In a surprise announcement late July, Senator Joe Manchin (D-WV) and Senator Majority Leader Chuck Schumer (D-NY) came to an agreement on adding a healthcare, tax, and climate proposal to the FY 2022 Budget Reconciliation. The Act, dubbed the Inflation Reduction Act of 2022, will significantly expand incentives and tax credits for a variety of decarbonization technologies including 45Q and alternative fuels. The Act also extends ITC and PTC tax credits for solar and wind projects. The Act passed the Senate on August 7, and if signed by President Biden, will bring immediate tax benefits to the energy transition sector. It is important to note that this legislation may change from what is currently proposed, changing our takeaways and how it affects the energy sector as well.
- Extension of the 45Q carbon oxide sequestration credit for projects beginning construction before January 1, 2033. The credit amount has also increased, and the minimum capture requirements are significantly reduced.
- Extension of the PTC and ITC for projects (e.g., wind, solar, geothermal, biomass, CHP, etc.) beginning construction before January 1, 2025.
- Expanded definition of ITC eligible energy property to include battery storage.
- Includes a direct pay option for certain tax exempt and governmental entities, there is a limited, time-based exception to this restriction for the Clean Hydrogen Credit, 45Q Credit, and Advanced Manufacturing Credit.
- Technology neutral PTC and ITC available beginning in 2025 through the later of (i) 2032 or (ii) the year certain emissions thresholds are achieved (at which point the credit will start to phase down).
- Introduces and expands certain credits including:
- Clean Hydrogen Credit;
- Nuclear Power Production Credit;
- Advanced Manufacturing Production Credit;
- Clean Fuel Production Credit;
- Renewable Fuels Credits; and
- EV (Electric Vehicle) and Charging Infrastructure Credits.
The following will detail: 1) expansion of the 45Q credit, 2) expansion of the ITC and PTC credit, 3) the new Clean Hydrogen PTC credit, and 4) Direct pay option. These areas are where Alturus believes our customers will see the greatest increase in benefits from projects currently under development and in the pipeline.
Production Tax Credit (PTC) (45) & Investment Tax Credit (ITC) Extension (48)
The Act would also extend the eligibility for qualified projects under the ITC and PTC to January 1, 2025. The PTC extension to 2025 would be applied to wind facilities, biomass facilities, RNG, trash facilities and CHP plants. The ITC extension could be applied to solar projects, qualified fuel cell implementation (>5kWh, a new qualifying project), microgrid controllers, waste heat recovery projects. Geothermal projects will be extended to January 1, 2035. Previously, projects were phased out if implemented after 2019 under both tax credits offering further opportunity for developers to implement energy conservation projects.
To take advantage of these benefits before the credits expire, projects where construction began before 2027 must be completed by January 1, 2029.
The PTC and ITC will have a new reduced base credit amounts as well. The PTC base credit will now be 0.3 cents per kWh and the new ITC base credit will be 6%. In addition, the base credit for both the PTC and ITC will be multiplied by 5 for projects that meet the new prevailing wage requirements.
Under the new prevailing wage previsions, the taxpayer is required to satisfy certain prevailing wage requirements for laborers and mechanics, including those employed by contractors and subcontractors, for wages paid during the construction and ongoing maintenance and repair. In addition, but subject to further exceptions, qualified apprentices are required to take part in the applicable number of hours during project construction. The applicable percentage would be between 10% and 15%, depending on the year in which construction of the project began.
Hydrogen Production: New Clean Hydrogen PTC (45V)
A new ten-year production tax credit under section 45V of the Code would be available for the production of clean hydrogen produced after December 31, 2022 by a taxpayer at a qualified facility beginning construction by January 1, 2033.To be eligible, the lifecycle greenhouse gas emissions rate cannot exceed 4 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen produced.
The new credit can either come in the form of PTC or ITC. The PTC base credit starts at $0.60/kilogram, multiplied by an applicable percentage, which is 100% if the lifecycle greenhouse gas emissions rate is less than 0.45 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen (adjusted downward based on the lifecycle greenhouse gas emissions rate). The increased credit rate is 5 times the base rate (i.e., up to $3.00/kilogram) if prevailing wage and apprenticeship requirements are met.
The ITC base credit of 6% multiplied by an applicable percentage, which is 100% if the lifecycle greenhouse gas emissions rate is less than 0.45 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen (adjusted downward based on the lifecycle greenhouse gas emissions rate). The increased credit rate is 5 times the base rate (i.e., up to 30%) if prevailing wage and apprenticeship requirements are met.
A taxpayer cannot benefit from both the clean hydrogen PTC and the 45Q Credit, however, they can take both the PTC or ITC and the Clean Hydrogen PTC (even if not sold to an unrelated party).
Carbon Capture: 45Q Carbon Capture Credit Extension and Expansion (45Q)
The proposed legislation generally extends the 45Q credit for projects beginning construction prior to 2033. Currently, only projects beginning construction before December 31, 2025, are eligible for 45Q credit. This proposed eight-year extension provides developers and investors an opportunity to make decisions about future project potential and when to start construction.
Coupled with the eight-year extension comes a decrease in carbon oxide capture requirements, expanding the definition for qualified facilities. A power plant will qualify if it captures at least 18,750 metric tons of carbon oxide each year and at least 75% of the baseline carbon oxide production. Other facilities will qualify if they capture at least 12,500 metric tons of qualified carbon oxide during the taxable year.
For geological storage projects the credit is up to $85/metric ton of carbon oxide. For enhanced oil or natural gas recovery projects the credit has been increased to up $60/metric ton of carbon oxide. This increased credit value will allow for broader project implementation.
Direct Pay Election
For applicable entities, The Act adds an available direct pay option (in the form of tax refunds) for the ITC, PTC and 45Q credits. Applicable entities include all tax-exempt entities, any state, tribal or local government, and the Tennessee Valley Authority.
For non-tax-exempt entities, the direct pay option is available, but only with respect to the clean hydrogen credit, the carbon sequestration credit, and the advanced manufacturing credit, and only for tax years beginning before 2023.
Direct pay election is made on a facility-by-facility basis and generally must be made in the year the qualifying project is put in service and applies for the entire credit period relating to the facility (subject to above time-based limitation for non-applicable entities).
The proposed Inflation Reduction Act of 2022 will significantly expand available tax credits for the industry and benefit all organizations pursuing decarbonization initiatives, given the breadth and depth of the credits and their size. Alturus’ programs can help organizations understand these new benefits and maximize the value of these within a comprehensive decarbonization program. To learn how Alturus can help start the process, contact a member of our team at firstname.lastname@example.org.