Inflation Reduction Act of 2022: What Does It Mean for Clean Energy?

In August, both the U.S. Senate and House of Representatives passed the Inflation Reduction Act of 2022 (IRA) - a pared-back version of the Build Back Better Bill, the tenets of which have been sitting in limbo for nearly a year and a half. President Joe Biden signed this bill into law on August 16, 2022. The Inflation Reduction Act's core focus is to reduce inflation, but in addition to that goal, a key feature is addressing energy and climate change. Though the final version designates a smaller amount of funding for climate than initially proposed in the Build Back Better Bill, the $389 billion investment in clean energy to reduce pollution, ramp up battery and solar manufacturing, and incentivize electric vehicle (EV) adoption presents the largest climate investment in U.S. history.

With this funding, it is estimated that we could lower national greenhouse gas (GHG) emissions up to 44 percent from 2005 levels by 2030. Though short of the Biden Administration's 50 percent target, this federal action could potentially be paired with state and local initiatives to help us meet that mark. All in all, the IRA is a big deal for advancing clean energy - and even more importantly, protecting people and the planet from the dangers of climate change through the following actions:

Extension of the Solar Investment Tax Credit (ITC) and Production Tax Credit (PTC)

The ITC provides a 26 percent credit for residential and commercial solar properties, and it's been a pivotal driver of U.S. solar capacity growth for more than a decade. The ITC was originally set to ramp down and expire in 2024. The PTC was also being phased out for other technologies, such as wind and geothermal energy. The IRA extends the ITC for 10 years, increasing the rate to up to 30 percent coverage of equipment installed before Jan. 1, 2025, then stepping down to 26 and 22 percent in 2033 and 2034, respectively. The extended ITC will also include tax credits for stand-alone energy storage, biogas, microgrids, and interconnection properties.

The PTC has been extended for eligible wind, geothermal, hydropower projects, and more. The IRA then adds a new incentive called the clean electricity production tax credit for post-2024 zero-emission electricity projects not included under the ITC and PTC.

By extending the tax credits and covering all clean energy technologies, the IRA secures greater financial certainty and better project economics for project developers, investors, and owners.

Allocation of Grants

States and electric utilities will receive funding to move to clean electricity, as well as to utilize clean fuels and accelerate access to clean transportation.

Establishment of a Federal Green Bank

Last year, we published an article discussing green banks, which are public, quasi-public, or nonprofit entities that facilitate private investment into low-carbon, climate-resilient infrastructure. Though there are currently seven state- and county-level green banks in the United States, the IRA would set aside $27 billion to establish a national green bank. This funding would provide low-cost financing, grants, and loans for clean energy and other projects. Up to $15 billion will be designated for reducing GHG emissions in historically underserved communities.

Allocation of Up to $60 Billion for Environmental Justice

It is well known that low-income areas and communities of color are disproportionately impacted by pollution and climate harms. The funding proposed in the IRA makes significant strides toward protecting disadvantaged communities. In addition to the green bank carveout, an additional $11 million is slated to clean up toxic pollution at Superfund sites, which are often sited near low-income areas and communities of color. The remaining billions of dollars will target these areas and provide grants for community-led initiatives in clean energy and climate resiliency; fund neighborhood reconnection and community access equity where communities are infrastructurally divided; establish rebates for home electrification; provide grants and loans for climate resilient, energy- and water-efficient, affordable housing; create grants for electrifying local government fleets; and tackle air pollution at ports.

Incentives for Reduction in an Individual's Carbon Footprint

Individuals may receive up-front incentives, rebates, and tax credits to buy EVs, switch to electric appliances, and install rooftop solar on their homes.

Incentivize and Finance Clean Energy Manufacturing and Industrial Energy Efficiency

$60 billion will be set aside to spur U.S. production of clean energy technologies (e.g., solar panels, batteries, wind turbines, EVs). The industrial sector is the third-largest polluter in the United States. The IRA would create grants and tax credits to help decarbonize and reduce emissions from fossil-heavy industries.

Fee for Methane Emissions

Though a less prevalent GHG than carbon dioxide, methane lingers longer in the atmosphere and is more than 28 times more potent when it comes to warming our planet. The IRA will support better monitoring and methane-reduction efforts at the federal level and levy fees for methane waste emissions above a certain threshold.

Future Outlook

Leyline is very excited for the progress the IRA will bring to the world of renewable energy. From the tax credits, which will make financing much more predictable and stable, to the variety of investments to level the playing field for clean technologies, to environmental justice funding to make the world better for all - we are optimistic that this act will be a game changer for the clean transition and climate action.

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