The Inflation Reduction Act (IRA) was signed into law by President Biden on 16 August 2022.  In this article, we focus on the provisions detailed in the IRA that relate to clean energy sources other than solar and wind projects covered in a previous blog.

Expansion and increased value of tax credits for carbon capture

IRA extends the Section 45Q carbon oxide sequestration tax credit (“45Q Credit”) for projects beginning construction before 1 January 2023 from its current deadline of 1 January 2026 to 1 January 2033. While the minimum capture requirements have been reduced, the credit amount has increased and, as amended, will apply to facilities or equipment placed into service after 31 December 2022.

 

End Use Current Amount IRA Amount w/out Wage and Apprenticeship Requirements IRA Amount with Wage and Apprenticeship Requirements
Traditional Carbon Capture: Carbon Oxide Used or Utilised USD 35 USD 12 USD 60
Traditional Carbon Capture: Carbon Oxide Sequestrated USD 50 USD 17 USD 85
Direct Air Capture: Carbon Oxide Used or Utilised USD 35 USD 26 USD 130
Direct Air Capture: Carbon Oxide Sequestrated USD 50 USD 36 USD 180

 

Facility New Minimum Capture Threshold under IRA
Direct air capture facility 1,000 metric tonnes (previously 100,000 metric tonnes)
Electricity generating facility 18,750 metric tonnes + facility must have a capture design capacity of at least 75% of the baseline carbon oxide production of such unit.
Any other facility 12,500 metric tonnes

 

New “technology neutral” PTCs and ITC

The IRA introduces a “technology neutral” PTC and ITC for projects that generate electricity and yield zero greenhouse emissions. The tax credit applies to facilities placed into service after 2024 and phases down until the later of:

  • (i) 2032 or;
  • (ii) the year certain emissions thresholds are achieved.

Like the current PTCs, the new PTC is worth 0.3 cents/kWh and can be increased to 1.5 cents/kWh if the Wage and Apprenticeship Requirements are met. Similar to current ITCs, this tax credit has a base rate of 6% (as a percentage of the taxpayer’s cost of the eligible property) and can be increased to 30% if the requirements are met. This tax credit will apply to facilities placed in service after 31 December 2024.

New Clean Hydrogen Tax Credit

The IRA offers a new 10-year production tax credit based on the kilograms of qualifying hydrogen produced at a facility that begins construction before 1 January 2033. The credit rate is the product of 60 cents/kg multiplied by a percentage that varies according to the level of greenhouse gas that remains after the hydrogen production process.

In addition to meeting the Wage and Apprenticeship Requirements, projects must also meet specific emission requirements under a life cycle analysis to receive the total tax credit amount. This tax credit will apply to property placed in service after 31 December 2022. Projects that begin construction before 1 January 2023 will be eligible for this tax credit once the facility starts producing clean hydrogen.

An ITC is also available for clean hydrogen facilities. The ITC is equal to a percentage of the cost of the facility. The tax credit amounts vary and depend on the level of greenhouse gas removed.

 

CO2/kg of H2 remaining PTC Credit % ITC Value
Not greater than 4.0kg and not less than 2.5kg 20% 1.2%
Less than 2.5kg and not less than 1.5kg 25% 1.5%
Less than 1.5kg and not less than 0.45kg 33.4% 2%
Less than 0.45kg 100% 6%

 

“Direct Pay” provisions

Direct pay (i.e. a refund from the Treasury) is available with respect to the majority of incentives mentioned above. However, in most cases, direct pay is limited to taxpayer claimants, such as tax-exempt entities, government entities, Indian Tribes, or Alaska Native Corporations.

Under some key exceptions, direct pay is available to taxpayers of all profiles. These exceptions include:

  • carbon capture facilities taking the 45Q Credit,
  • hydrogen facilities taking clean hydrogen tax credits, and
  • taxpayers taking advanced manufacturing production tax credits.

Even for tax-exempt entities, there are new provisions for the ITC and PTC that reduce or phase down the amount of the direct pay, such as meeting domestic content requirements. Further, in the case of 45Q and hydrogen projects, the IRA limits the ability to claim direct pay to the first 5 years of service of the project or equipment as opposed to the entire tax credit period.

Corporate minimum tax

The IRA imposes a 15% alternative minimum tax (Corporate AMT) on US corporations with a three-year average of more than USD 1 billion of annual adjusted financial statement income (AFSI). The Corporate AMT excludes S corporations, regulated investment companies and real estate investment trusts. It also applies to a US corporation in a foreign-parented international group if, over the three-year measurement period, the US corporation’s average annual AFSI is at least USD 100 million and the multinational group’s yearly average AFSI exceeds USD 1 billion.

A corporation’s AFSI is the net income or loss on the corporation’s applicable financial statement for the taxable year, subject to certain adjustments to reflect accelerated tax depreciation and certain other items.

Corporate AMT payable can be used as a credit in future years when a corporation’s regular corporate tax liability exceeds its liability under the Corporate AMT. However, taxpayers with significant net operating losses from tax years before 2020 may realise a permanent increase in tax liability since the Act precludes carry-forwards for financial statement net operating losses arising in such years.

The corporate AMT is unlikely to impact clean energy projects as profits are unlikely to exceed USD 1 billion for the group as a whole. The corporate AMT is expected only to affect 150 taxpayers a year.

Other Changes

There is a new nuclear power production tax credit, and the IRA proposes a fee on methane emissions from certain oil and gas facilities.

 

A number of the changes detailed in the IRA could significantly impact clean energy tax incentives. Operis has experience auditing models relating to tax equity structures and P3 projects to ensure they are optimised and correctly reflect relevant tax legislation changes. Its dedicated Tax & Accounting team can analyse changes within the IRA individually or overall.

If you have any questions regarding the above or would like to speak to someone at Operis about potential issues relating to the impact of provisions within the IRA on tax equity structures or P3 projects, please don’t hesitate to get in touch.

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