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

In early August, the Senate passed the Inflation Reduction Act of 2022 (IRA). The core value is an intention to reduce burgeoning inflation; however, in addition to adding taxes for large corporations and lowering prescription drug costs, a key feature is energy and climate reform. Though the final bill designates a smaller amount of funding for climate than initially proposed through Build Back Better, the $389 billion set to fund clean energy, 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 emissions up to 44 percent (from 2005 levels) by 2030 (see figure above). Though short of the Biden Administration’s 50 percent target, this federal action, coupled with state and local initiatives, could help us meet that mark. All in all, a big deal for advancing clean energy, and even more importantly–protecting people and the planet from the dangers of climate change. What are the biggest highlights in the bill?

● Extend the Investment Tax Credit (ITC) and Protection Tax Credit (PTC), creating clarity for financing projects:

The ITC provides a 26 percent credit for residential and solar properties, and has been a huge driver for U.S. solar growth. Until recently, the ITC was set to ramp down its percentage and expire in 2024. The ITC and PTC were additionally being phased out for other technologies such as geothermal energy. The IRA extends the ITC for ten years, increasing the rate to up to 30 percent coverage of equipment installed before January 1, 2025, then stepping down to 26 and 22 percent in 2033 and 2034, respectively. The extended ITC would also include standalone energy storage, biogas, microgrids, and interconnection properties. Currently, energy storage must receive greater than 75 percent of its stored energy from solar in order to be eligible for the existing solar federal ITC. By extending the ITC to stand-alone storage, it will allow utilities and developers to optimize energy storage facility locations rather than requiring them to be connected to solar projects.

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

● Establish a federal green bank:

Green banks: 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 U.S., 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. A significant portion–up to $15 billion–would be designated for reducing greenhouse gas (GHG) emissions in historically underserved communities.

● Allocate up to a total $60 billion for environmental justice work:

By now, 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 again are often sited near low-income and communities of color. The remaining billions 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; instate 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.

● Provide overall incentives to help individuals electrify, and reduce their 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:

$60 billion will be set aside to spur U.S. production of clean energy technologies (solar panels, batteries, wind turbines, EVs, etc.).

● Incentivize industrial energy efficiency:

The industrial sector is the third-largest polluter in the U.S. The IRA would create grants and tax credits to help decarbonize and reduce emissions from fossil-heavy industries.

Promise for the Future

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 the environmental justice funding to make the world better for all, this Act will be a game changer for the clean transition and climate action.

Originally posted in partnership with Leyline Renewable Capital.