Inflation Reduction Act: Follow Canary’s coverage
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Editor’s note, August 16: This story was originally published on August 12, 2022. It has been updated to note President Biden’s signing of the bill.
The most important climate legislation in U.S. history, the Inflation Reduction Act, was signed into law by President Biden on August 16, after passing the Senate and House the week prior. Every Democrat in Congress voted for the bill; no Republicans did.
The act dedicates $369 billion over 10 years to promote clean energy, pollution reduction and environmental justice. It contains a vast and dizzying array of tax incentives for wind and solar energy, batteries, nuclear power, clean hydrogen production, electric vehicles, heat pumps and much more.
Canary Media has been exploring and explaining many of the act’s critical provisions:
- It will give a major boost to grid energy storage.
- It will reinvigorate theU.S. solar industry.
- It will transform the market for home electrification.
- It will kick-start efforts to decarbonize air travel.
- It will spend $3 billion on clean electric mail trucks.
- It will dedicate $60 billion to environmental justice efforts.
- It stands to revolutionize manufacturing for solar, wind and batteries.
And that’s just for starters. To find out more, read our first big story about the legislation following its sudden introduction in late July, which summarizes its climate and energy provisions. Or listen to discussion of the law on our podcasts: The Carbon Copy, Political Climate and Catalyst with Shayle Kann.
We’ll continue to report over the coming days, weeks and beyond on the many components of the act and how they’re being implemented. Keep tabs on our Inflation Reduction Act page. If there are stories you want to see, tell us on Twitter or LinkedIn, or chime in with comments below.
This act is huge, and the fact that it actually got through Congress and to Biden’s desk is even huger. But you don’t have to take our word for it. Here’s testimony from some of the members of Congress who were thrilled to be able to help pass the historic legislation, which contains a number of meaningful health-care and tax provisions in addition to climate and energy ones.
When it comes to provisions for electric vehicles, the Inflation Reduction Act’s tax credits for passenger EVs — and the confusion over whether the law’s domestic-production and battery-sourcing requirements will bar most EVs from being eligible — have gotten the lion’s share of media attention.
But other components of the new law could have an equally important impact on the country’s push to electrify transportation — including the heavy-duty vehicles that are responsible for an outsized portion of the sector’s carbon emissions, as well as the charging infrastructure needed to keep EVs running.
One such provision promises to cut a fair chunk of the upfront cost of new electric vans, trucks and buses: a tax credit of 30 percent on the cost of commercial EVs, up to a maximum of $7,500 for light-duty vehicles and $40,000 for medium- and heavy-duty vehicles. EV charging systems would also be eligible for a 30 percent tax credit on up to the first $100,000 in costs per charger, or $30,000 at its top limit — a significant portion of their costs.
The law also provides $1 billion in grants for clean heavy-duty vehicles like school buses and garbage trucks, as well as other grants, such as $3 billion to reduce air pollution at ports, that could help boost heavy-duty EV adoption. Companies that build medium- and heavy-duty EVs can also seek access to billions of dollars in grants, loans and tax credits to support U.S. manufacturing and take advantage of provisions that privilege domestically produced vehicles and chargers.
For Kurt Neutgens, CTO and president of OrangeEV, these nationwide incentives could be “very helpful in making things move faster” toward electrification. His company makes electric terminal tractors, the heavy trucks that move cargo at warehouses, ports and other off-the-road working environments.
OrangeEV has delivered more than 450 trucks for use in more than 130 fleets since the first rolled off its assembly line in Riverside, Missouri in 2015, putting it in the lead for U.S. electric truck sales. While long-haul EV semitractors like those being built by Volvo and Daimler’s Freightliner and promised by Tesla and Nikola get more media attention, shorter-range workhorses like terminal tractors are easier to adapt to all-electric operations.
They’re also cheaper to fuel, maintain and operate than their diesel-fueled counterparts, yielding a lower total cost of ownership after a few years of operations. “With today’s fuel prices, the payback can be less than a year,” Neutgens said. “We’re not selling these trucks because they’re green — we’re selling them because they’re better for the bottom line.”
But that doesn’t mean that would-be customers aren’t faced with a big difference in upfront cost. A typical diesel-fueled terminal tractor can cost about $120,000, compared to about $270,000 for an electric model and the charging equipment to power it. In that light, “incentives can be a really good first-customer, first-purchase enhancer and accelerator,” he said. “Assuming we can get the $40,000 per truck nationwide,” along with tax credits for the chargers it sells with its trucks, “I think that would accelerate our growth considerably.”
Fast growth is what’s needed to cut trucking emissions at a pace commensurate with fighting climate change. Medium- and heavy-duty trucks make up less than 5 percent of vehicles on U.S. roads but account for a quarter of total transportation greenhouse gas emissions, according to the Environmental Protection Agency.
Neutgens said the roughly 60,000 terminal tractors in the U.S. are responsible for just under 1 percent of all carbon emissions in the country. “If you only make 1,000 or 2,000 a year, it takes a long time” to replace that existing fleet, he said. “We’re trying to get each truck out there as soon as possible.”
What nationwide incentives could do
A nationwide tax-credit structure could go a long way toward speeding up that buildout across the U.S. trucking industry, compared to the welter of state and local incentives that have driven the market for electric trucks so far, said Mike Roeth, executive director of the North American Council for Freight Efficiency.
“The fact that this has money for both trucks and chargers is huge,” Roeth said of the Inflation Reduction Act’s heavy-duty EV provisions. “It just gives more certainty for everybody,” from the trucking companies looking to shift to electric trucks to the utilities responsible for providing the power to charge them.
While grants have played a major role in determining where EV trucks have been deployed so far, “sometimes they can be very cumbersome to the end user,” he said. “They’ve got lots of strings attached” and tend to come in tranches of funding that can run out well in advance of demand from the industry.
They’ve also been limited to a relative handful of states, led by California and New York, that have directed the majority of the billions of state and utility dollars available for EV purchases and charging incentives. “Customers often say, ‘I want to buy [electric] trucks in this state, but not in that state,” Neutgens said.
Tom Taylor, policy analyst at Atlas Public Policy, noted that the Congressional Budget Office has estimated that the commercial EV tax credits in the Inflation Reduction Act are expected to direct $3.6 billion toward the cost of purchasing these vehicles over the legislation’s 10-year lifespan. That’s more than the $3 billion in federal and state spending on medium- and heavy-duty EVs thus far, and along with grants represents a “really significant injection of funds,” he said.
According to Taylor, Atlas Public Policy’s analysis indicates that the domestic content requirements that may bar many or all of today’s passenger EVs from being eligible for tax credits do not apply to the new commercial EV tax credit, although he acknowledges that “there has been some debate here.” The text of the Inflation Reduction Act that lays out the tax credits for commercial EVs and other “commercial clean vehicles” is separate from that which defines the “clean vehicle credit” for passenger vehicles and does not contain the domestic-content provisions of the latter section.
JoAnn Covington, chief legal officer at Proterra, agreed that the new tax credits are an important boost for business. Proterra is the biggest U.S.-based maker of electric transit buses, but it also makes batteries and drivetrains for other vehicle manufacturers, as well as charging infrastructure for vehicle fleets.
Last year’s infrastructure law contained billions of dollars for the purchase of EV charging equipment and public-transit and school buses, she said. The Inflation Reduction Act “opens up opportunities to accelerate adoption of battery-electric and zero-emissions vehicles to all the other commercial segments on the cusp of being electrified.”
America’s ports are busier than ever this year. Historic levels of goods are flowing into the country, and supply-chain snafus continue causing congestion along the U.S. coastline. The diesel-burning machines and vehicles that hoist, haul and ferry away our endless streams of stuff are working overtime — spewing more air pollution into nearby neighborhoods and generating planet-warming emissions.
The surge in cargo activity is putting renewed pressure on port operators and state regulators to clean up maritime hubs. Environmental groups and residents of port-adjacent communities are urging officials to hasten the electrification of polluting onshore equipment and take steps to reduce emissions from visiting cargo ships.
Now, with an unprecedented amount of federal climate and energy funding set to start flowing, port officials will have the chance to accelerate such initiatives.
The Inflation Reduction Act, which Biden signed into law in mid-August, includes $3 billion to reduce air pollution and advance zero-emissions technology in ports. Another $1 billion allotted for heavy-duty vehicles could help electrify the drayage trucks that carry cargo containers. That’s on top of the $17 billion provided in last year’s infrastructure law for upgrading ports and crucial waterways.
Ditching diesel fuel in ports would help slash greenhouse gases at a time when the global shipping industry’s emissions are rising, driven by growing consumer demand. It would also reduce the amount of nitrogen oxides, particulate matter and other health-harming pollutants that workers and neighbors inhale. More than 39 million people in the United States live within 3 miles of a port or freight hub, the majority of whom are low-income residents and people of color.
Curbing port pollution means tackling many disparate sources that operate in distinct ways. Here are three of the more immediate solutions that ports can implement to clean up their operations, experts told Canary Media.
1) Electrify the box-shuffling machines
When cargo ships arrive at shore, an orchestra of equipment is deployed to move steel shipping boxes from ship decks to the beds of trucks and trains. Mighty off-road vehicles called top handlers pluck containers weighing up to 100,000 pounds and move them around the port. Rubber-tired gantry cranes, which resemble giant sawhorses, stack containers like Lego bricks. Yard trucks, forklifts and other machines zip around, belching fumes as they go.
The ports of Los Angeles and Long Beach, which together comprise the nation’s largest shipping hub, are working on converting all their cargo-handling equipment to zero-emissions technologies by 2030. As part of that effort, the ports are set to test some 200 pieces of equipment in the next few years, including not just forklifts and tractors but also battery-powered locomotives and electric tugboats.
“The problem is that a lot of zero-emissions technologies are still early in their development. You can’t go down to the dealer and buy them,” said Chris Cannon, director of environmental management for the Port of Los Angeles. “So a lot of what we do is serve as a test bed for zero-emissions technologies and help demonstrate to the manufacturers that a market exists.”
He noted that, in 2020, the Los Angeles port began testing two of the world’s first electric top handlers, both of which have 1-megawatt batteries and are designed to operate for two entire shifts — up to 18 hours consecutively — between charges.
Editor’s note, August 16: This story was originally published on August 11, 2022. It has been updated to note President Biden’s signing of the bill.
The $369 billion in climate and energy funding in the Inflation Reduction Act isn’t just the biggest-ever U.S. investment in combatting climate change. It also promises to deliver for the first time a comprehensive U.S. clean energy industrial policy — a plan to transform the country from a laggard to a leader in making the technologies vital to combating climate change.
So say experts involved in crafting the core features of roughly $60 billion in tax credits and lending authority that the act will direct to turbo-charging U.S. clean energy industries.
And unlike the limited clean energy manufacturing grants and investment tax credits of the Obama-era recovery package of 2009 — the last major federal effort to jump-start a domestic clean energy industry — the Inflation Reduction Act’s core clean manufacturing program is designed to last a decade, scale up as companies increase production volume and efficiency, and support development across the clean energy supply chain.
That core program is called the 45X Advanced Manufacturing Production Credit, after the section of the tax code it will alter. According to the congressional Joint Committee on Taxation, it will direct roughly $30 billion over the next 10 years to support the production of components of solar panels, wind turbines, inverters and batteries for electric vehicles and the power grid, as well as to promote mining and refining the critical minerals that go into these products. (The other half of the clean energy manufacturing money consists of $10 billion in new investment tax credits and $20 billion in loans for clean vehicle manufacturing — more on those provisions in the last section below.)
But the total amount of 45X tax credits flowing to companies could well exceed that $30 billion estimate, according to Mike Carr, a partner at consultancy Boundary Stone. He worked with Democratic senators to craft the Solar Energy Manufacturing for America (SEMA) Act, which was largely incorporated into the Inflation Reduction Act and also became the model for the 45X program.
“We’re starting to see [companies] go back to scale up their projected investment by 50 percent or more” based on the tax benefits they expect to see from the 45X program, he said in an interview. “People are going to tap out their investment reserves and try to go as big as possible.”
A production tax credit designed to compete with China
The reason manufacturers might be inspired to go big is that the 45X production tax credit, or PTC in tax lingo, doesn’t provide a limited tax incentive based on how much a company invests in facilities to make or refine the products in question. That’s how previous clean manufacturing investment tax credits, like the Obama-era 48C program, were set up.
Instead, the credits in 45X are based on how much equipment or material is produced, Carr explained — a structure that allows federal support to grow with production.
Solar modules and cells will respectively receive 7 cents and 4 cents per watt of generation capacity, for example, while crystalline silicon wafers and solar-grade polysilicon will receive their own incentives based on volume of production.
Similar structures will offer per-watt incentives for wind turbines and their components and per-kilowatt-hour incentives for battery cells and modules. Other key products, like the specialized ships that install offshore wind turbines or the critical minerals needed for batteries, solar panels and electric-vehicle drivetrains, will earn credits for 10 percent of the costs of producing them.
That makes 45X “a policy that incentivizes not only building the facility, but building it at a globally competitive scale,” Carr said.
This design grew out of Carr’s prior experience at the Department of Energy during the Obama administration and his previous eight years as senior counsel for the Senate Energy and Natural Resources Committee, where his “beat was the edges of industrial policy,” he said.
About two years ago, Boundary Stone started working with South Korea–based Qcells and Michigan-based Hemlock Semiconductor, two companies targeting growth in the solar sector. They wanted “to build everything they could in the United States,” he said. The challenge was “China’s very real and explicit desire to dominate the entire supply chain.”
China has spent more than a decade orchestrating government policies that have driven an estimated $50 billion in solar manufacturing investment, erected trade barriers against non-Chinese suppliers, and secured its dominance across most of the global solar supply chain. Would-be U.S. silicon competitors like Hemlock have found themselves locked out of that market, while solar PV manufacturers like Qcells have struggled to justify investments in U.S. production in light of China’s monolithic position.
During the Obama administration, Hemlock and many other U.S. solar manufacturers tapped 48C tax credits to build facilities, Carr noted. But “they’d all been sort of undersized compared to what China was doing and lacked the means of support” beyond getting the facilities built, he said. All have since been idled or shut down.
SEMA’s tax credits for each unit of production were designed specifically to make up the difference between domestic production costs and competing costs from China, he said. If manufacturers could have per-unit credits “for at least five to eight years, they knew they could pay off that investment.”
That’s a radical departure from prior U.S. solar industry policy, Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association, said in a Tuesday press conference about the Inflation Reduction Act. “The production tax credit — the ongoing support for producing solar products — is what really differentiates it from other efforts we’ve seen at other points in our history.”
Designing a solar manufacturing policy from the ground up
Scott Moskowitz, head of market strategy and public affairs for Qcells, highlighted some of the 45X tax-credit features that could help bolster his company’s U.S. investments.
First, “it’s trying to incentivize companies to do multiple parts of the supply chain,” he said. Separate tax credits for polysilicon, ingots, wafers, cells and panels can add up to significant support for a robust solar manufacturing sector, whether the credits are used by companies seeking to vertically integrate their production or by one domestic manufacturer selling to another up the supply chain.
Qcells is already investing more than $170 million to double its solar-panel manufacturing capacity at its plant in Dalton, Georgia. Its parent company has also invested $160 million in REC Silicon’s now-idled Washington state polysilicon production facility, with the intent to “get it back up and running by next year,” Moskowitz said. In the longer run, “we intend to make an investment across the entire solar supply chain,” he said — a goal shared by only a handful of companies investing in North American solar production.
Moskowitz also pointed to the structural elements of the 45X credit that encourage innovation and efficiency. Credits are tied to productive capacity of the panels and cells produced rather than their cost, which encourages companies to strive to make higher-efficiency panels and removes the incentive to boost prices to increase credits.
Carr noted that 45X has two key incentives for rapid growth. The first is an expiration date — the full tax credits are available through the end of 2029 and then drop by 25 percent per year to zero over the next three years. That encourages companies to scale quickly to maximize the value of the credits they can get before they are gone.
The second is a provision that makes 45X tax credits available as direct payments from the federal government for the first five years they’re claimed so that companies can receive their full value even if it exceeds the amount of federal taxes they owe. That relieves companies of the burden of setting up tax-credit monetization structures to recover the full value of those credits and turns the credits into “a lifeline that pushes all the incentive to building big and building fast,” he said.
From solar to wind, batteries and other clean energy industries
As Democrats in Congress negotiated their climate and energy legislative policy over the past year, the concepts laid out in SEMA “started looking like the right approach for a bunch of other things,” Carr said. “It didn’t take long for the House to add wind technologies” to the 45X list.
“Next, we started talking about what to do about battery manufacturing,” he said. Senator Joe Manchin, the West Virginia Democrat whose flip from opposing to supporting the party’s climate agenda made the Inflation Reduction Act possible, “focused everyone’s attention on that, with his belief that China would be dominant in the battery supply chain.”
The battery tax credits in the act could be a significant boost to U.S. companies trying to compete with China, Princeton professor and energy-modeling expert Jesse Jenkins said during a podcast last week hosted by Canary Media Editor-at-Large David Roberts. The credits will amount to about 30 percent of the cost of battery cells and complete batteries, as well as 10 percent of the value of the electrode active material and the critical minerals that go into batteries, such as lithium and cobalt, he said.
Much like solar panels, batteries have a complex supply chain, said Lachlan Carey, senior associate at nonprofit climate think tank RMI. “A critical minerals producer faces a very different industry and cost structure than does the battery pack assembler. There need to be relatively targeted incentive structures for those different phases.” (Canary Media is an independent affiliate of RMI.)
RMI’s U.S. program worked alongside DOE, Benchmark Mineral Intelligence, BloombergNEF and academic partners to provide Senate Democrats with analysis that underpinned production-tax-credit structures to address these differences.
One key goal of providing tax credits along the battery supply chain is to encourage “vertical integration and geographic clustering,” Carey said. Co-location of companies playing different roles in battery production reduces transportation and logistics costs, he said. It also allows companies to share ideas and coordinate production more easily than if they’re across the world from each other.
Carr noted that this “innovation” effect has spurred support for the 45X policy from U.S. companies that aren’t directly reliant on China. U.S. solar manufacturer First Solar, for instance, makes thin-film solar panels that don’t use silicon, he said — but it does want to support a vibrant solar technology sector.
“When you have a single state that’s completely dominating the field…they control price and flatten out the curve of learning,” he said. “They also don’t have to be very receptive to new technologies.”
Nathan Iyer, a senior associate with RMI’s U.S. program, added that the tax-credit values for individual technologies and components were designed to make them competitive with “how much these things cost to produce in China versus the U.S., considering that they have huge economies of scale and huge subsidies. That eliminates China’s cost advantage overnight.”
Lindsay Gorrill, CEO of U.S.-based lithium-ion cell manufacturer Kore Power, agreed that the Inflation Reduction Act’s tax credits — $35 per kilowatt-hour of battery cell and an additional $10 per kilowatt-hour for completed battery packs or modules — could be a “significant” boost to domestically produced batteries. Kore now manufactures in China, but it’s in the midst of lining up financing to build a factory in Arizona that will produce up to 12 gigawatt-hours of battery cells per year.
“The key is to drive the supply chain,” Gorrill said. “If you have cell and battery production in or near the United States, that will drive down cost.” While Kore expects its U.S.-made battery cells to be cost-competitive with cells from major Asian manufacturers, “we’re ahead of them if you start to add in” the benefits of being able to tap into a broader domestic supply chain.
Which industries will get the biggest boost?
Once the Inflation Reduction Act is signed into law, it’s still uncertain how and when its manufacturing incentive structures will be put into full effect — and what impact they will have on U.S. clean energy manufacturing competitiveness.
On the first point, the Internal Revenue Service will need time to develop rules and guidance for how the 45X tax credits work. But those rules should be far more straightforward to implement than the investment tax credits that require DOE or another agency to pick recipients of a limited amount of money from a large pool of applicants, Carr noted.
In the longer run, China’s dominance of the solar industry will remain an obstacle to U.S. competition, Carey said. “The transportation cost of shipping solar panels to the U.S. is very low, and the economies of scale that China has built in the supply chain may overwhelm the benefits” from the bill’s domestic solar supports, he said.
Other industries may be better positioned to thrive under the Inflation Reduction Act. “I think you could see a really significant increase in wind power manufacturing, because of the transportation costs involved,” he said. Wind turbines and towers are much heavier than solar panels, and the tens of gigawatts of offshore wind being planned for U.S. coastlines will need the support of specialized ships and port facilities, he noted.
Batteries are another industry well positioned for dramatic growth, Carey said. U.S. automakers and battery manufacturers are planning more than $20 billion in North American lithium-ion battery production facilities in an effort to close China’s commanding lead in global battery market share.
The demand for domestically produced batteries and battery materials will only grow under the Inflation Reduction Act’s EV tax-credit provisions, he noted. For EVs to be eligible for credits of up to $7,500, their batteries must contain a certain portion of components and critical minerals from the U.S. or nations that have free trade agreements with the U.S.
While automakers are concerned that this may bar many vehicles from being eligible during the first few years of the tax credits, it could also provide a boost to U.S. minerals and battery production, Jenkins noted.
Other components of a clean energy industrial policy
Both Carey and Iyer emphasized that the 45X tax credits aren’t the only manufacturing incentives in the Inflation Reduction Act. It will also make $10 billion available in investment tax credits for a wide range of industries; companies could apply for them in lieu of production tax credits. Of that, $4 billion is reserved for investments in “energy communities” facing unemployment and economic hardship from the loss of fossil-fuel-related industries, Iyer said.
The act will also authorize tens of billions of dollars in new lending from the DOE’s Loan Programs Office, including $20 billion in loans to build new clean-vehicle manufacturing facilities, Iyer said. Loans from this DOE office during the Obama administration have been credited for proving the financial viability of U.S. utility-scale wind and solar projects and EV manufacturing, and a resurgence of the loan office under the Biden administration has led to billions more being proposed for EV battery manufacturing, battery materials processing and low-carbon hydrogen production.
Other legislation will play an important role too, Carey said. Last year’s infrastructure bill is directing tens of billions of dollars into EV charging, transmission grids and hubs for hydrogen and carbon capture, among other important investments. And the CHIPS and Science Act signed into law by President Biden this week, alongside its $76 billion in subsidies and tax credits to boost domestic semiconductor production, also contains tens of billions of dollars to fund technology research and development, including R&D on advanced batteries, he said.
“Really, I think of all of this as industrial policy — and I think that’s the best framework we have for understanding what Congress and this administration are trying to do,” Carey said.
In large part, the industrial-policy push is intended to compete with one country: China. The 45X tax credits, in particular, were designed for this purpose. They align with the Biden administration’s broader efforts to secure U.S. supplies of products seen as vital to national security, including lithium-ion batteries and critical minerals, sectors now dominated by China.
The U.S. has ongoing solar trade disputes with China and has accused the country of human rights abuses and using forced labor in industries including solar production. But even leaving aside these and the many other tensions between the U.S. and China, there are good reasons for the U.S. to expand its internal capacity for meeting its clean energy needs, Carr said.
“Just the sheer volume of panels and batteries and wind turbines and everything else that has to be generated can’t just come from China,” he said. “China could take all its existing capacity and use it themselves to meet their climate targets.”
“There was a certain fatalism that had taken hold around a lot of these technologies, that China will always beat us to the punch,” Carr said. “Frankly, if we can change people’s minds a little around that, then that will be a huge accomplishment in and of itself.”
Editor’s note, August 12: This story was originally published on August 3, 2022. It has been updated to reflect passage of the bill by Congress.
The relatively young energy-storage industry will get a proper seat at the clean energy policy table thanks to the Democrats’ climate bill, which passed both the House and Senate this week.
The U.S. conducts federal clean energy policy through tax credits, for better or worse. Wind and solar won dedicated tax credits years ago and rode them to the top of the charts, becoming the two largest sources of new power plant capacity in 2021. But until now, the technologies to store that renewable electricity have had to scrape by without their own tax credit. The best that storage plants could do was piggyback on solar projects in order to get a tax credit.
That’s not so bad for residential installations, where the primary reason for installing a battery is to store rooftop solar production. But massive utility-scale battery plants can do a lot of good in locations where solar installations are impossible or inadvisable, like densely packed population centers or strategically situated substations. Building more storage capacity makes the grid better at absorbing large amounts of renewable generation.
With the passage of the Inflation Reduction Act, energy-storage projects will now be able to benefit from federal support without needing to be located at the exact same spot as a solar farm. The act includes a stand-alone Investment Tax Credit (ITC) specifically for energy-storage projects, which will support all sorts of storage technologies.
“This is going to create a much fairer situation on the grid and really increase the speed at which we can deploy storage nationwide,” U.S. Senator Martin Heinrich (D-New Mexico) told Canary Media the week before the Senate passed the bill.“You’re going to see [storage] fill a lot of gaps where, because of this ITC, it ends up popping to the top of the solution set.”
Heinrich first introduced a stand-alone storage tax credit in 2016, to fill a critical gap in grid decarbonization efforts. As more renewables hit the grid, storage becomes more valuable for smoothing the ups and downs of clean energy production. But storage only gets built when developers believe they can make money from it, or when utilities determine it will cost-effectively meet their needs for the grid. Because of both the cost of deploying new technology and the power industry’s deeply rooted sense of caution, the storage buildout has lagged the renewables boom.
It didn’t have to take this long. Advocates have been pushing for this kind of stand-alone tax credit “since storage was a science project,” said Katherine Hamilton, chair at clean energy policy shop 38 North Solutions. Hamilton has worked on this issue long enough to remember Oregon Senator Ron Wyden (D) proposing a storage credit back in 2009.
Still, even without a dedicated tax incentive, the scrappy storage industry pushed its way onto the power grid, and now is“one of the fastest growing segments in the clean energy sector,” said Heather Zichal, CEO of industry group American Clean Power. The ITC will accelerate deployments even further. As Zichal told Canary Media last year, the stand-alone tax credit for storage has been one of her group’s top legislative priorities.
The storage analysts at research firm Wood Mackenzie projected that, without the tax credits in the Inflation Reduction Act or the earlier Build Back Better legislation, the U.S. would have only installed 100 gigawatts of grid-scale storage in the 10 years starting with 2022. (For comparison, the U.S. Energy Information Administration projected in January that the U.S. would install 5.1 GW of utility-scale batteries this year.)
Now that the act has become law, that 10-year outlook increases to a base case of 122 GW, said Dan Shreve, global head of energy storage at consultancy Wood Mackenzie. If conditions break even more favorably for the storage industry, deployments could approach the bullish case of 135 GW.
“If you look at where we were about to go two weeks ago, it’s a completely different animal,” Shreve said.
Tax credit tied to labor standards and community benefits
The new storage ITC will chop 30 percent off the cost of a storage project. But to qualify, projects will need to meet labor standards for prevailing wages and apprenticeship. That’s an important protection for the energy workforce as it stares down historic shifts in how electricity is produced.
A storage project will be able to claim another 10 percent credit if it hits a threshold for domestically produced materials, and yet another 10 percent if it is located in a community that historically produced energy (and presumably will be affected by the energy transition), such as a community facing the closure of a coal-fired power plant.
“There’s the potential to really stack benefits on the incentive side,” Heinrich said.
Exactly how storage developers will be able to make use of those adders remains to be seen.
What is clear is that this policy will not be just for lithium-ion batteries, which have been the near-exclusive choice for grid storage technology in recent years. The ITC will be open to anything that stores energy, Hamilton noted, including older forms like pumped hydro, and new and emerging technologies for cost-effectively storing and discharging power over many hours.
“You’ll get a lot more scale on some of those other long-duration technologies because of this,” Hamilton said.
The ITC will also cover thermal storage, a well-established technology that reduces energy needs for heating and cooling at crucial hours.
Prior to this legislation, renewable tax credits have followed a boom-and-bust cycle: They spurred installations for a few years, then were supposed to sunset, at which point the industry rallied its lobbying forces to win an extension for a few more years. The IRA would establish decade-long tax credits for storage and the other forms of clean energy — a kind of certainty the industry has never had from the tax code.
“This bill sends the market signals: Energy storage is here to stay, and feel free to invest, because these aren’t going away for 10 years,” Hamilton said.
Storage projects on the edge will become profitable
The modern energy-storage industry became viable over the last decade as lithium-ion battery costs came down and revenue-making opportunities started to appear. But the battery price tag still deters grid battery construction outside a few geographic enclaves. That’s where the storage ITC can help, by reducing the capital cost of projects significantly.
That could get private developers off the fence in competitive markets. That’s where the storage boom started — with privately developed projects delivering the lightning-fast service known as frequency regulation in the mid-Atlantic PJM market. But that market quickly got saturated. Since then, large-scale batteries have tended to get built when they have utility contracts to guarantee some revenue. A few pioneering firms have gone it alone, building merchant storage plants in California and Texas, and developing them in New England. But they’re the outliers.
Now that investment costs for a power plant are poised to suddenly drop 30 percent, potentially up to 50 percent, that will make it much easier for a project to pay itself off. Merchant markets are still risky, and few companies have a track record of making money with merchant storage, but the ITC will shift the risk/reward calculus in the right direction.
The other, much larger category of big batteries is utility-led. This includes projects built and owned by utilities, and projects built by independent developers to fulfill a utility contract. These projects have taken off in places where decarbonization policy pushes developers toward battery storage for new firm capacity — California and Hawaii, for instance. In other states, like Arizona and Colorado, utilities found the combination of solar and storage beat out other options on price.
In places where storage already pencils out, the ITC will mean federal taxpayers are buying down the cost of storage for local ratepayers. The project that was already a good deal will become a better deal. In the many parts of the country where utilities have yet to build battery storage at meaningful scale, the technology will become that much more competitive against other options.
“Because it’ll drive down cost and drive up scale, [the IRA] will make storage much more part of how planning is done from the utilities and [independent system operators],” Hamilton said.“It will open up states that did not have [storage] targets but can really use the services storage provides.”
And buyers who have been waiting to seal the deal until the long-simmering tax credits were finalized can finally move ahead.
“We’ve had utilities tell us, ‘We will not buy storage until the ITC passes,’” one storage developer told Canary Media.
For those concerned about decarbonization, the thing to watch is whether a storage ITC will mean that battery plants (charged from the grid, but benefiting from cheap renewable production) can beat out gas-burning plants for the role of peak power delivery.
Gas power-plant technology is not getting radically cheaper. And the fuel itself has gotten more expensive recently, with U.S. gas futures hitting their highest prices since 2008 this summer.
With the stand-alone storage tax credit, battery projects “are immediately put in a much better position in terms of your delivered cost of electricity versus a gas peaker,” Shreve said.
Editor’s note, August 16: This story was originally published on August 4, 2022. It has been updated to note President Biden’s signing of the bill.
Donnel Baird, CEO of BlocPower, thinks the Inflation Reduction Act could transform the country’s home efficiency and electrification markets. It could certainly boost the bottom line for his company and help the primarily lower-income and disadvantaged communities it serves.
Baird estimated that the act’s tens of billions of dollars in federal rebates, tax incentives, grants and lending capacity for electric appliances, heat pumps, rooftop solar, home batteries, efficiency retrofits and other building improvements could cut 5 to 40 percent of the per-home cost of the efficiency and electrification projects that BlocPower is doing around the country.
That “means there are millions and millions of buildings where you couldn’t make the economic argument, where now you can,” he told Canary Media, “particularly low-income buildings where the financial payback did not pencil out before.”
The result will be many more homes and apartments with lower energy bills, reduced health risks from burning fossil fuels indoors, higher property values for owners, and appliances that can interact with a grid increasingly powered by renewable energy, he said.
And, of course, it will be a vital part of combating the climate crisis. The direct use of fossil fuels in buildings accounts for about 13 percent of total U.S. greenhouse gas emissions.
The U.S. can’t meet its decarbonization goals “unless we electrify the 1 billion machines across our 121 million households across the country,” Ari Matusiak, CEO of pro-electrification nonprofit group Rewiring America, said at a Wednesday press conference. His organization designed one of the key electrification-rebate provisions of the new law. “Transforming the market so that we rewire America’s households is a big task,” one that “needs to be catalyzed” by federal legislation.
But when it comes to turning the act’s efficiency funding into that market transformation, “the devil’s in the details,” Baird said. “Can we pull it off in the real world?”
That challenge includes straightforward issues of timing and complexity. How long will it take federal and state agencies to devise the rules to give out rebates and grants? Will those rules allow households and contractors to get the money relatively quickly, or will they be complicated by red tape?
Then there are structural questions. Can heat-pump manufacturers and efficiency contractors meet the demand expected to arise in response to a big jolt of federal funding? How can programs avoid a boom-bust cycle of big spending that eventually ends and leaves businesses facing shortfalls and layoffs?
These are the questions that climate activists and efficiency and electrification professionals will be asking in the months to come, said Panama Bartholomy, executive director of the Building Decarbonization Coalition.
“They took like 10 years of climate-activist angst and put it all into one bill,” he said. “It’s a Christmas tree of stuff.” But “it’s another thing to get the money out the door.”
Andy Frank, president and founder of New York–based home-efficiency and electrification provider Sealed, agreed that successful implementation of the bill’s provisions “could spark a lot of market dynamics” that will lower the cost and improve the quality of homeowners’ clean-energy investments. “That creates a positive feedback loop.” But the federal and state agencies involved will “need to design the program rules and programs in a way that’s healthy and sustainable for the market,” he said.
This admonition applies to the three main buckets of efficiency and electrification support in the Inflation Reduction Act: tax credits, rebate programs and new lending authority that could be used to transform the home energy market.
1. Tax credits to promote efficient electric homes
The most immediate impact will come in the form of tax credits, Frank said. That’s because most of them will be available to homeowners next year, and some of them will apply to investments made in 2022.
For homeowners, the most important is an expansion of the Energy-Efficient Home Improvement credit, known as 25C after its section in the tax code. It will allow households a tax deduction of up to 30 percent of the cost of energy-saving home upgrades, ranging from insulation and new doors and windows, to heat pumps that use electricity to heat and cool homes far more efficiently than fossil-fueled furnaces and water heaters, to upgrades of electrical panels to serve those new electric loads.
Most of these credits will be capped at $1,200 per household per year, or $600 per measure such as insulation or more efficient windows. But heat pumps — devices that can both heat and cool homes by tapping temperature differentials between indoor and outdoor air or underground thermal sinks — will be eligible for the 30 percent credit for up to $2,000 of their value.
The Residential Clean Energy credit, or 25D, will allow homeowners to deduct up to 30 percent of the cost of fancier home-electrification projects. Those include rooftop solar, which is currently eligible for a 26 percent tax credit but under the new law will be eligible for 30 percent. And for the first time, residential battery systems will be eligible for a tax credit, whether or not they’re connected to rooftop solar.
These home-efficiency and clean-energy tax credits have a 10-year lifespan, Matusiak noted. So as heat pumps and other technologies get cheaper over time, the relative portion of their costs covered by the credits will increase, he said — you will still get up to $2,000 off a heat pump even as the cost of that heat pump declines.
A 10-year lifespan also provides more certainty for contractors and manufacturers that may want to bundle the value of these credits into how they price their products and services. Whether contractors do that could “make or break these programs,” Bartholemy said, since homeowners usually follow contractors’ advice on what equipment to install — particularly when replacing a broken-down furnace or water heater.
While rooftop solar installers have had decades to build business models around federal tax credits, “it is very new for the home-electrification community,” he said. “It’s going to be contractors going to customers and saying, ‘Here’s how we’re going to bundle all these incentives and tax credits’ — and state ones as well,” such as the heat-pump incentives available in California, Maine, New York and Washington state.
Editor’s note, August 12: This story was originally published on August 5, 2022. It has been updated to reflect passage of the bill by Congress.
Now that the Democrats’ major climate and tax bill has been passed, the United States might actually end up with an effective industrial policy for the clean energy and electrification sectors.
The Inflation Reduction Act is a clean-power policy behemoth that will lower energy prices, benefit consumers with more clean energy choices, and provide a path to cut U.S. carbon emissions 40 percent below 2005 levels by 2030. It includes $369 billion in support for clean energy and a stable climate, including provisions to promote EVs, heat pumps, energy storage, nuclear power, environmental justice and more.
Notably, the bill will give domestic manufacturers generous incentives to build renewable energy hardware in the U.S., with the intent of reclaiming manufacturing dominance from China and generating millions of domestic jobs.
Here’s a rundown of the potential impacts on the U.S. solar industry.
Trying tax-credit carrots instead of tariff sticks to spur manufacturing
For more than a decade, tariffs imposed on Chinese-made solar equipment failed to jumpstart a domestic U.S. solar manufacturing industry, despite the protectionist leanings of the Obama, Trump and Biden administrations. In fact, the U.S. watched its solar production expertise migrate to Japan, then Germany and ultimately to China over the last two decades because trade tariffs simply don’t work.
The U.S. currently has approximately 11 gigawatts of photovoltaic module production capacity, according to consultancy Wood Mackenzie, out of a global capacity approaching 500 gigawatts as of 2021. China is home to 70 to 98 percent of the world’s production capacity for the silicon-based materials and components in PV panels, according to S&P Global. China has invested more than $50 billion in solar PV manufacturing capacity since 2011, the International Energy Agency recently reported.
That Chinese investment has been built on more than a decade of active government policy that has offered low-cost finance and targeted incentives for every portion of the solar supply chain. The Inflation Reduction Act will employ a similar carrots-instead-of-sticks approach to spur the creation of a vibrant solar manufacturing sector in the U.S.
The core of the law’s domestic manufacturing tax policy is built on the provisions in the Solar Energy Manufacturing for America Act, introduced by U.S. Senator Jon Ossoff of Georgia (D) in June of last year.
Particularly important are the tax credits for domestic production of solar cells, modules and components. Manufacturers will be eligible for a generous credit of 11 to 18 cents per watt for a solar module manufactured in a U.S.-based vertically integrated plant. Subsidies will apply across the solar value chain of polysilicon feedstock, thin-film or crystalline PV cells, wafers and modules, and will cover about half the cost of a solar module — a significant subsidy that will make U.S. manufacturing much more competitive.
The tens of billions of dollars devoted to long-term, sweeping industrial policy in the bill could result in tens of gigawatts of solar panel production being returned to American shores. As Harry Godfrey, managing director at the Advanced Energy Economy trade group, told Canary Media in late July, the solar manufacturing credits, along with similar provisions for domestic production of wind turbines, batteries, electric vehicles and other clean energy technologies, represent“a new era for American manufacturing.”
Offering larger and longer-lasting solar tax credits
Although the U.S. has lost major ground on solar manufacturing over the last two decades, it has installed more than 100 gigawatts of solar power, driven by subsidies in the tax code — specifically the solar Investment Tax Credit.
The new law includes a 10-year extension of the ITC. Without it, the existing tax-credit policy passed by Congress in late 2020 would have put the solar ITC, which now stands at 26 percent of the cost of installed equipment, on a declining path from 2022 to 2025. Now, under the new law, credits will stay steady at 30 percent for a decade, then step down to 26 percent in 2033 and 22 percent in 2034. This will provide much more certainty and a far longer time horizon than the solar industry has ever gotten from the tax code.
Solar projects will also be allowed for the first time to access the Production Tax Credit (PTC), which is based on the power produced by a project over 10 years — different from the ITC, which allows project investors to claim a one-time tax credit based on a project’s value. As Canary Media’s Jeff St. John recently explained,“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 will also provide“bonus amounts of ITC or PTC for meeting additional requirements,” as an analysis from Pillsbury Law explains — for example, using domestically produced steel and iron, investing in lower-income and tribal communities, and paying prevailing wages and participating in union apprenticeship programs.
Another tax-credit add-on aims to help communities transition from producing fossil fuels to producing renewable energy. Clean-energy developers can get additional ITC or PTC value if they locate projects in areas that have had a significant number of workers in the coal, oil and gas sectors since 1999 or that have been home to a coal mine or coal-fired power plant that was shut down.
“The bonus credits can be stacked,” the lawyers at Pillsbury write,“so a project that meets several of the additional requirements could qualify for upwards of a 50% ITC or more.”
Making it easier for solar developers to benefit from tax credits
In a perfect world, the renewable energy industry would not be entirely dependent on the tax code. We’re not living in that world, but the Inflation Reduction Act at least makes some moves to free renewables from the confines of traditional tax equity structures.
Under the current tax regime, developers of solar and wind projects can only access the ITC and PTC if they’re sufficiently successful to owe enough in taxes for the credits to be applied to — or else they have to resort to complex dealings with big banks or other financial players to access the tax credits, in the process giving up a significant amount of the value. In an important departure from that system, the new law allows developers to sell their tax credits to unrelated third parties for cash.
As Pillsbury points out,“The scarcity of tax equity is an ongoing issue for many developers, so the ability to sell credits in a frictionless fashion could help expand the pool of available counterparties and limit the need to deploy more complex tax equity structures.”
Editor’s note, August 12: This story was originally published on August 10, 2022. It has been updated to reflect passage of the bill by Congress.
French postal service La Poste operates nearly 40,000 electric delivery vehicles. In Germany, Deutsche Post recently added the 20,000th EV to its delivery fleet. The U.K.’s Royal Mail plans to operate 5,500 electric vehicles by early next year, while Japan Post owns 1,200 small electric vans.
The U.S. Postal Service, meanwhile, has about two dozen electric mail trucks — and some 212,000 gas guzzlers that it’s looking to replace.
Democratic policymakers and environmental groups are pushing for the independent federal agency to electrify its entire mail-truck fleet, a measure that would significantly reduce greenhouse gas emissions and curb toxic tailpipe pollution in neighborhoods all around the country. Yet the Postal Service has been reluctant to fully embrace EVs, mainly because, it says, battery-powered models are more expensive to buy than petroleum-powered vehicles.
The major climate and tax bill that passed both the House and Senate this week aims to alleviate some of that sticker shock.
Known as the Inflation Reduction Act, the legislation will provide $3 billion for the Postal Service to buy zero-emissions delivery vehicles and install necessary charging infrastructure at post offices and central mail facilities. (That’s triple the amount of direct funding in the bill for heavy-duty vehicles such as garbage trucks and school buses.)
The Postal Service has previously stated that, should Congress provide more support, the agency could increase the number of electric vehicles it plans to introduce.
“This bill is trying to put to bed their argument that they need more resources,” said Adrian Martinez, a senior attorney for Earthjustice. The environmental group is one of several organizations that are suing to force the Postal Service to scrap its original mail-truck plan.
The humble, boxy delivery vehicle has become a political flashpoint over the last year because it represents an important crossroads: Either the agency helps accelerate the nation’s shift to cleaner cars — or it locks in fossil-fuel use and associated emissions. New mail trucks are expected to operate for 20 years, if not longer; many existing mail trucks have been carrying letters and packages for over three decades.
The Postal Service has argued that its vehicle-buying strategy is meant to be flexible, and it has gradually increased its EV ambitions in the face of mounting pushback. In March, the agency doubled the number of electric mail trucks it initially planned to order from 5,000 to 10,000. Then it announced a new plan in July that would order at least 33,800 electric trucks — 40 percent of its initial 84,500-truck order. The rest would run on gas.
Editor’s note, August 12: This story was originally published on August 8, 2022. It has been updated to reflect passage of the bill by Congress.
As aviation companies develop the first hydrogen-powered jets and electric regional aircraft, a more immediate way to curb the industry’s climate pollution is to burn “sustainable aviation fuel.” Made from waste materials such as used cooking oil, landfill gas and forest residue, the fuels can be blended with fossil jet fuel and used in existing engines. The problem is that today’s sustainable supplies amount to a tiny drop: well below 1 percent of global jet fuel demand.
This week, the House and Senate approved a climate and tax law with nearly $370 billion to help decarbonize the U.S. economy, including funding to swiftly boost U.S. production of sustainable aviation fuel (SAF). The Biden administration has previously called for increasing SAF production in the U.S. to at least 3 billion gallons per year by 2030. That’s nearly 100 times more than the entire world will produce this year.
Known as the Inflation Reduction Act, the law includes two key provisions that experts say will multiply the nation’s SAF supply.
First, fuel companies will receive tax credits worth $1.50 per gallon for sustainable fuels with 50 percent lower life-cycle greenhouse gas emissions than standard jet fuel. The greater the emissions reduction, the more money producers can earn, up to $1.75 per gallon. Those calculations account for the fuel’s “induced land-use change value,” meaning the emissions created by displacing crops or natural areas to produce fuel feedstocks. The idea is to favor fuels that don’t compete with food production or environmental conservation.
The law’s second provision dedicates nearly $300 million in research and development grants to initiatives that make, transport, blend or store SAF, as well as projects to develop fuel-efficient aircraft or otherwise reduce emissions from flying.
The grants will also support fuel makers, airlines and engine manufacturers in their efforts to achieve 100 percent SAF use during flight. Today, the amount of SAF that can be blended with conventional fuel is limited to 50 percent. That’s primarily because existing sustainable fuels don’t meet the industry’s criteria for jet fuels, and industry regulators want to ensure all fuels are compatible with aircraft engines and infrastructure worldwide. Companies are developing new synthetic compounds and refining engine technologies to enable fossil-fuel-free flights.
How much would the SAF incentives actually help?
Airline CEOs and industry trade groups expressed support for the climate law’s aviation provisions, saying the policies would spur much-needed investments to reduce the environmental toll of flying people and cargo. Commercial planes and business jets account for roughly 3 percent of total U.S. greenhouse gas emissions, a share that’s on track to soar as passenger travel grows.
Editor’s note, August 12: This story was originally published on August 10, 2022. It has been updated to reflect the passage of the bill by Congress.
The breakthrough bill that passed the House and Senate with $369 billion in climate funding includes up to $60 billion in environmental justice initiatives. (That figure depends on what you count, of course.) The money is intended to help communities of color and low-income areas that have been overburdened with pollution and pushed to the front lines of climate change by historically racist and classist practices.
The “once-in-a-generation investments” in the Inflation Reduction Act will “greatly benefit people adversely impacted by fossil-fuel operations and climate crises,” Dana Johnson, senior director of strategy and federal policy at WE ACT for Environmental Justice, told Canary Media.
Senator Edward Markey (D-Massachusetts), who worked on some of the environmental justice provisions in the act, said in a statement prior to its passage that it “would be the most significant investment in environmental justice and climate action in American history.”
So what exactly are the bill’s environmental justice investments? Here are some of the heftiest:
$15 billion for projects that reduce greenhouse gas emissions in low-income and disadvantaged communities. This is part of a larger $27 billion Greenhouse Gas Reduction Fund, which will act like a federal green bank. The fund will provide competitive grants, loans and low-cost financing for clean energy projects (rooftop solar and electrified transportation, for example), and ideally will stimulate high levels of investment from the private sector. Leah Stokes, professor and climate policy expert at the University of California, Santa Barbara, recently told Canary Media Editor-at-Large David Roberts that the $15 billion for low-income and disadvantaged communities — more than 55 percent of the fund — is a major victory for environmental justice advocates. The money is split across two pots: $7 billion for zero-emissions technologies and $8 billion for other projects that help slash climate-warming emissions.
A projected $11 billion for cleaning up industrially polluted Superfund sites. These toxic sites — which harbor pollutants that threaten human health, including lead, trichloroethylene and benzene — disproportionately affect communities of color and low-income residents. The new funding for Superfund cleanups will be raised from a reinstated and beefed-up tax on oil production and import of 16.4 cents per barrel.
$3 billion for environmental and climate justice block grants for community-led projects. These grants will go toward community initiatives that track and combat air pollution and urban heat, fund climate resiliency and invest in clean energy, such as community solar. Johnson of WE ACT said that many communities already have projects they’ve started to develop. “This [funding] gives them the flexibility and the autonomy to really pursue them.” The block grants can also be used to help community members participate in state workshops and rulemakings.
$3 billion for neighborhood access and equity grants. Communities that have been divided by highways or other infrastructure barriers will be able to use these funds to help them reconnect. Communities can also invest the funds in public transportation.
$3 billion in grants to clean up air pollution at ports. With these grants, port authorities will be able to buy and install zero-emission trucks and equipment that will allow port communities, which are often lower-income communities of color, to breathe easier.
$1 billion in grants for local governments to purchase zero-emission heavy-duty vehicles, such as school buses, transit buses and garbage trucks. This is another “really important” provision, said Johnson. “We want to see our public buses electrified to reduce pollution.”
$1 billion in grants and loans to make affordable housing more energy- and water-efficient and climate-resilient. Qualifying projects include weatherizing buildings and installing heat pumps, home batteries, rooftop solar and low-flow water systems. Given the high number of federally supported housing units, though, that could mean less than $200 for each one.
A bonanza of rebates worth thousands of dollars for low-income families looking to electrify their homes. From Canary Media’s Jeff St. John, here’s a breakdown of what households earning 80 percent or less of area median income could get: “up to $8,000 to cover the full cost of equipment and installation for a heat pump for space heating, up to $1,750 for a heat-pump water heater, up to $840 for an electric stove or electric clothes dryer, and up to $1,600 for insulation, ventilation and sealing. Those that need to upgrade their household electrical system could receive up to $4,000 for an upgraded electrical panel and up to $2,500 for upgraded electrical wiring.”
Sylvia Chi, senior strategist at the Just Solutions Collective, also lauded a provision that could bring wind and solar projects to disadvantaged communities. The bill will offer extended tax credits to developers of clean energy projects, plus a 10 percent bonus for projects sited in low-income communities and another 10 percent for projects on land contaminated with industrial pollution or within “energy communities” that have historically depended on coal, oil or fossil gas.
Chi pointed out another juicy and wonky provision in the bill: Tax credits for clean energy projects will have a “direct-pay” option. Currently, wind and solar tax credits are applied against an organization’s annual tax bill, so companies that owe sizable amounts of tax can most easily access them. Nonprofits and other tax-exempt entities — such as rural electric cooperatives, publicly owned utilities, and state, local and tribal governments — now need to partner with banks or corporations with big tax liabilities in order to take advantage of the tax credits. But that’s an uncertain and often expensive proposition. Under the Inflation Reduction Act, nonprofits could get direct payments for tax credits from the federal Treasury — unlocking far broader potential for the communities that most need clean energy to deploy it.
Smaller environmental justice gems
The bill also has smaller provisions poised to serve environmental justice goals.
For example, the bill will provide a much-needed $281 million to state agencies for air-quality monitoring. “Air monitors are not equitably distributed,” Johnson said. She cited the example of northern Manhattan in New York City, where WE ACT is based: “Four of the five bus depots in the city are in northern Manhattan,” but “we only have one air quality monitor in our community.” This provision “gives us an opportunity to really dig deep and have the data that we need to monitor what’s happening,” she said.
The bill will also provide $697 million to federal agencies to conduct environmental reviews and gather community input for major infrastructure projects, WE ACT estimated, a process required under the National Environmental Policy Act of 1970. These reviews historically have been underfunded, according to Johnson.
When agencies carry out robust impact studies under NEPA, communities are able to make their voices heard about whether a proposed project could expose them to pollutants or tear their social fabric, as well as suggest solutions. “The community-engagement piece is so important and critical,” said Johnson. “You bring government, the private sector and the community together to really come up with the best [approaches] for moving a project forward and preventing harm.”
Word on the street
The success of the bill’s billion-dollar grant programs will now hinge on thoughtful implementation, according to Sneha Ayyagari of the racial and climate equity nonprofit The Greenlining Institute. Government agencies will need to get the word out early and often — for example, through partnering with existing advocacy networks — to engage potentially under-resourced community groups.
“Organizations that…aren’t as familiar with the process or are dealing with the realities of climate injustices might take a bit more time to gather an application,” said Ayyagari, clean energy initiative program manager at Greenlining.
To give community organizations the best chance of success, administrators could assist them with the technical aspects of applying and connect them with other groups to create regional learning networks, according to Ayyagari. A model might be California’s Transformative Climate Communities program, which helps groups develop their project ideas and implement them, she said.
Without these kinds of support strategies, “there is a real risk of perpetuating the status quo,” with “most of that funding going to people who already have the capacity to apply for those grants, like wealthier cities,” said Ayyagari. “We have such a widening racial wealth gap. […] It’s important to see how we can use this funding as a way to really deliver the economic, environmental and health benefits.”
The good and the ugly
For all its environmental justice provisions, advocates have pointed out that the bill is not all roses. Thorns include permitting reform that could expedite fossil fuel projects and a mandate to auction offshore oil and gas drilling leases in step with offshore wind leases, which could threaten coastal communities of Alaska and the Gulf of Mexico. Those compromises “don’t support transitioning our economy in a way that sets all Americans up for environmentally sound, economically vibrant communities,” said Johnson.
Ayyagari shares the sentiment: “We think there’s still significant work that needs to be done to address the long legacy of environmental injustice.”
Still, the bill is “historic,” she said. “We need such climate policy action at the federal level.”
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 “11th-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.
Canary Media’s chart of the week translates crucial data about the clean energy transition into a visual format.
American voters are overwhelmingly supportive of the Inflation Reduction Act, according to a new poll conducted by Data for Progress and Climate Power. You wouldn’t know it from the name, but the bill contains a huge amount of spending for climate protection and clean energy — $369 billion over 10 years. If it passes, it will be by far the biggest and most important climate bill in U.S. history.
On the Catalyst with Shayle Kann podcast this week:
The $369 billion climate and tax bill from Sen. Joe Manchin (D-West Virginia) and Senate Majority Leader Chuck Schumer (D-New York) caught everyone by surprise. Democrats had abandoned their climate legislation last month after Manchin, a must-have vote for Democrats, signaled his opposition to it.
But late last week Manchin and Schumer announced they had revived the deal under a new name: the Inflation Reduction Act of 2022. If passed, it would be the most ambitious climate action in U.S. history.
And now with support from another key swing vote, Sen. Kyrsten Sinema (D-Arizona), the bill is an important step closer to passage.
So what would the bill do?
In this episode, Shayle talks to Princeton professor Jesse Jenkins. Jesse leads the REPEAT Project, which analyzed the effects of the bill in a report released today. Overall, the bill would make clean energy cheaper and build up the capacity of climatetech industries in the U.S. and its allies across multiple sectors of the economy, including power, transportation, heavy industry and buildings.
Shayle and Jesse walk through the key provisions in the proposed legislation and their predicted impacts, including:
- Hundreds of new gigawatts of solar and wind capacity, plus new technology-neutral tax credits to support other technologies such as advanced nuclear.
- Building up a North American supply chain for electric vehicles (EVs).
- Reducing the costs of EVs, sustainable aviation fuels, energy storage, hydrogen and more.
- Increased energy security for medium- and low-income households, from steps such as installing heat pumps and insulation.
Recommended reading from Canary Media:
- Clean energy would get big boost from new climate bill. Just how big?
- Energy storage would win long-sought victory with Inflation Reduction Act
- Climate bill could spur‘market transformation’ in home electrification
- Chart: Most voters support climate bill, including majority of Republicans
- Could the Inflation Reduction Act revive solar manufacturing in the US?
On The Carbon Copy podcast this week:
Just a few weeks ago, the Biden administration’s historic climate package looked like it was on the brink of ruin after Senator Joe Manchin (D-West Virginia) walked away from negotiations for a second time.
But behind the scenes, backdoor negotiations were underway. At the end of last month, Manchin and Senate Majority Leader Chuck Schumer (D-New York) announced they had made a deal — and on Sunday, the Senate passed major climate legislation for the first time in American history.
The Inflation Reduction Act of 2022 has over $360 billion for energy and climate provisions. It’s a historic opportunity to supercharge clean energy and give the country a fighting chance at slashing emissions in time to meet the goals of the Paris Agreement.
So what’s in the bill? And what comes next?
Guest: Katherine Hamilton, chair of 38 North Solutions
The Carbon Copy is a co-production of Post Script Media and Canary Media.
- Canary Media: Inflation Reduction Act: Follow Canary’s coverage
- Canary Media: Clean energy would get big boost from new climate bill. Just how big?
- Canary Media: Climate bill could spur‘market transformation’ in home electrification
- Canary Media: Could the Inflation Reduction Act revive solar manufacturing in the US?
On the Political Climate podcast this week:
The Inflation Reduction Act of 2022 contains an enormous amount of spending for climate protection and clean energy — $369 billion over 10 years — and is expected to put the country on a path to cut greenhouse gas emissions by 40 percent by 2030.
But it’s not all good news for everyone. In order to get the support of Democratic Senators Joe Manchin (West Virginia) and Kyrsten Sinema (Arizona), the final bill made significant cuts to the Democrats’ initial budget reconciliation plan, plus some other compromises.
Political Climate hosts Julia Pyper, Shane Skelton and Brandon Hurlbut discuss how climate and clean energy provisions survived the reconciliation bill roller coaster and the impact of key elements of the Inflation Reduction Act.
Listen and subscribe to Political Climate on Apple Podcasts, Spotify, Stitcher or pretty much wherever you get podcasts! Follow us on Twitter at @Poli_Climate.
Canary Media: Inflation Reduction Act: Follow Canary’s coverage
Scientific American: Nearly $53 Billion in Federal Funding Could Revive the U.S. Computer Chip Industry
Canary Media: Climate bill could spur‘market transformation’ in home electrification
Canary Media: What could the climate bill do for environmental justice?
Don’t miss our live episode of Climavores in New York City on October 20! Sign up here for a night of live audio and networking with top voices in climate journalism.
On the Catalyst with Shayle Kann podcast this week:
Depending on which headlines you read, the Inflation Reduction Act will either hurt U.S. electric vehicle sales by replacing existing tax credits with new, more complicated incentives or spur the buildout of a North American battery supply chain and turbocharge EV sales. So which narrative is accurate?
In this episode, Shayle talks to Sam Jaffe, vice president of battery solutions at E Source, about the key provisions of the Inflation Reduction Act’s EV and battery tax credits. Sam explains how the new law will bolster the North American EV battery supply chain in the long run — but will also create winners and losers along the way.
There’s a $30 billion pot of money for various tax credits and limited time to make use of them. Which companies will get to it first? There are already some early movers making plays.
Sam explains the key provisions:
The EV components tax credit reduces the cost of EVs whose batteries contain materials assembled in the U.S. or its free-trade partner countries. This includes electrodes, electrolyte components and cells.
The critical and strategic minerals tax credit reduces the cost of EVs whose batteries contain minerals mined and processed in the U.S. or its free-trade partner countries. These minerals include lithium, cobalt and rare earth metals, among others.
The 45X advanced manufacturing production credit reduces the cost of making batteries in the U.S.
Certain credits ratchet up the percentage of materials required to qualify over several years. That means that once an EV model qualifies, it will have to maintain eligibility by sourcing increasingly larger shares of its components and minerals from approved countries.
Shayle and Sam also discuss which part of the battery industry will benefit more: the EV battery side or the stationary storage side. And Sam explains why he’s paying attention to the Treasury Department’s forthcoming guidance on the tax credits.
The New York Times: For Electric Vehicle Makers, Winners and Losers in Climate Bill
Canary Media: Private-sector reactions to the Inflation Reduction Act
Canary Media: 6 clean energy companies that are ramping up U.S. manufacturing
Catalyst is a co-production of Post Script Media and Canary Media.