Inflation Reduction Act

4 min read

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November 2022

By Michael Beirne, vice president of external affairs and OMEA executive director

Passage of the Inflation Reduction Act of 2022 (IRA), which President Biden signed into law on Aug. 16, brought an end to more than a year of negotiations and discussions over a bill that originated as the Build Back Better Act. The final bill is expected to raise $739 billion in revenue and contains provisions primarily related to health care, tax reform and energy.

Most of the bill is dedicated toward energy and will invest an estimated $369 billion into the sector. While the bill has been heralded as one of the biggest climate initiatives ever passed in the United States, it is largely focused on a mixture of tax incentives, grants and loan guarantee programs, rather than enforcement mechanisms.

With the main focus of the bill being on tax incentives, there are a number of provisions that are of interest to public power.

Direct pay

Comparable tax incentives for non-profit entities are something that public power has long advocated for. With direct pay, public power utilities can now benefit from tax credits that they were previously locked out of due to the lack of the proper tax obligation. Before now, tax incentives were largely exclusive to for-profit developers, leaving out municipal electric utilities, rural electric cooperatives and other non-profit developers. Direct pay allows for a system where payments are made directly to the municipality by the U.S. Department of Treasury, allowing participation by all utilities and developers.

In addition, the IRA recognizes the harm created through the imposition of budget sequestration and includes a provision to protect the payments from budget sequestration in the form of a true-up provision, addressing another of public power’s major issues. However, the legislation does not address the current sequestration of existing Build America Bonds and New Clean Renewable Energy Bonds, an issue we’ve long raised concern about and continue to advocate for relief from the onerous action.

Investment tax credit and production tax credit

Previously, the investment tax credit (ITC) and production tax credit (PTC) were made available to only a handful of named technologies, including solar and wind. With the passage of the IRA, this credit will expand the number of eligible technologies immediately and ultimately expand the tax benefits to any technology that produces zero emissions beginning in 2025. This means it will fully incentivize hydro facilities, which had previously received only a partial credit.

Once the full credit is in effect, hydro facilities will be eligible for credits based on a two-tier system. The base credit for the PTC would be 0.3 cents per kilowatt hour (kWh), adjusted for inflation, while the base credit for the ITC would be six percent. The bonus would be available to those facilities in compliance with prevailing wage and apprenticeship requirements, as well as domestic sourcing requirements.

45Q tax credit

The 45Q tax credit (45Q) previously existed to incentivize carbon capture and sequestration projects, but the requirements to qualify were extremely arduous, and the credit provided very little practical incentive. With the passage of the IRA, the structure of the 45Q tax credit has been expanded to make usage of the credit more viable.

Electricity generating facilities that capture at least 18,750 metric tons of carbon oxide and 75 percent of the baseline carbon emissions from each generating unit on which carbon capture is installed now will be eligible. The base rate for this credit is $17 per metric ton of carbon oxide captured and stored, with the bonus rate reaching as high as $85 per metric ton. The credit applies to projects that begin construction before the end of 2032.The compliance requirements are much the same as mentioned in the section above.

Clean energy provisions

The IRA also includes a number of additional clean energy provisions that may be of interest to public power utilities or their customers.

• • Electric vehicle tax credit: A credit of up to $7,500 was included to encourage the purchase of electric vehicles (with some vehicle price and income limitations). Additionally, there is a tax credit of up to $4,000 or 30 percent of a vehicle’s value for the purchase of used electric vehicles.
  • Residential solar program: A 10-year extension of tax credits for rooftop solar panels and other consumer energy merchandise, such as heat pumps and electric water heaters.
  • Energy efficiency tax credits: A number of credits have been made available for installing qualified energy efficiency improvements, including exterior windows and skylights, exterior doors, central air conditioning, heat pump water heaters and more.
  • Clean energy tax credits: Tax credits going towards projects on a brownfield site; in an area with significant employment in coal, oil or natural gas; sited where a coal mine has closed after 1991; or sited where a coal-fired generating unit has retired since 2009. There is an additional 10 percent bonus credit for PTC and ITC projects.

Next steps

While the IRA has officially passed, the bill will likely take some time to come into full effect. Many of the programs and provisions will require new guidelines, rules and procedures to be developed by the federal government, many of which are currently underway.

Direct pay will require a great deal of work. The U.S. Department of Treasury and Internal Revenue Service will need to establish new guidelines for how direct pay tax credits will function and how those funds will be delivered.

Similarly, the U.S. Department of Energy will need to develop guidance and implement new procedures for the energy- and efficiency-related provisions of the bill. Funds for these newly established provisions will not be released until this process has been completed.

It should also be noted that the IRA was passed strictly along party lines. Following the November elections, it is expected that increased oversight and scrutiny of implementation and spending will take place with a change in the House majority.

As with anything in Washington, things will move slowly, and nothing is guaranteed. As this process unfolds, AMP will continue to work with the American Public Power Association, Large Public Power Council and its other partners to ensure that the interests of public power and AMP member communities are well represented. AMP will provide updates on these provisions as guidelines and procedures are established.

Additionally, AMP has partnered with The Ferguson Group (TFG) to identify grant and funding opportunities for member communities, both from the IRA and the Infrastructure Investment and Jobs Act, passed in 2021. TFG is monitoring developments from IRA and infrastructure act implementation and communicates opportunities as they become available.

As part of AMP’s relationship with TFG, email updates on grant opportunities that member communities and utilities may qualify for are sent weekly to subscribing members. Member officials are encouraged to subscribe to this email, and can do so by contacting Erin Miller, AMP assistant vice president of energy policy and sustainability, at [email protected].

If you would like more information on the IRA, a detailed presentation of the relevant provisions is available to members on the AMP Member Extranet. If you have questions about the IRA or AMP’s current efforts, please contact me at [email protected].