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    Sustainable Finance Highlights in the Inflation Reduction Act of 2022

    The Inflation Reduction Act of 2022 (H.R. 5376, the “IR Act”) contains numerous incentives and support for energy transition efforts in the United States. This includes expanding on the predominately-public funding mechanisms for infrastructure projects set forth in the Bipartisan Infrastructure Law last year into the private and public-private sectors. While some are technical in nature and may need time to be more clearly defined, certain provisions should be useful financing tools for sustainable projects and for companies engaged in environmentally sustainable practices.

    The most relevant aspects of the IR Act to sustainable finance are found in “Subtitle D–Energy Security” under Title I, in addition to funding for and expansion of existing government programs under later titles of the bill that are important to manufacturers and energy producers. Highlights of the more beneficial provisions include:

    Energy Project Federal Tax Credit Expansions

    The primary federal subsidies for energy transition projects, (i) the Investment Tax Credits (“ITC,” IRC Section 48), a tool for project capitalization, and (ii) the Production Tax Credits (“PTC’” IRC Section 45), a revenue-enhancing incentive, have been renewed and have been restored and extended to technologies other than solar.

    Specifically, the IR Act extends tax credits through 2024 for power production using solar, wind, biomass, geothermal, landfill gas, waste-to-energy and most river, marine and hydrokinetic hydropower. It also includes credits for fuel cells, waste-to-value projects, combined heat and power, non-utility scale wind and microturbine and alternative fuels and fuel mixtures, such as biodiesel and renewable diesel (including a clean fuel production credit for low-emissions transmission fuel in new Section 45Z). The IR Act further adds inclusion of zero-emission nuclear power, sustainable aviation fuel, clean hydrogen and energy storage technology, with caveats.

    Monetization of Credits: One of the more exciting elements of the new energy provisions is included in Section 6418, which allows certain credits to be transferred. Specifically, this provision gives an eligible taxpayer the one-time right to transfer such credits to an unrelated party, provided the transfer is (i) paid in cash, (ii) not included in the income of the recipient and (iii) not deductible for the paying taxpayer. Expectedly for municipal and other tax-exempt entities, Section 6417 provided for direct payment of credits (although experts expect this system to take time to be implemented).

    Credit Amounts: The IR Act changed the previous tax credit structures to a base credit plus bonus credit amount tied to prevailing wage and apprenticeship requirements for both ITC and PTC. The ITC base amount is reduced from 30 percent of the qualified capital costs to a base amount of 6 percent of cost plus an incentive credit amount of 5X the base amount (up to 30 percent) available if prevailing wages are met. Similarly, the PTC is reduced from a base of 1.5 cents per kilowatt to 0.3 cents/kW plus an incentive credit amount of 5X the base amount (up to 1.5 cents/kW) available if prevailing wages are met.

    Bonus credits for ITC and PTC are available through two features:

    • Domestic Material Usage: An additional 10 percent tax credit is available if at least 40 percent of all steel, iron and manufactured products in the project are produced in the United States (threshold to increase in the future).
    • Energy Community Location: In addition, projects located in depressed economic areas (referred to as “energy communities”) are also eligible for another 10 percent increase in ITC and PTC amounts (creating an interesting overlap with environmental and social sustainable finance).

    Manufacturing/Mining Activities: Part 5 of the IR Act extends the existing Advanced Energy Project Credits for manufacturing and recycling projects and establishes the Advanced Manufacturing Production Credit available for domestic production of key components in sustainable projects. These include vital energy-capture components (e.g., solar film and wind blades), battery components and key construction materials (e.g., steel, cement and even structural fasteners) as well as over thirty “critical minerals” such as aluminum, cobalt, graphite, lithium, nickel and tin, magnesium, titanium and zinc (interesting to note that copper is not explicitly included in this list).

    New Conservation Easement Opportunities: The IR Act Section 21001 establishes new agricultural conservation easements under the authority of the Commodity Credit Corporation for conservation practices that (i) improve soil carbon or reduce nitrogen losses or greenhouse gas emissions or (ii) capture or sequester greenhouse gas emissions associated with agricultural production.

    The IR Act also may benefit small businesses in the US in its extension of (i) the tax deduction for energy efficient commercial buildings and (ii) the tax credit for alternate fuel refueling property expenditures, which creates a new credit for commercial clean vehicles. The IR Act further increases the amount of the Research & Development Tax Credit that may be applied against the payroll tax liabilities of certain small businesses.

    Our experts at FD look forward to speaking with you about the exciting provisions presented in this new legislation as well as how we can help your company capture opportunities and develop strategies for the environmental sustainability transition.

     

    About the Author

    Lance Healy is the Managing Director of FD Real Asset Advisors, a specialized investment banking practice, where he focuses on finance and advisory services for sustainable infrastructure and other real asset projects. As a Principal with Frazier & Deeter, he leads the firm’s financial and valuation advisory services for real asset projects and companies.

     

    Securities offered through Bridge Capital Associates, Inc., member FINRA & SIPC. (Lance Healy is a Registered Representative of Bridge Capital Associates, Inc.)

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