On August 16 the Inflation Reduction Act (IRA) was signed into law by President Joe Biden, and is touted as the “largest federal investment” in clean energy and climate legislation history. A key target for $369 billion of the IRA investment is reduction of CO2 emissions of 40% below 2005 levels by 2030.
Although there are several benefits across multiple dimensions in the IRA, we will focus in this blog on high-level benefits to the renewable and clean energy industrial sectors in the U.S. with emphasis on wind and solar, carbon capture, methane reduction, and clean hydrogen production.
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Investments and incentives for American clean energy manufacturing
The IRA includes over $60 billion to support clean energy manufacturing in the U.S. across the full supply chain of clean energy technologies. Investments that will benefit the clean energy and utility sector include:
Production tax credits (PTCs) totaling $30 billion to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing.
Investment tax credits (ITCs) worth $10 billion to build clean technology manufacturing facilities, such as facilities that manufacture wind turbines, solar panels and EVs.
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Investments and incentives for reducing carbon dioxide and methane emissions
Tax credits will now be available for clean sources of electricity and energy storage, with around $30 billion in grant and loan programs for states and electric utilities to accelerate the transition to clean electricity.
A $27 billion-clean energy technology accelerator to support deployment of technologies to reduce emissions, especially in disadvantaged communities.
A methane emissions reduction program to reduce leaks from the production and distribution of natural gas.
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Investment and production tax credits extended for wind, solar and many more clean energy projects
The IRA extends the ITC for wind, solar, geothermal, biogas, fuel cells, combined heat and power, waste energy recovery, small wind property, microturbine and microgrid assets for projects beginning construction before January 1, 2025.
It also extends the PTC for wind, solar, biomass, geothermal, landfill gas, municipal solid waste, qualified hydropower, and marine and hydrokinetic resources for projects beginning construction before January 1, 2025. The IRA allows some taxpayers to include their interconnection costs as part of their eligible basis for the ITC.
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Projects can now see up to 60% tax credit opportunities
The ITC has increased from 26% to 30% and may now be transferred or sold to other parties, creating the potential for a Tax Credit exchange. The 30% applies to both business and residential projects, including projects installed in 2022, and will last until the end of 2032.
Energy storage projects will now receive the same 30% tax credit, even if they’re stand-alone facilities. Batteries connected to a solar power project will continue to qualify for the credit, for example, even if they are no longer being charged by solar power.
Domestic content and project siting opportunities can provide for up to 10% ITC adders each, and further credits up to 10% can be realized via selling electricity via community solar to low-income families. There are some strings attached to qualify for the full benefits, which are beyond the scope of this post.
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Carbon capture, utilization and storage (CCUS) and revisions to the 45Q tax credits
In addition to incentives for CCUS already received in the 2021 Bipartisan Infrastructure Law, substantial changes to CCUS tax incentives are provided in the IRA which, in some cases can increase prior benefits very substantially, as noted below:
| Current Tax Incentives | New Incentives under the IRA | |
| USD per ton of CO2 utilized (including EOR) | Up to $35 | $60 |
| USD per ton of CO2 stored permanently | Up to $50 | $85 |
| DAC (Direct air capture of CO2, USD per ton utilized) | Up to $35 | $130 |
| DAC (Direct air capture of CO2, USD per ton stored permanently) | Up to $50 | $180 |
| Minimum CO2 volume captured | Power Plants – 500 ktpa Industrial – 100 ktpa DAC – 100 ktpa | Power Plants – 18.8 ktpa Industrial – 12.5 ktpa DAC – 1 ktpa |
| Payment type over 12 years | Tax credit for full 12 yrs. | Direct payment first 5 years then tax credit remaining 7 years or tax credit for full 12 years |
| Construction start required by | January 1, 2026 | January 1, 2033 |
Who can claim 45Q tax credits?
The credit under section 45Q is only available for qualified carbon dioxide that is captured and disposed, used, or utilized within the United States. Entities may have to recapture the credit for any carbon dioxide that does not remain permanently sequestered or utilized in a qualifying manner.
Methane reduction
The IRA will drive investment in advanced technologies that measure and reduce methane emissions, allocating $850 million towards methane mitigation and monitoring and $700 million toward reducing emissions from marginal wells.
The IRA amplifies the EPA’s regulations under Section 111 for reducing methane emissions from oil and gas facilities through several provisions. For example, the IRA establishes a backstop methane charge, which is the first federal carbon price on a greenhouse gas (GHG), unless and until stringent regulations are in effect. The charge starts at $900 per ton in 2024 and reaching $1,500 per ton in 2026 and each year thereafter.
Adding CCUS to conventional methane-emitting processes like flaring operations can provide a viable alternative to clean up methane emissions while potentially monetizing larger existing gas emissions sources. One area for potential new development may lie in capturing this methane for blue hydrogen (gray hydrogen with carbon capture), reducing methane emissions while simultaneously generating clean hydrogen with essentially existing low-to-no cost feedstock sources. The IRA provisions may help to make such projects now more economically attractive and serve to solve an age-old methane emissions challenge as well.
Clean hydrogen tax credits
The rapidly developing “green hydrogen” market, where hydrogen is generated as a fuel for many applications and as an Energy Storage medium, must be generated via wind, solar or other zero emissions renewable energy sources to be considered as “green”.
Typically generated via electrolysis, a decades-old established technology that is seeing a lot of new innovation to cut costs, the startup of this industry in the U.S. and other OECD countries has sought to achieve cost parity (or better) for hydrogen with that derived from natural gas to become an economically viable alternative. The green hydrogen wave was already gaining momentum as technology providers have made strides in recent years to improve and develop new electrolysis “clean tech”. A new credit of up to $3 per kg of clean hydrogen produced – whether by electricity produced by renewables or other non-emitting sources such as nuclear – will help to catapult this emerging market much more rapidly.
The IRA provides tax credits to producers of low-carbon hydrogen at a rate that depends on how much carbon is emitted during production, among other factors. At the lowest emission rate, 0.45 kilograms of carbon dioxide emitted per kilogram of hydrogen produced, producers are eligible for a credit of up to $3 per kilogram of hydrogen, making the cost cheaper, in some instances, than that of ordinary “gray” hydrogen, which is derived from natural gas through steam methane reforming (SMR).
Production of gray hydrogen generates from 8 to 12 kilograms of CO2 per kilogram of hydrogen produced. Costs of gray hydrogen vary but are roughly $2 per kg in the United States, but now more focus lies on the CO2 output.
Nearly all hydrogen made in the United States, around 10 million tons last year, and around 95% of all hydrogen produced globally, is produced via SMR. Blue hydrogen can be made with existing carbon capture technologies but have the added capex/opex costs associated with adding a chemical process to the mix.
There’s substantial runway for a combination of green hydrogen and blue hydrogen to develop over the coming years, and “hydrogen hubs” are in planning and development in the U.S., Europe, and beyond to store, transport and distribute clean hydrogen at scale as technology and production costs reduce. The IRA will play a major part in the acceleration of these programs.
ADI has already begun addressing the value of these factors in a number of clean energy, renewable power, methane emission reduction, energy storage, battery manufacturing and recycling, CCUS, and other energy transition and oil & gas projects. Please reach out to us to learn more and how we can be of help with your projects.
Elliott Smith, Executive Advisor, ADI Analytics
