The Inflation Reduction Act of 2022 (the “IRA”) enacted tax provisions to incentivize a wide range of clean energy technologies, constituting almost $300 billion of the climate-related expenditures implemented by the legislation. In addition to the significant extensions and increases applicable to tax credits for wind, solar, clean hydrogen and carbon capture projects discussed elsewhere herein, there are extensions and increases in existing and new credits for numerous other clean energy technologies.
Clean Fuel Production (Renewable Natural Gas and Sustainable Aviation Fuel)
The IRA revamped the credit profile for the production of clean fuel. It extended through 2024: (1) the income and excise tax credits for biodiesel (section 40A) and biodiesel mixtures (section 6426) at $1.00 per gallon, (2) the $0.10 per gallon small agri-biodiesel producer credit (section 40A), (3) the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures (section 6426), and (4) the second generation biofuel income tax credit (section 40). It also creates a new sustainable aviation fuel (SAF) income tax credit (section 40B) and excise tax credit, applicable to sale or use of qualified mixtures after 2022 and before 2025.
The IRA created a new technology-neutral clean fuel production credit in section 45Z that applies after 2024 and before 2028. Fuels may qualify for the credit if their lifecycle emissions are sufficiently below the U.S. average for fuel production.
Both new section 40B and section 45Z provide that the credit amount turns upon the carbon intensity of the production profile. As is the case with new section 45V for clean hydrogen production, the credit amount depends upon the extent to which the CO2 equivalent (“CO2e”) emissions are reduced as compared to normal fuel production.
The IRA expands the production tax credit for hydropower projects placed in service after December 31, 2022. In particular, the IRA eliminates the 50% production tax credit reduction under current law for qualified hydroelectric production and marine and hydrokinetic renewable energy. The IRA also expands application of the production tax credit to marine and hydrokinetic renewable energy by (i) including energy derived from certain pressurized water pipelines and (ii) reducing the minimum required nameplate capacity rating for a qualified facility to 25 kilowatts.
The IRA does not include the provision from prior proposals that would have applied the investment tax credit to “hydropower environmental improvement property.” As a result, the investment tax credit remains available for such property (if at all) only by electing the investment tax credit in lieu of the production tax credit under section 48(a)(5).
New Tax Credit for Production of Zero-Emission Nuclear Power in Section 45U
The IRA creates a new tax credit, in new section 45U, for the production of zero-emission nuclear power (the “Nuclear Power Production Credit”). In general, the Nuclear Power Production Credit equals a base rate of 0.3 cents per kWh of electricity produced at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, less the “reduction amount.” If prevailing wage requirements (but not apprenticeship requirements) are satisfied, the amount of the Nuclear Power Production Credit otherwise available is quintupled.
The “reduction amount” is 80% of the excess of (x) gross receipts from the sale of electricity to an unrelated person during the taxable year over (y) the product of 2.5 cents and the number of kWh of electricity used to initially calculate the Nuclear Power Production Credit. Thus, the reduction amount has the effect of phasing out the Nuclear Power Production Credit as the price of electricity increases.
A qualified nuclear power facility means a facility owned by the taxpayer, which uses nuclear energy to produce electricity, is not an advanced nuclear power facility under section 45J(d)(1) and is placed in service before the date of enactment of the IRA (August 16, 2022).
The Nuclear Power Production Credit is inflation-adjusted and applies to electricity produced and sold after December 31, 2023, and before December 31, 2032.
The IRA includes tax incentives for many other clean energy technologies. In addition to the well-established and well-recognized technologies such as wind, solar, hydrogen and carbon capture discussed elsewhere and those discussed above, incentives have been introduced or enhanced for geothermal projects, waste energy (heat) recovery property, thermal energy storage, electric vehicles, microgrid controllers, dynamic glass and residential energy efficient property. All of these incentives will serve to foster increased interest and investment in clean energy projects in the United States.
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