Potential Energy Tax Incentives Aim to Accelerate Energy Transition

by Greg Matlock

If enacted, the Green Energy Provisions could accelerate the energy transition by incentivizing cleaner, more efficient operations and by encouraging additional investment in alternative energy sources.

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Many legislative proposals have been released this year that, if enacted, could accelerate the energy transition and help companies operate in cleaner, more efficient ways. These proposals have been released at a rapid pace, and many could drastically impact the U.S. energy industry. Most recently, on September 10, 2021, the House Ways and Means Committee released legislative text that included, in part, several energy-related provisions (the “Green Energy Provisions”). If enacted, the Green Energy Provisions could accelerate the energy transition by incentivizing cleaner, more efficient operations and by encouraging additional investment in alternative energy sources.  

The Green Energy Provisions are multi-faceted, focusing on reducing emissions, providing certainty to many renewable energy tax credit provisions and generally boosting investment in alternative energy sources. While significant uncertainty exists as to the likelihood of passage (and, even if enacted, what the exact legislative language would be), it is clear that providing incentives for alternative energy is a priority of the current administration.

The Green Energy Provisions would, among other things, extend and expand the production tax credit (the “PTC”) under Section 45 of the Internal Revenue Code of 1986, as amended (the “Code”), which often applies to wind-related projects (as well as numerous other projects), as well as the investment tax credit (the “ITC”) under Section 48 of the Code for solar and other renewable power generation activities. Additionally, the Green Energy Provisions would provide various support (through new or modified tax credits) for nuclear generation, electric transmission property, energy-efficient construction, zero-emissions facilities, electric vehicles and energy storage. Further, the Green Energy Provisions would expand the list of qualifying income categories for publicly traded partnerships to include a wide variety of alternative energy income generating activities.

Of particular relevance to the development of the carbon capture use and sequestration (“CCUS”) market—an energy transition area that has generated significant discussion and that can leverage the assets and expertise of traditional energy companies—the Green Energy Provisions contain a number of modifications. First, the tax credit under Section 45Q of the Code (the provision of the Code that directly addresses CCUS) would be extended to facilities that begin construction before the end of 2031 and would reduce the minimum capture thresholds for certain carbon capture facilities to receive the tax credit (and would also tie the threshold to certain percentages of carbon oxides that would otherwise be released into the atmosphere by such facilities). Also, the Green Energy Provisions would significantly increase the Section 45Q tax credit for direct air capture facilities (e.g., to either $180 or $130 per metric ton of capture carbon oxides, depending on the use of such oxides). And for projects other than direct air capture facilities, the tax credit would be immediately increased to either $50 per metric ton (for captured carbon oxides that are sequestered) or $30 per metric ton (for captured carbon oxides used as a tertiary injectant or otherwise used in an approved manner). Finally, the Section 45Q carbon capture tax credit would be modified to be subject to prevailing wage and apprenticeship requirements.

The Green Energy Provisions also seek to incentivize domestic job creation by sharply limiting certain tax credits for projects that do not satisfy prevailing wage and apprenticeship requirements and by enhancing credits for certain projects constructed in low-income areas (i.e., bonus credits for solar projects in low-income communities) or that meet minimum standards for domestic content. Specifically, the PTC and ITC tax credits would be subject to an 80% reduction if the prevailing wage and apprenticeship requirements are not satisfied, and these requirements would also apply to the enhanced Section 45Q CCUS tax credit and the new tax credit for electric transmission property. These limitations result in a two-tiered tax credit system (one rate for those projects or taxpayers that meet the prevailing wage and apprenticeship requirements or satisfy certain other exceptions and a lower tax credit rate for those that do not).

Importantly, the Green Energy Provisions contain a “direct pay” option for certain energy-related tax credits (which would include the PTC, ITC and Section 45Q tax credits), subject to certain phasedowns and limitations. Under a direct pay regime, taxpayers with little to no U.S. federal income tax liability could still take advantage of a tax credit (which would accrue to such taxpayers through a refund mechanism). A direct pay option, which would be effective for property placed in service after December 31, 2021, could provide for additional funding (i.e., tax-exempt entities, state and local governments, etc.) and could intensify the development of the alternative energy market.

Today’s energy source environment will be significantly different than the energy landscape of the future. Although traditional hydrocarbon-based energy sources will continue to be highly relevant and essential, reducing carbon emissions and improving the climate impact of operations are expected to be constant attributes of the energy transition movement. Traditional energy producers, as well as alternative energy companies and investors, will continue to play an oversized role in meeting and exceeding long-term, net-zero goals. The Green Energy Provisions could assist in reimagining the energy industry and spurring a new wave of investment capital into the energy space. Taxpayers ought to carefully monitor the Green Energy Provisions and evaluate the impact that the proposals could have on investments, operations and strategic decisions.

Greg Matlock is the global co-leader of the Tax-Energy group at Mayer Brown and member of the firm’s Tax Transactions & Consulting practice.