Over the weekend, the House Ways and Means Committee released legislative text it will debate and mark up in the coming days. The released text includes Subtitle G on green energy (the “Green Energy Subtitle”), which addresses an array of new and revised tax incentives for green energy and fuels. This alert summarizes highlights of the Green Energy Subtitle.
As with other legislative proposals affecting the green energy sector, much uncertainty as to its passage, and the ultimate form of the legislation if enacted, remains. We continue to monitor the progress of this and other related legislation and expect to provide further updates as developments unfold. If you have any questions about the current form of this legislation, please contact any of the authors of this update.
Two-Tiered Incentives Structure
The Green Energy Subtitle structures various tax credits in two tiers with a “base rate” and a “bonus rate.”
The bonus rate generally applies only to those projects which meet the prevailing wage and apprenticeship requirements during applicable periods or satisfy certain other exceptions. Projects which are exempted from the prevailing wage and apprenticeship requirements and, thus, qualify for the bonus rate, generally include (1) where applicable, projects with a maximum net output of less than one megawatt and (2) projects which commence construction prior to the enactment of these new rules. The base rate applies to all other projects which otherwise meet the requirements for the particular credit and is 20% of the bonus rate.
Under the “prevailing wage requirements,” the taxpayer must ensure that laborers and mechanics employed by contractors and subcontractors working on construction and operation of the project for ten years after the placed in service date are paid the prevailing wages in the locality as determined by the Secretary of Labor. Under the “apprenticeship requirements,” the taxpayer must ensure that no fewer than the applicable percentage (5% for projects which begin construction in 2022, 10% for 2023, and 15% thereafter) of total labor hours are performed by qualified apprentices. Both requirements have certain cure provisions.
"Sweetener" for Domestic Content
For certain types of credits, such as the production tax credit under Section 45 (the “PTC”), the investment tax credit under Section 48 (the “ITC”), and the new tax credit for qualifying electric transmission property under new Section 48D, an additional credit amount is available if the “domestic content requirements” are satisfied. Under the “domestic content requirements,” the taxpayer must ensure that a sufficient portion (generally, at least 55% by cost) of the materials and products used in the qualified facility or energy property, as applicable, are manufactured or deemed manufactured in the United States.
In the case of the PTC, this additional credit amount equals 10% of the amount otherwise available to the taxpayer. In the case of the ITC and the tax credit under new Section 48D, this additional credit would increase the applicable credit rate by (1) 2 percentage points for projects with a maximum net output of one megawatt or more and that fail to meet the prevailing wage and apprenticeship requirements or (2) 10 percentage points for projects which have a maximum net output of less than one megawatt or which satisfy the prevailing wage and apprenticeship requirements.
Extensions of the PTC, ITC, and 45Q Credit
The Green Energy Subtitle extends the PTC, the ITC, and the credit for carbon oxide sequestration under Section 45Q (the “45Q Credit”).
The PTC for solar energy is revived and extended through 2031, phasing down to 80% of the applicable credit rate in 2032, and 60% of the applicable credit rate in 2033. The PTC for wind energy is increased to the full applicable credit rate through the end of 2031, phasing down to 80% of the applicable credit rate in 2032, and 60% of the applicable credit rate in 2033. The PTC for other facilities is extended through the end of 2031, phasing down to 80% of the applicable rate in 2032, and 60% of the applicable rate in 2033.
The ITC for solar energy property is extended, providing a rate of 30% (in the case of projects qualifying for the bonus rate) through the end of 2031, phasing down to 26% in 2032, 22% in 2033, and finally 10% for energy property qualifying for the bonus rate (or 6%, 5.2%, 4.4% and 2%, respectively, in the case of energy property eligible for the base rate) which begins construction before 2034 and is not placed in service before 2036. The ITC for geothermal energy property is modified to match the credit timeline for solar energy property. The ITC for other energy property is extended through the end of 2031, phasing down in 2032 and 2033.
The 45Q Credit is extended for facilities that begin construction before January 1, 2032. Section 45Q, as revised by the Green Energy Subtitle, would provide a credit at a rate of $50 (in the case of facilities qualifying for the bonus rate) per metric ton of carbon oxide captured for geological storage and a credit at a rate of $35 (in the case of facilities qualifying for the bonus rate) per metric ton of carbon oxide captured and used by the taxpayer for enhanced oil recovery or other allowable use. These rates, which would be effective starting in 2022, represent an increase over the current credit amounts which ratchet up and only hit this level ($50/$35) in 2026 and later years. For any taxable year beginning after December 31, 2021 and with respect to qualified direct air capture facilities, the Green Energy Subtitle also provides a new, enhanced 45Q Credit at a rate of $180 (in the case of facilities qualifying for the bonus rate) per metric ton of carbon oxide captured for geological storage and a credit at a rate of $130 (in the case of facilities qualifying for the bonus rate) per metric ton of carbon captured and used by the taxpayer for enhanced oil recovery or other allowable use. While the proposal does not increase the credit period (12 years), it does reduce the minimum capture thresholds that must be met in order to be a qualified facility, while adding a requirement that electricity generating facilities must capture no less than 75% of the amount they otherwise would emit and other facilities must capture no less than 50% of the carbon oxide they otherwise would emit.
Expansion of the ITC
The Green Energy Subtitle expands the ITC to include:
- energy storage equipment, which uses batteries and other storage technology to store energy for conversion to electricity and has a minimum capacity of 5 kilowatt hours,
- qualified biogas property, which converts biomass into a gas which consists of (or is concentrated by such system to consist of) not less than 52% methane and captures such gas for productive use,
- microgrid controllers, which are parts of, and monitor and control the energy resources and loads on, qualified microgrids capable of generating not less than 4 kilowatts and not greater than 20 megawatts of electricity,
- linear generator assemblies, which generate electricity through electromechanical means without using rotating parts and have a minimum capacity of at least 1 kilowatt, and
- dynamic or electrochromic glass, which uses electricity to change its light transmittance properties in order to heat or cool a structure.
“Direct Pay”: Elective Tax Refund for Deemed Payment of Credits
The Green Energy Subtitle allows taxpayers to elect to be treated as having made a payment of tax equal to the value of eligible tax credits and to request a tax refund for the deemed payment of tax rather than carrying forward such credits, implementing what is referred to as “direct pay” with respect to the credits. This provision allows entities with little or no tax liability (including tax exempt entities) to accelerate utilization of these credits.
The types of credits eligible for such election include, among other things, the ITC, the PTC, the 45Q Credit, the Section 48C advanced energy project credit, the Section 48D credit for transmission property, the Section 48E zero emissions facility credit, and the Section 45X clean hydrogen production credit. This provision applies to projects placed in service after December 31, 2021.
However, in the case of a facility for which ITCs, PTCs, Section 48D credits, or Section 48E credits are claimed and which has a maximum net output of one megawatt or greater, the domestic content requirements are imposed to potentially limit such payments. If the facility claiming such credits fails to meet the domestic content requirements, the amount of direct payment would generally be subject to a phasedown schedule: the amount of such payment would be 100% of the credits the taxpayer would otherwise be eligible for if the facility commences construction before 2024, 90% if the facility commences construction in 2024, 85% if the facility commences construction in 2025, and 0% if the facility commences construction in 2026 and thereafter.
Expansion of Publicly Traded Partnership Qualifying Income to Include Green Energy Income
The Green Energy Subtitle expands the definition of “qualifying income” for publicly traded partnerships to include certain income derived from green energy. Such income includes, among other things, income from the generation of energy eligible for the PTC, income from the operation of energy property eligible for the ITC, income from certain activities related to renewable fuels, and income from facilities eligible for the 45Q Credit.
New Tax Credit for Electric Transmission Property and Zero Emissions Facility
The Green Energy Subtitle creates a new tax credit, in new Section 48D, for the basis of qualifying electric transmission property placed in service by the taxpayer after December 31, 2021 and before January 1, 2032, at a credit rate of 30% (in the case of projects qualifying for the bonus rate). Qualifying electric transmission property includes transmission lines capable of transmitting electricity at a voltage of not less than 275 kilovolts with capacity of not less than 500 megawatts, as well as certain related transmission property.
The Green Energy Subtitle also creates a 30% credit, in new Section 48E, for qualified investment with respect to a zero emissions facility. A zero emissions facility is one which generates electricity but emits no greenhouse gases and is not covered by the ITC, the PTC, or Section 45Q. Unlike the other credits discussed above, this zero emissions facility credit does not follow the two-tier structure—a facility must satisfy the prevailing wage and apprenticeship requirements to qualify for this credit.
New Tax Credit for the Production of Clean Hydrogen
The Green Energy Subtitle creates a new tax credit, in new Section 45X, for the production of clean hydrogen (“Clean Hydrogen Production Credit”) by a taxpayer at a qualified facility beginning in 2022 during the ten year period beginning on the date such facility is placed in service. The credit applies to facilities which commence construction before 2029.
The amount of the Clean Hydrogen Production Credit is equal to the “applicable percentage” of $3.00 (in the case of projects qualifying for the bonus rate), indexed to inflation, multiplied by the volume (in kilograms) of clean hydrogen produced by the taxpayer at a qualified facility during such taxable year. The “applicable percentage” depends on the reduction in lifecycle greenhouse gas emissions as compared to the production of hydrogen using steam-methane reforming, with the highest applicable percentage being 100% (for a reduction in lifecycle greenhouse gas emissions of at least 95%) and the lowest being 20% (for a reduction in lifecycle greenhouse gas emissions of at least 40% and less than 75%).
A taxpayer may elect to treat a qualified clean hydrogen facility as energy property for purposes of the ITC in lieu of the Clean Hydrogen Production Credit, in which case the ITC shall equal the applicable percentage multiplied by the energy percentage, and the credit rate is 30% (in the case of projects qualifying for the bonus rate) of the basis of such qualified energy property. The Clean Hydrogen Production Credit does not apply to hydrogen produced at a facility for which the 45Q Credit is allowed.
Extensions of Excise Tax Credits Relating to Alternative Fuels and Second Generation Biofuel Incentives
The Green Energy Subtitle extends through 2031: (1) the income and excise tax credits for biodiesel and biodiesel mixtures at $1.00 per gallon, (2) the $0.10-per-gallon small agri-biodiesel producer credit, (3) the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures, and (4) the second generation biofuel income tax credit.
We will continue to monitor developments and will provide further updates on the green energy package. In the meantime, Baker Botts would be pleased to assist you in your analysis of the legislative text and other green energy tax incentive matters.
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