4 billion of loan principal for energy and water efficiency upgrades to affordable housing
- Under the HOMES grant program:
- Rebates are 2X for low/moderate income dwellings
- Program authorizes states to offer higher rebates/grants for low/moderate income dwellings
- Contractors are eligible for $200 per home in disadvantaged community
- Under the High-Efficiency Electric Home program:
- Eligible project costs are 2X for low/moderate income dwellings
- $7 billion of grants through September 30, 2024 to deploy Zero Emission Technologies in low-income and disadvantaged communities
- $8 billion of grants through September 30, 2024 for financial and technical assistance to reduce greenhouse gas emissions in low-income and disadvantaged communities
- $3 billion through September 30, 2026 for grants and technical assistance
- For entities (primarily nonprofits) who engage in qualifying activities to benefit disadvantaged communities
- Incentives and Grants for Domestic Manufacturing
- Addition of advanced manufacturing production tax credit
- Specific credit amounts listed for solar components, wind components, inverters, as well as battery components and minerals
- Full credit until December 31, 2029then phased out over 4 years with a 25% multiplier drop each year
- Production in or a possession of the United States
- $3 billion through September 30, 2028 in loans for the manufacturing of cars with zero or low greenhouse gas emissions
- $2 billion through September 30, 2031 in grants for domestic production of efficient hybrid, plug-in electric hybrid, plug-in electric drive, and hydrogen fuel cell electric vehicles
- Requires at least 50% match
- Addition of advanced manufacturing production tax credit