The Inflation Reduction Act: how the ‘historic’ bill will affect US energy investment

Congress is the closest it has ever been to passing massive climate reform. The bill is packed with tax credits, grants and even a new green bank – so what could this mean for US infrastructure?

President Biden’s Build Back Better agenda has been assumed dead in the water since it was introduced to sit on the Senate floor in November 2021. However, in a surprise turn last week, elements of the plan have been drudged back up, albeit with a new face and name.

The Inflation Reduction Act of 2022, sponsored by Chuck Schumer and Joe Manchin, is expected to be passed by the upper chamber this week. With a Democratic majority in the House and a supportive president, it is likely to become law in the coming months. So, what does the overhaul mean for infrastructure investors?

Some $385 billion of the bill’s $485 billion in proposed spending is focused on climate and energy – the most ambitious effort by the US government to tackle the climate crisis to date, with Democrats stating it will reduce US emissions by about 40 percent by 2030. Most of this money will be concentrated in production tax credits and investment tax credits for various sectors of the renewables industry.

But there are also some wildcards present in the bill. Some $27 billion will go towards the creation of a Greenhouse Gas Reduction Fund, to be utilised by the federal government to fund projects that seek to avoid greenhouse gas emissions. The fund, to be invested over 10 years, will be used “for the purposes of providing grants, loans, or other forms of financial assistance, as well as technical assistance, to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies”, according to the bill.

A credit to itself

While the tax credits are largely an extension of what has previously existed, they’re poised to usher in big changes in the world of renewables. “This bill is historic,” Anne Levin-Nussbaum, a senior tax lawyer at Mintz, told Infrastructure Investor. “In terms of benefiting the clean energy sector, it’s hard to say I have any qualms about it.”

As Levin-Nussbaum noted, the bill will bring benefits to the solar industry, which has been hit hard by the recent supply chain crisis, and the bill contains funds to carry out Biden’s recent use of the Defense Production Act.

“It will be extremely helpful [to the solar industry],” she said, adding that the bill contains, “extensions of time [for the production tax credits and investment tax credits], which will aid supply chain issues… and offer new opportunities for investments in the facilities that produce renewables components”.

Other market opportunities may open up in response to the bill. “Until now, the tax equity market has been limited to a narrow group of investors. I hope these changes will bring opportunities for new tax equity to enter the market,” Levin-Nussbaum said.

She added: “The opportunities for new entrance into the market are that it may mean there will be smaller types of projects. We will also have more inventory, which has been an issue for new tax equity.”

While the bill extends the renewables tax credits into the early-mid-2030s, Levin-Nussbaum called for more certainty, with their futures seemingly always under threat.

“I’d like to see these tax credits be permanent,” she said. “It would bring a lot of security to investments. So, there’s still more that can be done.”

Building back… worse?

One tax credit that will receive a massive boost from the bill is 45Q, which currently allots direct air capture facilities up to $50 per tonne of carbon removed from the atmosphere. It is also the only federal statute aiming to boost demand for a budding carbon capture and sequestration industry. The bill seeks to boost the credit and expand the number of qualifying facilities, despite protests from progressives and environmentalist groups, arguing that such moves would disincentivise companies from lowering their emissions in the first place.

Opinions on carbon capture and sequestration aside, 45Q’s critics are correct in assuming that the Inflation Reduction Act will aid the development of the CCS industry. As Levin-Nussbaum put it: “The benefits [for the CCS industry] are huge. I really expect to see a lot more investment. There’s been interest in transactions involving tax equity investments in projects that have carbon sequestration capabilities.”

She explained: “[45Q] is extended through 2033. So now there’s a lot of time for development and improvement in the technology to get new investors involved, to develop structures that work. There’s also a lower minimum requirement for the level of carbon that has to be captured in order for the facility to qualify for the credit.”

The Senate aims to pass the Inflation Reduction Act through budget reconciliation sometime this week, though the support of Arizona’s Senator Sinema has not yet been publicly secured. Therefore, elements of the bill – and the tax credits that come with it – are subject to change.