US clean power projects placed in service after 2024 could be eligible for new, technology-neutral tax credits under the Inflation Reduction Act that could help deploy a wide range of carbon-free energy sources.
The credits will be structured similarly to existing federal incentives for certain renewable and clean energy resources but can apply to any facility that achieves net-zero carbon emissions. Despite their broad potential applicability, industry sources say guidance from the US Treasury Department will help determine exactly which facilities can claim the credits.
"The technology-neutral [incentives] have elements in common with the existing [credit] regime, but there are also important differences," said Greg Matlock, global energy and resources tax leader for consulting firm Ernst & Young. "One major distinction lies in their flexibility to accommodate rapidly evolving clean energy technologies."
The Inflation Reduction Act (IRA) established technology-neutral tax credits for clean electricity facilities placed in service on Jan. 1, 2025, or later. The credits apply to facilities with net-zero greenhouse gas emissions and will succeed the IRA's existing production tax credit (PTC) and investment tax credit (ITC) for qualifying wind and solar projects. In addition, qualified energy storage facilities will be able to receive the new technology-neutral ITC if they enter service in 2025 or later.
Another novel aspect of the new credits is that they start phasing out in 2032 or when US greenhouse gas emissions from electricity production are 25% of
Breaking down silos
The technology-neutral approach stemmed from a compromise between the US House and Senate's respective tax-writing committees as they drafted the IRA, which was enacted in August 2022. Democrats on the House Ways and Means Committee had called to extend the traditional PTC and ITC for solar and wind power and allow some new technologies to qualify. Leaders with the Senate Finance Committee meanwhile sought a transition to technology-neutral credits awarded based on emissions.
In the final legislation, the renewable PTC and ITC were extended for several years until the new technology-neutral credits take effect.
The American Council on Renewable Energy (ACORE), a trade group representing clean energy developers, "has long supported a technology-neutral tax credit," said Lesley Hunter, ACORE's senior vice president for policy and engagement. "We found that to be a way to help simplify the tax code and help with climate outcomes."
By allowing any carbon-free power resource to qualify, the credits can support a range of existing and emerging technologies. And the length of the IRA incentives will avoid the need for frequent, short-term extensions from Congress.
"This will continue to encourage research into other zero-emitting technologies because [developers] won't need a whole separate tax incentive, which is kind of a heavy lift," said Emily Fisher, executive vice president of clean energy and general counsel at the Edison Electric Institute, a group representing investor-owned utilities. "It just takes anything that they eventually deem to qualify and gives it this nice long runway."
Along with renewable power plants, the new credits could benefit a wave of other technologies, including coal- and natural gas-fired plants with carbon capture and sequestration (CCS). Few coal and gas plants are pursuing CCS given the technology's costs and operational hurdles. Those that do may opt for the IRA's enhanced CCS production tax credit, which cannot be stacked on top of the technology-neutral clean power PTC.
But with utilities looking for more sources of zero-emissions electricity to reach their climate goals, the technology-neutral system could prove more efficient, Fisher said.
"I think people have for a while thought that there were some benefits to not creating all of the different silos where you had to name the technology to get the credit," Fisher said. "So I think it's also just sort of an administrative efficiency kind of thing."
Mona Dajani, a partner with Baker Botts LLP and the global co-chair of the firm's energy, infrastructure and hydrogen teams, echoed those thoughts.
"I'm a clean energy dealmaker lawyer, so I'm going to say that it's very good," Dajani said. "There really is an incentive right now to get projects in the ground because project developers are not only racing against the clock to get projects up and running by 2032, but they're also racing against the opportunity to reduce power emissions."
Given the often lengthy development timeline for energy projects, Hunter said power sector carbon emissions will probably not reach 25% of 2022 levels until after 2032, meaning the technology-neutral credits will be available past that year. "That will be very helpful as we further move toward the decarbonization of the power sector," she said.
Statutory, political risks
The Treasury Department is expected to issue guidance in the coming months on the technology-neutral credits that will give more certainty to developers.
The US is on track to add nearly 220,000 MW of new solar capacity between 2024 and 2030, according to data compiled by S&P Global Market Intelligence. Across the same period, the country is set to add 85,615 MW of combined capacity from onshore and offshore wind projects and 110,687 MW of standalone and co-located energy storage.
"Our guidance on these credits will create a framework that allows future innovation in clean energy technologies — supporting American ingenuity, jobs, and energy security for the long haul," Treasury's Assistant Secretary for Tax Policy Lily Batchelder said in remarks delivered in late January.
A Treasury spokesperson did not have an update on timing, but Hunter said the guidance will likely come out in the second quarter. The guidance could offer important clarity on how certain projects can demonstrate eligibility.
"The big one we've been getting questions about is ... if you ... combust things [like] municipal solid waste, biomass, landfill gas — can you show zero or lower emissions?" said Keith Martin, a tax and project finance attorney with Norton Rose Fulbright LLP. "And I'm not sure there's a clear answer to any of that yet."
Martin said Treasury is trying to complete the rules around the credits soon to avoid potential repeal if Republicans win control of Congress and the White House in the November elections.
Policy experts have estimated that the Biden administration must finalize federal rules by the end of April to avoid potential repeals in 2025 under the Congressional Review Act (CRA). The law allows Congress to overturn federal rules completed in the past 60 legislative days with approval from a simple majority of both chambers and backing from the president. In addition, the CRA prevents agencies from forming substantially similar rules to those struck down under the act.
Even if a GOP-majority Congress did not overturn Treasury rules through the CRA, Republicans could still try to repeal key IRA provisions. Doing so would be tough, however. The IRA's energy credits are supporting investments in Republican-held districts, meaning even a GOP-controlled Congress could be hesitant to roll back the incentives.
"Nobody is expecting a wholesale repeal of the IRA," Martin said. "But it is causing some questions from people who aren't immersed in US politics," such as international companies building projects in the US.
Although a complete IRA repeal would be difficult, Republicans in Congress could try to shorten the length of some credits or rescind some of the law's bonus incentives, including those for projects that use a certain amount of domestically produced materials. If the election outlook is favoring Republicans in late summer, Martin said developers may consider entering into binding contracts for projects.
"There's a long tradition when Congress has pulled away incentives to grandfather those who've already committed to investments based on the existing incentives," Martin said.
Despite those risks, clean energy developers are moving ahead with project plans.
"Companies are eager to leverage all the incentives made possible by the IRA," according to EY's Matlock. "As 2025 nears, the interest in the technology-neutral credits will grow."
