This August marked the two-year anniversary of the passage of the Inflation Reduction Act (IRA), the single largest legislative investment in climate and energy in American history. VX News excerpts this webinar from the Environmental Law Institute on the IRA’s impact on renewable energy project development. Moderated by Farella Braun + Martel's Linda Sobczynski Gilleran, the panel features JP Morgan VP of Climate Tech, Jackson Morrow, Farella Braun + Martel Partner Julie Treppa, and Rocky Mountain Institute Sr. Principal, Uday Varadaraja who outline the marketmaking impacts and new funding opportunities available.
Linda Sobczynski Gilleran: The Inflation Reduction Act was passed on August 16, 2022, and two years later, in 2024, just this past August, the White House released a fact sheet summarizing IRA successes, including the creation of more than 330,000 clean energy jobs. The private sector announced over $265 billion in clean energy and manufacturing investments, and the administration awarded over $1 billion to help communities become more resilient. This is a monumental piece of legislation, and so before we get into the moderated discussion, each of the panelists is going to provide a mini-presentation on the IRA's impact on their careers.
Jackson Morrow: As part of the green economy banking team at JP Morgan, I specifically work with the VC-backed companies in the space that are really working on what we call climate tech – any company developing technology that has some kind of decarbonization aspect to it.
I have colleagues on my team who work with some more of the traditional wind and solar developers. They work with the utilities in the space; they're going to be more familiar with the traditional tax credit structures and the traditional ITC and PTC credits. But what's exciting to me about the Inflation Reduction Act is how it's allowed a lot of the companies that I work with on the more emerging side to access these valuable credits.
I will say, as a preface, that I'm not a legal expert. I do not typically study government legislation super closely, but I will say that the IRA has been a really interesting bill for me to learn about, partly because it's so bold and ambitious, but also just because of how many different layers there are, and there's just really a lot to dig into. I'm excited to discuss this topic with everyone here.
As Linda mentioned, this is a transformational bill. It's the largest government investment in clean energy in history, and I don't think it's close there. It moved the United States from a lagging position globally to a leading position, and it pretty quickly influenced places like Canada or Europe to implement similar legislation to try to remain competitive with what the U.S. is doing. There have been wild ranges of estimates for how much government funding could ultimately be deployed as part of this. The initial estimate from the CBO was around $360 billion. That's now increased to just about a trillion dollars in total over the 10 years. Part of the reason for this uncertainty is a lot of these incentives are uncapped, so it's formulaic based on utilization. There's a whole range of potential outcomes for how this could ultimately turn out, but the latest investments I've been seeing are roughly around $1.2 trillion for total government spending in the form of tax credits, and that's not including all the private investment that is going to be influenced as part of this.
I think it's worth just going backward in time and remembering exactly how this came about. This originally passed the House in November of 2021 and was expected to go through the Senate as well, but Senator Joe Manchin, at the last minute, pulled his support and threw everything in flux. After that, it seemed like there wasn't much chance of it passing until August of the following year. After some kind-of secretive negotiations, the bill ultimately did pass the House and the Senate, and it's been a scramble since then to understand the details of the law and get it enacted as quickly as possible.
The key components of the IRA were extending and increasing the solar and wind ITC [investment tax credit] and PTC [production tax credit], but then also expanding those types of tax credits to emerging technologies like energy storage, geothermal, biofuels, nuclear, and green hydrogen. This opened up the scope for what types of technologies could access these credits. It went even further and created this technology-neutral concept that takes effect in 2025, opening the door for any technology that can effectively prove that it is generating clean electricity can be considered for these really valuable tax credits. I think that's important because the government is effectively recognizing that there are novel technologies that are being developed that can't necessarily be defined today but are worth considering in the future as an important part of this decarbonization question.
There are even more credits beyond the ITC and the PTC that can be accessed, and they're stackable. In some cases, a lot of these technologies on average are seeing 40% reductions in the cost by accessing these credits. It can go as high as 70% or even 100%.
The other program that received a ton of funding was the Loan Programs Office receiving $100 billion in additional loan authority. They're designed to scale proven technologies and make them bankable in the way that solar and wind are today.
Then there's the Office of Clean Energy Demonstrations, which received, I believe, $25 billion to award funding to first-of-its-kind, large-scale industrial decarbonization projects. That's pretty significant because it's kind of the step before the Loan Program Office and is creating that pipeline of technologies and how they can reach bankability.
The Greenhouse Gas Reduction Fund was another big part of this bill, and it's focused on community-level clean energy and energy efficiency investment. That's designed to spur a lot of private capital, especially in underserved communities where it typically hasn't flowed.
The last thing I'll say is really kind of subtle and maybe not as flashy update to the IRA was the introduction of the transferability and direct pay of tax credits. This seems kind of small, but it is quite significant in terms of leveling the playing field of which types of companies, and which types of entities can monetize these tax credits that they haven't been historically.
There's a lot to dig into here, and I'm excited to talk about it. Of course, there are shortcomings in the law. There's plenty of criticism of it, and I think that's valid as well and worth discussing, but as a significant piece of legislation.
Julie Treppa: Given what I do, I wanted to start by giving an overview of how tax credits work and how they fit into basic policy. I think most people understand that tax credits are available, and they are different from deductions. For example, when you do your taxes, you might take a deduction, which reduces your taxable income by your marginal tax rate. However, if you get a tax credit, it reduces your tax liability dollar for dollar. And if that credit is refundable, you can even get a tax refund, even if you haven’t paid any taxes.
It’s an important part of economic policy and shaping the behavior of both individuals and businesses. Tax credits are typically used for several reasons: to incentivize particular investments, to redistribute income (you’re probably hearing a lot about a child tax credit or earned income credit during the campaign, which is designed to redistribute wealth), to correct market failures, and to promote social goals. Harris, for example, talks a lot about her Housing Credit, which tries to bridge the gap between the expense of new housing and what an investor might get from it.
Now, what’s interesting about the Inflation Reduction Act (IRA) is that it kind of encompasses a lot of these goals. The intent of the IRA, of course, was to incentivize development in renewable energy projects, but in addition, it incorporates certain aspects designed to strengthen America’s energy security, create good-paying jobs, and promote shared economic growth in lower-income communities, or in communities that have been historically dependent on fossil fuel development.
So, how do tax credits really work?
An investment tax credit is a credit where you get a certain percentage of the cost of your project, which reduces your cost by the percentage of the tax credit you receive. It’s an upfront credit, meaning it’s available to an investor in the year the project is placed in service. The energy credit and the clean electricity investment credit are the key core credits in renewable energy, but there are all sorts of investment tax credits. With the energy credit, the taxpayer receives a credit for a portion of the expenditure they invest in energy property in the year the project is placed in service. The credit percentage differs based on the technology being utilized. Starting in 2024 the idea is to replace that energy credit with a tech-neutral clean energy investment credit. The goal here is to provide credit for investments in energy storage technology and in qualified facilities, which are defined as facilities whose greenhouse gas emissions rate is not greater than zero.
The production tax credit, on the other hand, is earned over time, typically 10 years. The taxpayer is allowed a per-kilowatt-hour credit for producing and selling renewable energy. For this, the taxpayer must produce the electricity, it must be a qualified energy resource, and it must come from a qualified facility. This credit is taken over 10 years. After 2024, this credit will also be replaced with a tech-neutral type credit.
Taxpayers cannot claim both credits, so there’s an analysis required—do you take the investment tax credit or the production tax credit?
Typically, the investment tax credit is upfront, so if you need immediate funding for your project costs, you might want to take that one. But if your project will produce a significant amount of energy over time, the production tax credit might be more valuable.
We’re in an interesting time because, for the year 2024, you might be able to take either the existing credit or the new tech-neutral credit. You’re eligible for the existing credits as long as construction begins in 2024, but you’re also eligible for the new credits if you place the project in service after 2024. You could easily be involved in a project that begins construction now but won’t be placed in service until next year, so you have a decision to make regarding which credit to take.
What I’m finding in my practice is that, even though people in the industry complain that it took Treasury a while to release guidance, they’ve been moving incredibly fast. I’ve been practicing tax law since 1995, and I’ve never seen Treasury move this quickly in issuing guidance. We are still waiting on guidance for some passive activity loss rules that were enacted when I first became a tax lawyer! So, I think the Treasury is doing a tremendous job. That said, there’s still some uncertainty about the new program in 2024, so some people are rushing to begin construction this year to take advantage of the existing credits because there’s more certainty. I do believe the Treasury is committed to providing more guidance before the end of the year, and they’re working closely with other departments, like the Department of Labor and the Department of Energy, to coordinate efforts and get regulations out as quickly as possible.
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Linda Sobczynski Gilleran: The last topic before I turn over to the audience Q & A is about manufacturing. Jackson, how has the IRA impacted investment in manufacturing for clean energy technologies?
Jackson Morrow: Yeah, it seems like this has really been one of the big focuses of IRA is to bring manufacturing back to the United States. It seems to have been a be a trend in the US, but this really kind of puts it into to law in a big way.
Most of the investment that's been either funded so far, or at least announced so far, has gone into the more mature areas, which I think is by design, those kind of have the lowest risk of failing, but it looks like roughly 50% has gone into electric vehicle manufacturing.
A large percentage, more than I expected, has gone into solar module manufacturing in the US. I think solar in particular has the domestic solar manufacturing capacity has quadrupled just in the last two years since IRA was put in place. So that's a pretty massive change there.
And then battery storage being the other one. Many, many battery plants have been announced. Foreign companies that know how to make batteries are coming to the US to set up a plant here to take advantage of these tax credits. So I think, from that standpoint, it seems like the results have been pretty strong, and it's really just the beginning.
It's worth noting, just because it gets talked about all the time, that much of the funding has flowed into either, Republican congressional states, or swing states, I think so that the top four states in terms of funding, I believe, are North Carolina, Georgia, South Carolina, and Michigan. And I think there's a variety of reasons for that. Those states are maybe have their own state incentives to layer on top. Maybe cheaper labor available there, cheaper real estate there. But a lot of investment has gone into those states. it'll be interesting to see when these facilities really like get built labor that's needed to build these out. But I think it's that aspect of IRA has been fairly successful so far.
Linda Sobczynski Gilleran: Uday, you spoke a little bit about the DOEs Loan Programs office and its authority to finance projects that retool, repower, repurpose or replace energy infrastructure. One example of an eligible project is to replace retired power plants with new manufacturing facilities for clean energy projects or services. Tell us more about this program and its impact, and I'm referring to the Energy Infrastructure Reinvestment Program, and its impact on promoting domestic manufacturing.
Uday Varadaraja: So, I think the program has an enormous amount of potential. It’s a $250 billion loan program—we've often called it maybe the most important loan program you've never heard of. It's taken a fair bit of time, as with other programs, to really come up to speed, so it's only starting to really make loans at scale.
Actually, let me back up a little bit to talk about what the program does. The program has the authority to provide lending for any entity that wishes to either take an existing or operating bit of energy infrastructure involved in either transmission or generation of electricity or anywhere in the fossil fuel supply chain, and retool/repurpose that infrastructure for some clean energy or emissions-reducing purpose, or to do so for a piece of energy infrastructure that has already ceased operation. So really, whether you're operating, continuing to operate, or whether you're retired,This is financing at a very low cost.
It gives you the ability to really get financing specifically to deploy, whether it's clean manufacturing or clean energy resources on the sites of existing fossil assets in a meaningful way.
And I'll take an example of where this can be extraordinary helpful. I was talking a little earlier about how municipal utilities are having a difficult time when they're building clean energy. I'll take the example of what happened in Puerto Rico with the destruction of the hurricane that left an already financially strapped utility really unable to finance the kind of clean energy that needs to be deployed. The program announced a loan to Puerto Rico for a significant, I think, around a billion dollars that enables Puerto Rico, for their for entities, to build new clean and allowed private finance to really flow to Puerto Rico.
So, this is an example of the types of things that can happen now. We're hoping that, indeed, what we'll see-- but we haven't seen significant loans along these lines that are directly tied to manufacturing— is, in fact, to see this used in the way that I was discussing earlier. Many of these sites are places where you can get the energy communities at or and you can enable other sites to get the bonus domestic adder. And so we're looking forward to the loans being used on sites near existing fossil assets and brownfields, where they can do that stacking and therefore unlock significant value in particularly significant places that are hard hit by this transition.