Client Alert

Significant Business and ESG Opportunities for Your Organization in the Inflation Reduction Act

The just-passed landmark Inflation Reduction Act (the Act) provides numerous opportunities for organizations to cost-effectively meet their ESG and other sustainability goals. The Act also provides many opportunities for clean energy project developers and manufacturers of clean energy equipment to lower their costs and increase their business. The combination of several clean energy and manufacturing tax credits, important new options for receiving or transferring most of these credits, and billions of dollars in new or expanded grant opportunities can allow organizations to dramatically lower the cost of meeting their sustainability goals and implementing energy efficiency and clean energy improvements, thereby also significantly lowering their operating costs. Likewise, clean energy developers and manufacturers can take advantage of the numerous incentives under the Act to significantly lower costs and dramatically grow their business opportunities.

Below is a list of some of the key opportunities the Act provides:

1. Significant extension of investment and production tax credits. The Act extends the time period for tax credits available to both wind and solar, as well as other technologies such as geothermal. This is critical since many of the clean energy tax credits either had expired or were on schedule to significantly decrease.
2. Tax credits for additional technologies. The Act also adds several technologies as eligible for tax credits, including energy storage technologies, microgrid controllers, qualified biogas property, alternative fueling property, clean hydrogen production, zero emission nuclear power production, carbon sequestration, sustainable transportation fuel (including enhanced credits for aviation fuel) production, and clean energy production facilities.
3. Need to consider prevailing wages and apprenticeship requirements. While the Act extends the time period for claiming tax credits and increases the value of certain tax credits, the full amount of certain credits may be claimed only if energy projects are either exempt from or meet prevailing wage and apprenticeship requirements. Otherwise, the potential tax credits may be reduced by 80% if these requirements are not met.
4. Opportunities to receive enhanced tax credits based on project location and use of American-made materials. The Act also provides opportunities to significantly increase tax credits. If a project meets domestic-content requirements, production and investment tax credits could increase by 10 percent.  Also, projects that are built in “energy communities,” which includes, among other things, brownfields and areas with closed coal plants, can also receive a 10% increase in tax credits.  Likewise, subject to allocation caps, small wind or solar projects up to 5 megawatts in size built on Indian lands or in low-income communities could potentially receive a 10% increase in tax credits and projects serving low-income housing could potentially receive a 20% increase.
5. Opportunities for credits for advanced energy manufacturing facilities construction. The Act modifies and extends the qualifying advanced energy project credit by providing $10 billion in competitive tax credits (of which $4 billion are reserved for areas where a coal mine or a coal-fired electric generating unit recently retired). These competitive tax credits are potentially available for facilities that produce or recycle renewable energy production property, fuel cells, microturbines, or energy storage systems and components, electric grid modernization equipment or components; property to capture or use carbon oxide emissions, equipment to refine, electrolyze, or blend renewable or low-carbon and low-emission fuel, chemical, or product, property to produce energy conservation technologies, electric or fuel cell vehicles and their components and associated charging or refueling infrastructure, and other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Secretary of Treasury, or property that re-equips an industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20 percent through the installation of low- or zero-carbon process heat systems, carbon capture, transport, utilization and storage systems, energy efficiency and reduction in waste from industrial processes, or any other industrial technology designed to reduce greenhouse gas emissions, as determined by the Secretary.
6. Opportunities for tax credits based on the production of clean-energy equipment. The Act includes advanced manufacturing production credits that provide tax credits for the manufacturing of certain eligible clean energy components, including qualifying solar cells and modules and certain of their components, certain wind energy components, inverters, battery cells, modules and electrodes.
7. Tax credits for electric vehicles and alternative fueling facilities. The Act provides tax credits for electric vehicles, subject to certain made in America or made in North America requirements.  It also provides tax credits for alternative fuel refueling property, including for EV charging. 
8. Opportunities for governmental and tax-exempt entities to directly receive benefits of tax credits. The Act allows states, political subdivisions of states, Indian tribes, tax-exempt organizations and rural energy co-ops to receive many of the above tax credits by treating them as having paid taxes in the amount of the applicable credits, subject to their meeting certain applicable requirements. 
9. Opportunities for others to transfer tax credits. The Act provides that entities that are not allowed to directly receive tax credits as discussed in Item 8 to transfer many of the tax credits to those that can use them, subject to meeting certain requirements regarding transfer. This transferability, combined with the ability of governmental, rural energy co-op and tax-exempt entities to directly receive the benefits of tax credits, should greatly expand the beneficial options for developing and structuring clean energy projects for all types of entities.
10. Significantly increased funding and grant opportunities under USDA REAP program. The Act provides $2 billion in additional funding for the U.S. Department of Agriculture “Rural Energy for America” grants and loan guarantees for renewable energy and energy efficiency projects and increases the potential size of REAP grants from 25% to 50% of project costs.
11. Significant funding for Advanced Industrial Technologies at Eligible Industrial Facilities. The Act provides for over $5.8 billion to provide financial assistance on a competitive basis that could provide up to 50% of the cost of projects that employ advanced industrial technologies to lower emissions, reduce waste and allow for sustainable manufacturing at energy intensive industrial facilities. 
12. Very Significant Funding for Greenhouse Gas Reduction Fund. The Act makes a total of $27 billion available to eligible entities to use to provide funding and financing for zero-emission projects and certain other projects, activities and technologies that reduce or avoid greenhouse gas emissions and other forms of air pollution or assist communities in reducing or avoiding greenhouse gas emissions and other forms of air pollution.
13. Climate Pollution Reduction Grants. The Act provides $5 billion in funding for planning and implementation grants for States, municipalities, and tribes to plan and implement programs, policies, measures, and projects that will achieve or facilitate the reduction of greenhouse gas air pollution.
14. Environmental and Climate Justice Block Grants. The Act provides $2.8 billion in funding for grants to community-based organizations or partnerships of those organizations with municipalities, tribes or institutions of higher learning to benefit disadvantaged communities. The block grants can be used for community-led air and other pollution monitoring, prevention and remediation, and investments in low- and zero-emission and resilient technologies; mitigating climate and health risks from urban heat islands, extreme heat, wood heater emissions, and wildfire events; climate resiliency and adaptation; reducing indoor toxics and indoor air pollution; or facilitating engagement of disadvantaged communities in State and Federal public processes.
15. Partially forgivable loans for rural electric generation. The Act provides $1 billion for electric loans under the Rural Electrification Act of 1936 for electric generation (including energy storage) from renewable energy resources for resale to rural and nonrural residents. These loans are potentially forgivable up to 50% and are at rates equal to the average tax-exempt municipal bond rate of similar maturities.
16. Domestic Manufacturing Conversion Grants and advanced technology vehicle manufacturing loans. The Act provides $2 billion for grants for the domestic production of efficient hybrid, plug-in electric hybrid, plug-in electric drive and hydrogen fuel cell electric vehicles. The Act also provides $3 billion for loans for re-equipping, expanding or establishing manufacturing facilities for advanced technology vehicles or for engineering integration for such vehicles.
17. Significant increase 179D tax deduction for building energy efficiency. The Act significantly increases the current maximum of $1.88 per square foot deduction to $5.00 per square foot to incentivize energy efficient construction and rehabilitation of commercial buildings and multifamily buildings that are four stories or taller. Also, tax-exempt building owners, as well as governments, will be able to allocate 179D tax deductions to architects, engineers, and designers responsible for designing a building’s energy efficient systems. In addition, REITs will have the ability to utilize 179D tax deductions for purposes of computing earnings and profits. 

To discuss the above and other opportunities, please contact John Clancy. Because of the length and complexity of the Act and the numerous underlying requirements that apply to it, whether the above programs are applicable to your organization and your projects is based on a number of factors in addition to those outlined in this summary update. Therefore, it is important to make sure that all relevant factors are considered as you proceed.