This guest essay by Andrew Shaw, a Dentons partner, highlights where the Inflation Reduction Act stands a year since passage:
“Happy Birthday IRA! Here’s Your One-Year Status Report
Like any proud parent, the White House and Congressional Democrats are extolling the benefits of the Inflation Reduction Act, the landmark legislation that turns one this month. At its one-year birthday, there’s much to celebrate with the IRA. Things like significant investments in clean energy and reshoring some domestic supply chains.
The Biden administration has also issued numerous rules related to various clean energy tax provisions. And launched funding opportunities pursuant to the IRA. Yet as the sugar rush from the birthday cake wears off, Democrats will face the reality despite the progress so far, they are far from realizing the promise of the IRA.
Make no mistake about it, the IRA is arguably the legislative centerpiece of President Biden’s first three years in office. Harkening back to the line then Vice President Biden used in 2010 when referring to passage of the Affordable Care Act aka ObamaCare – the IRA is also a “big [expletive deleted] deal.”
The measure provides nearly three hundred and seventy billion dollars for combatting climate change. This constitutes the largest investment Congress has ever made to reduce greenhouse gas emissions.
Carbon capture, hydrogen, clean electricity. The IRA establishes long-term certainty in extending and in many cases expanding a suite of clean energy tax incentives.
This legislation, in of itself, will not get the U.S. to President Biden’s 2030 GHG reduction goals. But the measures will make a considerable chunk in meeting that target.
When we look back at subsequent birthdays for the IRA, the keys to further progress will be related to implementation. And how policymakers and industry navigate various economic, policy and political challenges to the law.
Here’s where things stand at the IRA’s one-year birthday:
Guidance on Clean Energy Tax Incentives: Most of the clean energy funding under the IRA is through the extension and expansion of various clean energy tax incentives. The Treasury Department has been busy issuing rules related to these incentives. Including issuing guidance on the following:
Energy Communities: In June, the Treasury Department released updated eligibility rules for the ten percent bonus credit for various clean energy tax incentives. Such as the electricity production tax credit and the investment tax credit for projects that are in certain communities. The White House Interagency Working Group on Coal and Power Communities and Economic Revitalization has also issued an interactive map to help guide companies on whether a project can qualify for this bonus credit.
Direct Pay and Transferability: In June, the Treasury Department released separate draft guidance on both the IRA’s direct pay and transferability provisions. The IRA’s direct pay provisions help tax-exempt entities monetize the value of various clean energy tax incentives.
As to transferability, the Treasury Department’s guidance is intended to ease the ability to transfer tax credits, thereby allowing renewable developers to avoid tax equity arrangements. These arrangements, typically with financial institutions, can be costly, particularly for smaller developers.
Domestic Content: The IRA offers a ten percent bonus credit for many incentives if the project meets domestic content provisions. The Treasury Department in May released proposed regulations governing the domestic content bonus credit for the clean electricity production and investment tax credits. The domestic content requirements were always going to be some of the most difficult and controversial provisions to implement. And the draft regulations faced criticism from some lawmakers and domestic manufacturers.
Clean Vehicle Critical Mineral and Battery Component Requirements: One of the more controversial actions thus far by the Biden administration has been initial rules relating to domestic content requirements for critical minerals and battery components for the clean vehicle tax credit. The initial rules allow more electric vehicles to qualify for the credit.
But Senate Energy and Natural Resources Committee Chairman Joe Manchin contends that the Treasury Department is interpreting the domestic sourcing requirements contrary to Congressional intent. And he is threatening to sue the Biden administration.
Prevailing Wage and Apprenticeship: Clean energy developers can receive a more robust incentive if they meet prevailing wage and apprenticeship requirements. The Treasury Department last November released initial guidance on how developers can meet the requirements. But additional rules are expected.
Stakeholders are still awaiting the Treasury Department to release guidance on implementation of the hydrogen and the nuclear production tax credits.
Funding Opportunities: The Biden administration has launched various clean energy funding opportunities. In July, Vice President Kamala Harris and Environmental Protection Agency Administrator Michael Regan unveiled twenty billion dollars in two separate funding opportunities through the IRA’s GHG Reduction Fund.
The IRA provided twenty-seven billion dollars for EPA’s GHG Reduction Fund, the largest source of climate funding in the law outside of the clean energy tax provisions. This funding announcement is a significant step forward in distributing this funding to support clean technology projects nationwide. Applications for both programs are due October 12.
The Treasury Department and the Department of Energy also are moving forward with the first round of funding for the Advanced Energy Project Credit program. It’s a competitive process where certain clean energy manufacturing, critical minerals and industrial projects can receive an ITC of thirty percent.
The deadline for applicants to submit concept papers was July 31. The Treasury Department is planning to make announcements on recipients by the end of the first quarter of 2024.
While there has been progress in implementing the IRA and substantial investment in the U.S., there are a variety of challenging to achieving the goals of the legislation:
Permitting: The IRA is expected to significantly expand renewable electricity capacity, but the benefits of this expansion may be limited without changes to government permitting processes.
According to Princeton University’s Zero Lab, transmission lines must double from the one percent average during the 2010s to two and three tenths’ percent over the coming years to realize the full potential of the IRA. Unfortunately, transmission developers are facing a myriad of permitting challenges at all levels of government, but particularly at the local and state level.
Case-in-point is state and local obstacles to various proposed transmission lines that would connect New England with Quebec. Clean hydropower imports can help the region meet their climate and clean energy goals.
The importance of interstate transmission lines to the clean energy transition is why you see the Biden administration and many Congressional Democrats calling for permitting reform legislation. Previous bills, such as those authored by Senator Manchin, would bolster the Federal Energy Regulatory Commission’s authority to approve national interest transmission lines if states fail to provide necessary permits. Manchin’s proposal would also authorize FERC to spread the costs of the transmission projects to communities who benefit from these said lines.
While acknowledging the need for more transmission capacity, some Republicans are skeptical of enhancing federal authority over transmission permitting and allowing the broader allocation of costs associated with such projects. Nonetheless, negotiations continue between leading Congressional Democrats and Republicans. It is unclear whether a compromise can be reached.
Supply Chains: The IRA provided significant tax incentives to re-shore manufacturing for the renewable industry. Over the last year, we have seen companies announce investments in bolstering the domestic solar supply chain. The solar industry though is facing looming tariffs on imports from four South Asian countries. And as such, the U.S. will need to increase domestic manufacturing capacity.
Political: Notwithstanding the significant economic opportunities stemming from the IRA, some Republicans are calling for the repeal of the legislation. Earlier this year, House Republicans passed the Limit, Save, Grow Act, which would have repealed many of the clean energy provisions from the IRA.
Legislation like the Limit, Save, Grow Act currently stands virtually no chance of passing. But the 2024 elections could change the prospects of repealing parts of the IRA if Republicans win the White House and hold majorities in both Chambers of Congress.
The energy industry needs to spend the next eighteen months educating the public and Members of Congress on the importance of these incentives to their projects, many of them in rural, Republican-leaning areas.
Happy Birthday IRA. You have reached many milestones during your first year. But much work remains to continue the progress over the coming years.”
Steve Mitnick, Executive Editor, Public Utilities Fortnightly, and President, Lines Up, Inc.
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