Breaking Down the Inflation Reduction Act

By Deidre Kohlrus, Energy Workforce & Technology Council

In mid-August, President Biden signed into law the Inflation Reduction Act (IRA) which funded $369 billion in climate and energy-related programs, including many that impact the energy services and technology sector of the industry.

The provisions in this legislation include the creation and expansion of tax credits, funding for grants and financing of large energy projects, impacts to the federal oil and gas leasing programs and increases in regulations and tax obligations.

Tax Credits

The IRA includes several opportunities for businesses to take advantage of expanded and newly formed tax credits. This legislation extends the investment tax credit (ITC) from 6% to 30% for solar, geothermal, biogas, fuel cells, waste energy recovery, combined heat and power, small wind property, and microturbine and microgrid property for projects beginning construction before January 1, 2025.

It also extends the production tax credit (PTC) to 2.6 c/kWh for wind, biomass, geothermal, solar, landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic resources for projects beginning construction before January 1, 2025.

The 45Q tax credit has been extended to 2032, which includes projects eligible for direct pay for the first five years. The IRA also significantly reduces the threshold amounts of carbon oxide required to be captured in order to qualify for the 45Q credit.

The IRA creates a new Section 45V, which provides a new two-tier, inflation-adjusted, 10-year PTC for clean hydrogen produced at a qualifying facility if the facility’s construction begins before 2033.

Additionally, this legislation adds Section 45X, which provides a PTC for manufacturers of eligible components that are produced and sold, which include specific components used in wind, solar and battery projects.

Funding Opportunities

The IRA creates a “Green Bank” that is run through the Environmental Protection Agency (EPA) which will distribute grants through non-profit organizations who then would contract out commercial enterprises for technology purchases.

This includes $12 billion in financing for the rapid deployment of low-emissions or zero-emissions technology and products, and $7 billion to finance community-based zero-emissions technology like rooftop solar panels in low-income and other disadvantaged areas.

This legislation also greatly increases funding for the Department of Energy (DOE) Loan Program Office, with an additional $40 billion in funding to the Innovative Technology Loan Guarantee Program. This funding will expand opportunities for projects that utilize innovative technology to reduce, avoid, or sequester greenhouse gas emissions or air pollutants.

Additionally, the IRA funds a new program through the DOE Loan Program Office, called the Infrastructure Reinvestment Loan Guarantee Program. This program has received up to $250 billion in loan guarantee authority for projects that retool, repower, repurpose or replace energy infrastructure that has ceased operations or projects that enable operating energy infrastructure to avoid, reduce, utilize or sequester air pollutants or anthropogenic emissions of greenhouse gases.

The newly formed DOE Office of Clean Energy Demonstrations will receive $5.8 billion for deployment of Advanced Industrial Technology in energy-intensive industrial processes in the IRA.

Additionally, this bill establishes a Methane Emissions Grant Program through the EPA. This $850 million in grants will be allocated to facilities subject to the methane charge for a range of objectives, including “improving and deploying industrial equipment and processes” that reduce methane emissions. The program also allocates $700 million for "marginal conventional wells" to be disbursed in the form of grants, rebates, contracts, direct loans for financial and technical assistance for the same purposes.

Federal Oil and Gas Leasing Program

The Federal oil and gas leasing program had several substantive changes made through the IRA. This legislation raises offshore and onshore royalty rates to 16.66% from 12.5% currently. The bill also increases the minimum bid rate to $10/acre from $2/acre, instituted a $5/acre fee for operators to informally nominate lease tracts inclusion in lease sales to the Department of Labor and eliminates non-competitive leasing if leases fail to receive competitive bids at auction. The IRA took a bold step and ordered the Department of Interior (DOI) to hold oil and gas lease sales in order to issue a right-of-way for new wind or solar energy development on Federal Lands.

Additionally, DOI must reinstate the November 2021 Gulf of Mexico oil and gas lease sale that was vacated by a federal district court, and requires the Department to hold the Alaska Cook Inlet and two Gulf of Mexico lease sales that were cancelled earlier this year.

Regulatory and Tax Increases

This legislation creates a methane emissions charge which, if enacted, would be the first time the federal government would directly impose a charge, fee or tax on GHG emissions.

This fee on methane emissions would apply only to methane emissions from specific types of facilities that are required to report their greenhouse gas (GHG) emissions to the EPA’s Greenhouse Gas Emissions Reporting Program (GHGRP). The charge would start in calendar year 2024 at $900 per metric ton of methane, and increase to $1,200 in 2025, increase to $1,500 in 2026 and would remain at $1,500 for subsequent years.

The biggest uncertainty surrounding the formation of this fee is the potential for businesses to be exempt from the charge if future, final EPA regulations addressing methane emissions are in effect in all states and if adherence would result in equivalent or greater emissions reductions as would be achieved by the November 2021 rule.

The IRA enacts a new Chapter 37 and Section 4501 of the Internal Revenue Code that imposes on a “covered corporation” (generally, a publicly traded U.S. corporation) a non-deductible excise tax equal to 1% of the fair market value of the stock of the corporation that is considered “repurchased” by the corporation during the tax year.

The IRA also introduces the corporate alternative minimum tax of 15% targeted at certain large U.S. corporations if such corporation’s adjusted financial statement income which is similar to book earnings prepared in accordance with U.S. GAAP, exceeds certain threshold amount.

The Energy Workforce Government Affairs team will continue to monitor these funding and tax opportunities and regulatory changes as they are enacted.