Three Game-changing Aspects of the New Climate Bill
The proposed Inflation Reduction Act of 2022 is potentially game changing legislation for addressing climate change, with the bill’s authors claiming it will achieve the Biden administration’s goals of a 40% reduction in greenhouse gasses by 2030.
In our review of the bill, we have noted three aspects that we feel may transform our efforts, and the efforts in the industry in general, to stand up new clean energy infrastructure at the rapid pace we will need in order to meet our climate goals.
Supercharged ITC, PTC and grant funds tied to a just transition
If the new bill passes, the labor and community aspects of any new renewable energy project will have significant effects on the tax incentives and funds on which it can draw. The investment tax credit (ITC) and production tax credit (PTC) available to renewable energy projects have been amended, in each case, so that they have a small base rate - 6% in the case of the ITC and $5.50/MWh (in today's dollars) in the case of the PTC.
But these low base rates are, in each case, multiplied by five times (to 30% and $27.50/MWh) if a project is below 1 MW or, for larger projects, if prevailing wages are paid to workers on the project and a minimum number of hours from qualified apprentices are used in its construction.
Additionally, the new bill provides that in cases where the project may serve to more equitably share the benefits of the climate transition, the tax credits may be increased substantially.
The ITC percentage may be increased by an additional 10% if the project is located in an “energy community,” which includes brownfields, census tracts impacted by coal mine or coal power plant closures and other areas at risk of suffering unemployment in the transition away from fossil fuels.
Another 10% increase is available if the project uses domestic iron, steel and manufactured materials. The PTC per kWh credit also increased in such circumstances by 10% of the amount of the credit.
And finally, an up to 20% increase in the ITC percentage is available for small (under 5 MW) projects benefiting low-income communities (subject to an application process and annual cap). A project may gain half of this increase (10%) if it is sited in a low-income community or on Tribal land, or the full 20% if either greater than half the financial benefit of the project goes to low-income residents, or the project is built on a residential building project that participates in covered housing programs such as Section 8.
All together, it is possible to achieve as much as a 70% ITC and a PTC well in excess of $30 per MWh. Projects can still only take advantage of the ITC or the PTC, but not both.
An additional $27 billion in federal grant money has been set aside for a Greenhouse Gas Reduction Fund, effectively a federal green bank, which also focuses on low-income communities.
Evergreen has been focusing on labor and community concerns in regard to the development of our projects since our inception. We are in the process of publishing our own ESG Scorecard for solar projects to further quantify the high-standards we are setting, and if this bill passes, there will be even more incentive for developers and companies to abide by best practices.
Tax equity turns into a tax credit
The bill may also make the monetization of the ITC and PTC easier for our developer partners. Monetizing federal tax credits has until now been a major complicating factor in standing up new renewable energy projects, in particular C&I (commercial & industrial) projects that exist between the utility scale and the heavily-standardized residential market. This is because most solar developers do not have the type of federal tax bills allowing them to use these non-refundable credits, and because the credits cannot simply be transferred to investors that are able to make use of them; instead, credits have to be “allocated” to investors in accordance with a complicated set of legal and financial rules that require the investor to maintain an equity stake in the project, at least temporarily. This ultimately leads to high transaction costs that generally limit investors in these “tax equity” structures to a handful of large banks and other institutional entities, and makes smaller or mid-size projects almost impossible to fund unless they can be aggregated together into a large pool.
The new bill may radically change this regime by enabling tax credits for renewable projects to be sold - ultimately making it much more efficient to monetize them. This could lead not only to smaller deals becoming more economical but also to additional investors joining the market. There is precedent, also, at the state level for active markets to develop for the sale of discounted tax credits. Although some inertia in the market is to be expected and much depends upon the nature of the regulations the IRS is required to release governing these transfers, we are already in discussions with companies who are interested in tax equity opportunities and now tax credit purchases.
Storage just got tailwinds
The bill would also make the ITC available for standalone energy storage systems. Federal tax incentives for storage are currently only available for systems that are paired with solar projects, and under IRS guidance this means that at least 75% of the storage needs to be charged by the solar project, as opposed to from the grid. Additionally, any charging from the grid results in a reduction of the total amount of investment credit that could be claimed, and could result in recapture of the tax credit in the event that this charging exceeds the amount initially expected. This has made it difficult for even co-located storage projects to benefit from the tax credits, and impossible for standalone projects.
However, storage is critically important to the energy transition, as it is needed to help compensate for the fact that renewables collectively result in a more dynamic grid and volatile energy market. The proposed change to the ITC reflects this and enables standalone storage to collect the full credit, without any of the limitations on charging referenced above. We believe this is a major step forward towards bringing more storage on-line, both standalone and co-located.
Evergreen is eagerly following the progress of this new bill and thinking through what it means for the future of renewable energy development. If you have any questions on this bill or want to engage with us to learn more, please feel free to reach out to us at firstname.lastname@example.org. Also check out our website www.ever.green if you are interested in high impact virtual power purchase agreements or RECs.