Clean energy would get big boost from new climate bill. Just how big?

Senator Joe Manchin has agreed to work with Democratic Senate colleagues to quickly pass a climate and health bill that could direct nearly $370 billion over 10 years toward clean energy, electric vehicles, pollution reduction and energy security — potentially the largest-ever single federal investment in fighting climate change.

Wednesday’s surprise release of the Inflation Reduction Act of 2022 from Manchin and Senate Majority Leader Chuck Schumer represents a striking turnaround for Democrats’ prospects of passing major energy legislation before the midterm elections in November. Manchin’s continued opposition to climate spending in a budget reconciliation bill that requires all 50 Senate Democrats’ support to pass has stymied progress on this key Biden administration goal, with the latest setback coming only two weeks ago.

The new bill falls short of the $555 billion in climate spending in the Build Back Better legislation that was scuttled by Manchin last year, as well as the provisions of the bill passed by House Democrats earlier this year. But it does direct tens of billions of dollars toward extending tax credits to the deployment and manufacturing of a long list of technologies, including wind and solar power, batteries, nuclear power, hydrogen production, electric vehicles, heat pumps and emissions-reduction systems.

“This bill really represents a tremendous step toward smart investments and forward-looking industrial policy that can make the United States the arsenal of clean energy technology,” said Harry Godfrey, managing director at trade group Advanced Energy Economy. The bill targets both short-term relief from the ballooning fossil fuel costs driving inflation and long-term investments in industrial capacity, he said.

Some environmental groups expressed anger on Wednesday over major concessions included in the bill that presumably cater to Manchin’s interest in promoting fossil fuels. The Center for Biological Diversity called out provisions that would require oil and gas leases along with solar and wind development on federal lands and ocean waters as a ​“slap in the face to the communities trying to protect themselves from filthy fossil fuels.”

But many more environmental and clean energy industry groups cheered the bill as a major breakthrough on federal climate action that many feared was out of reach. A summary of the bill released Wednesday said it would lead to a roughly 40 percent reduction in nationwide carbon emissions by 2030 — four-fifths of the country’s Paris Agreement commitment to halve emissions by decade’s end.

“To limit the worst impacts of climate change, we must make rapid progress in transitioning to clean energy and transportation this decade,” Johanna Chao Kreilick, president of the Union of Concerned Scientists, said in a Thursday statement. ​“With communities reeling from extreme heat, record drought and wildfires right now, this announcement is more than welcome news. It’s a relief.”

In a statement on Wednesday, President Biden said the bill ​“addresses the problems of today — high health care costs and overall inflation — as well as investments in our energy security for the future,” and he urged lawmakers to pass it ​“as soon as possible.” The bill still needs to secure the support of Democrats in the House of Representatives, the approval of the Senate parliamentarian under reconciliation rules, and the continued commitment from Manchin himself, in order to pass.

The legislative text released Wednesday is subject to change as it moves through the Senate and House, but here’s a breakdown of its existing provisions, both those carried over from previous Democratic proposals and those that break new ground in federal support for clean energy.

Clean energy deployment and manufacturing 

U.S. clean energy groups have been clamoring for Congress to extend federal tax credits for solar and wind power industries, as well as to expand tax credits for technologies such as energy storage, carbon capture and storage, and low-carbon and carbon-free hydrogen production. The Inflation Reduction Act of 2022 appears to deliver on these hopes.

One of the biggest boosts for wind and solar power would come via a 10-year extension of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) programs that have been a linchpin for the country’s solar and wind power growth to date. That’s a major change from existing tax credit policy passed by Congress in late 2020, which set the ITC for solar projects on a declining path from 2022 to 2025 and allowed the PTC for wind projects to expire by the end of 2021.

Projects that use domestically produced steel and iron could receive an enhanced credit, as would those that invest in low-income or tribal communities. Projects would also be required to adhere to prevailing wage and union apprenticeship regulations or face penalties.

U.S. solar and wind deployments have been shrinking over the past year as rising costs for equipment, supply-chain disruptions and uncertainty over the future of federal policy have weighed on the industry. In that light, the new bill’s provisions are an ​“11^th-hour reprieve for climate action and clean energy jobs,” said Heather Zichal, CEO of the American Clean Power Association trade group, in a Wednesday statement.

Under the bill’s provisions, solar projects would be allowed for the first time to access the PTC, which pays tax credits based on the power produced over 10 years, as opposed to the ITC, which allows project investors to claim a one-time tax credit of 30 percent of a project’s value. This could offer solar projects a potentially more lucrative tax credit value, since the cost of solar projects is declining compared to the value of the electricity they will produce over time.

The bill also gives the energy storage industry something it’s been seeking for years now: access to the ITC for stand-alone energy storage investments, ranging from battery projects to thermal energy storage systems. To date, only batteries being directly charged by solar installations have been eligible for the ITC, limiting federal tax policy support for a technology that’s seen as central to integrating variable wind and solar power into the grid.

Energy storage isn’t the only technology gaining new access to federal tax credits. The bill would also extend the ITC to technologies including microgrid controllers that orchestrate on-site generators and batteries to provide power during grid outages and linear generators that can run on low- or zero-carbon fuels.

Nuclear power would become eligible for the PTC, potentially offering a lifeline to financially struggling nuclear power plants across the country. So would some classes of hydrogen production, providing support for a source of carbon-free fuel that’s seen as critical to decarbonizing industry and heavy transportation.

Technically speaking, the bill calls for these traditional tax-credit structures to be extended through the end of 2024. At that point, the credits would be transformed into a technology-neutral ​“clean electricity credit” structure that would tie credit values to the rate of reduction of carbon emissions from the U.S. electricity sector.

While this shift to a technology-neutral credit is complicated, AEE’s Godfrey highlighted its value in supporting a range of carbon-reduction technologies that are still on their way to commercial viability. ​“It’s going to take a lot of technologies to move us toward a reliable, affordable swift transformation to a carbon-free economy,” he said.

Beyond tax credits for deploying clean energy technologies, the bill would also support investments in manufacturing them domestically. These include production tax credits for manufacturing of solar panels, wind turbines, electric vehicles, batteries and facilities that process the minerals needed to make them. These credits could drive about $30 billion in new investment, along with $10 billion in investment tax credits for such facilities.

The value of tax credits relies on investors being able to offset tax liabilities. Economic downturns can reduce the appetite for tax offsets, a factor that’s driven clean energy industry groups to ask Congress to allow some existing tax credits to be converted to ​“direct pay,” or payments from the U.S. Treasury Department.

The Inflation Reduction Act does call for some nonprofit and government entities to access direct payments in lieu of tax credits since these entities aren’t subject to taxation in the same way that for-profit companies are. But it doesn’t extend direct pay to the private sector, Durgesh Chopra, managing director and head of power and utilities research at Evercore ISI, said in a Thursday presentation.

The bill also doesn’t offer tax credits for transmission grid investments, Chopra noted. Utilities and clean energy groups have called for a transmission ITC as a way to boost the buildout of a U.S. power grid that experts agree isn’t growing quickly enough to support the rapid growth of clean energy needed to reach the Biden administration’s goal of a net-zero electricity sector by 2035. The absence of that credit in the new bill is ​“a tailwind for transmission investment,” Chopra said.

But AEE’s Godfrey pointed out that the manufacturing tax credits in the bill are structured to allow the companies investing in new factories to receive the value of those credits via direct-pay methods. That will allow manufacturers to ​“realize the full value” of those credits in a more streamlined way than if they were required to set up the structures for monetizing tax credits that have been developed by the wind and solar industries over the past two decades, he said.

Electric vehicles and building decarbonization 

The Biden administration has set a goal for electric and plug-in hybrid vehicles to make up half of all cars sold by 2030. Extending federal tax credits for customers buying EVs and for companies building them in the U.S. is seen as a critical part of reaching that goal, as is boosting demand for EVs from federal agencies like the General Services Administration and the U.S. Postal Service.

The Inflation Reduction Act delivers on such policies. On the manufacturing front, on top of the previously mentioned tax credits available to EV and battery production, the bill directs up to $20 billion in loans to build new clean-vehicle manufacturing facilities. It also directs $9 billion toward federal procurement of U.S.-made clean energy technologies, including $3 billion to boost the Postal Service’s zero-emissions vehicle purchasing plans.

As for consumer tax credits, the bill would extend an existing $7,500 tax credit for new EV purchases, which is lower than the $12,500 per vehicle credit proposed in earlier legislation. But it would lift the existing cap that limits tax credits for individual automakers’ vehicles once that automaker has sold more than 200,000 EVs — a cap that Tesla and GM have already reached, and Ford and other automakers expect to reach soon.

Federal tax credits remain important for reducing the upfront cost of EVs for middle- and lower-income consumers. That can help more people buy vehicles that have significantly lower long-term costs to fuel and maintain than internal combustion engine models.

The bill would also introduce a first-of-its-kind $4,000 tax credit for the purchase of used EVs, with new rules that allow higher-priced vehicles to be eligible for the credit but also limit the credits to buyers who earn $75,000 or less in annual income. These rules could ​“really provide relief to folks who need it most,” AEE’s Godfrey said. ​“Gas bills are totally killing their budget.”

The building-decarbonization provisions in the bill could also help reduce Americans’ exposure to high heating bills, Senator Martin Heinrich said in a Thursday statement. Those provisions include $9 billion in consumer home energy rebate programs, with a focus on low-income consumers, that will fund electric home appliances such as heat pumps and help pay for energy efficiency retrofits.

“If we are truly serious about driving down the inflation that’s hurting families in my home state of New Mexico, in places like West Virginia,” Senator Manchin’s home state, ​“and across the country, we have to focus on the primary driver of inflation, and that is the soaring price of fossil fuel,” Heinrich said during a Tuesday press conference hosted by the pro-electrification group Rewiring America. ​“Investing in clean energy and electrification will create substantial savings for American families on their household heating bills and their transportation costs.”

President Biden’s invocation of the Cold War–era Defense Production Act last month would get a boost of funding from a provision in the bill that would direct $500 million toward investments in manufacturing of products that fall under that authorization. Those include critical-minerals processing and the manufacturing of heat pumps, all-electric heating and cooling systems that are seen as a vital tool in decarbonizing building heating.

Environmental justice and emissions reduction 

Many of the Inflation Reduction Act’s provisions target low-income and disadvantaged communities in new ways, from the enhancement of tax credits for clean energy investments to energy efficiency assistance for low-income homeowners and renters. A host of funding streams is dedicated specifically to aiding communities historically burdened by pollution.

One of the largest of these is a $27 billion ​“Greenhouse Gas Reduction Fund” available through 2024, said Russell Mendell, an associate with the U.S. program of nonprofit think tank RMI. (Canary Media is an independent affiliate of RMI.) The fund is essentially a federal clean energy accelerator, or in more common parlance, a federal green bank, similar to but much larger in scope than the 21 state- and local-level green banks created over the past decade.

This entity would be able to offer grants, loans and other assistance on its own or to existing state and local green banks for a range of emissions-reduction investment, ranging from rooftop solar installations and home energy efficiency retrofits to clean transportation and industrial decarbonization. Of the funding, $8 billion would be reserved for low-income and disadvantaged communities.

Mendell highlighted other specific environmental justice provisions of the bill, including $3 billion for environmental and climate justice block grants for community-led projects, $3 billion in neighborhood access and equity grants, and $3 billion to reduce air pollution at ports, many of which are located in or near lower-income communities. Another $20 billion would be targeted at reducing emissions in agricultural operations, and rules to limit methane emissions from oil and gas wells and pipelines could not only reduce a major source of global warming emissions but also ease the burden faced by communities facing the health impacts of that pollution.

“I think it’s an excellent bill for climate justice,” Mendell said.