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By: The Practical Guidance Energy & Utilities Team
On January 27, 2021, President Joseph R. Biden signed Executive Order 14008,1 calling for the country to become net zero on carbon emissions by the year 2050. This order also called for the country’s electricity sector to become net zero by the year 2035. Both were tall orders calling for drastic action.
TO EFFECTUATE THESE ORDERS, THE BIDEN ADMINISTRATION needed more than unilateral executive action and regulation—both of which can be reversed by subsequent administrations. Instead, it needed solid legislation passed and funded by Congress. Enter the great climate change legislative debate of 2022. After much political wrangling and negotiation, and months and months of uncertainty, Congress eventually passed the $740 billion Inflation Reduction Act (Act), which was signed into law on August 16, 2022. The Act provides almost $400 billion in federal funding for energy and climate-change projects, with the goal for the U.S. economy to achieve a 40% reduction in carbon emissions by the year 2030.
As with any large, expensive omnibus bill that successfully makes its way through Congress, the Act is both comprehensive and complicated. It combats climate change via a number of avenues, focusing on clean and renewable energy sources and technology to reach President Biden’s climate-change goals.
One of the Act’s main focuses is actually on nuclear energy—with significant tax credits available for private nuclear project developers who build advanced nuclear energy projects. The Act also seeks to create a private marketplace for the purchase and sale of high-quality, low-enriched uranium for advanced nuclear reactors (previously only supplied by the federal government). It views this as a way to break down barriers to entry and innovation in the advanced nuclear field. Notably, the Act also provides significant tax credits for clean hydrogen production—including through the use of advanced nuclear reactors—making future nuclear power projects even more promising, probable, and profitable.
The showcase feature of the Act focuses on production and incentive tax credits for the build-out of new wind, solar, and battery storage facilities throughout the United States. These tax credits—which last 10 years—provide up to 2.6 cents per kilowatt hour for wind or solar power produced by new projects and provide up to a 30% project cost reduction for new wind and solar projects that meet certain wage and workforce requirements. In real dollars, it is expected that these tax credits will equate to more than $130 billion in direct incentives for developers to build new wind, solar, and battery storage projects. These funds are crucial to help the Biden Administration reach its carbon-reduction goals, as they are designed to spur a multi-fold increase in wind, solar, and battery-storage projects over the next 10 years. Using these funds, the Biden Administration wants to see at least 50,000 new wind turbines, 750 million new industrial-scale solar panels, and 2,300 new battery storage projects built in the next 10 years.
The Act also provides increased federal Section 45Q tax incentives2 for utility-level carbon capture programs, showing that green tech can partner with traditional energy producers to work toward net zero. These programs have been championed by members of Congress, including the all-important Senator Joe Manchin, as a way to work toward net zero through innovation rather than elimination of carbon production. Importantly for the West Virginia senator, carbon capture represents the clearest way to keep coal-fired power plants operating throughout the country, while still effectively reducing carbon emissions.
Focusing directly on consumer action, the Act also provides a multitude of tax credits for the purchase of new and used electric and hybrid vehicles, as well as for the installation of home solar and energy-efficient appliances, HVAC systems, and hot water heaters. If fully utilized, these tax credits have the ability to put thousands of dollars each year into an average consumer’s pocket, spurring the economy and boosting residential green energy utilization substantially. Most importantly, the Act helps consumers get into the habit of thinking about sustainability—an important milestone if the United States is to achieve its carbon reduction goals.
Surprisingly, even the traditional oil and gas industry is given some benefits under the Act. Notably, offshore areas opened up for renewable energy production (such as for offshore wind) must now also be made available for offshore oil and gas development. While applications for offshore oil and gas drilling permits can always be denied, the Act at least provides for some mechanism to increase land available for offshore oil and gas development. While these provisions do not combat climate change directly, they likely helped ensure the Act’s passage by throwing benefits to Gulf-coast states whose senators and/or representatives would otherwise have voted against the Act’s passage.
Unlike many bills passed by Congress, where funding mechanisms are amorphous, the Act makes little secret of who will foot the bill. First, the Act provides for a minimum 15% corporate tax on the largest U.S. corporations—including energy giants such as Exxon and Chevron. Next, the Act provides for $80 billion in additional funding for the IRS—ostensibly to enhance customer service, but also to dramatically increase tax enforcement for the wealthiest American corporate and individual taxpayers. Finally, the Act provides for a tax on stock buyback programs, in an effort to force corporate reinvestment, rather than direct shareholder enrichment.
By increasing taxes and tax enforcement, and penalizing stock buyback programs (which often occur at major energy companies), the Biden Administration hopes the Act will both pay for itself and actually decrease the budget deficit on a year-over-year basis. With armies of tax lawyers both involved in drafting the Act and in fighting its goals, it remains to be seen whether the Act’s funding mechanisms will create the financial windfall hoped for by the Biden Administration.
There is no doubt the Act invests heavily in carbon-reduction and elimination technologies and programs. However, much of this investment comes in the form of tax credits and incentives, the future effects of which rely, in part, on interest rates; economic growth; future tax policies; commodity prices; local, state, and national permitting; and regulatory hurdles. Each of these items can increase or decrease the true monetary value of incentives provided by the Act.
Siting these new renewable energy projects will increasingly become a problem as well—with the best sites already taken, and only more and more marginal locations available for future development. And there is the increasing problem of grid stability, interconnectivity, and power transmission. It is anticipated that a fully upgraded electricity grid with modern transmission facilities sufficient to handle all of the new renewable energy projects anticipated over the next 10 years may cost up to $2.5 trillion. The Act provides no answer (and no funding) to manage this significant problem, although a small down payment of $65 billion in funding can be found in 2021’s bipartisan Infrastructure Investment and Jobs Act.
As our electricity grid continues to age, becomes more fragile, and becomes more susceptible to dramatic outages, something will have to be done on the transmission side to keep pace with new renewable generation.
Despite its implementation challenges, if all goes as planned (which things in Washington rarely do) then the Act is on pace to help the United States hit a 40% carbon-reduction goal by the year 2030. This is a lofty goal, and one worth shooting for. But to reach this goal, hundreds of millions of new solar panels, tens of thousands of new industrial-scale wind turbines, and a multi-fold increase in industrial-scale battery storage must be installed. Whether this dramatic renewable energy growth can be achieved or not is an open question, and the devil is often in the details. However, the Act has provided the country with its best chance, to date, to combat climate change in a way that is meaningful, measurable, and in line with the efforts of other developed nations around the world.
To find this article in Practical Guidance, follow this research path:
RESEARCH PATH: Energy & Utilities > Downstream Energy > Public Utilities
> CLIMATE CHANGE RESOURCE KIT
For background information on using tax equity to finance renewable energy projects, see
> FINANCING A PROJECT WITH A TAX EQUITY INVESTMENT
For an analysis of energy tax credits and incentives for businesses, see
> ENERGY TAX CREDITS AND INCENTIVES
> ENERGY SECURITY AND CLIMATE CHANGE INITIATIVES IN THE INFLATION REDUCTION ACT: CLIENT ALERT DIGEST
> OFFSHORE WIND TECHNOLOGY
> SOLAR ENERGY FINANCING
> SOLAR ENERGY PROJECT DEVELOPMENT
> CLEAN ENERGY FINANCING
> ENERGY FINANCE RESOURCE KIT
> ENVIRONMENTAL PROTECTION RESOURCE KIT