The House-Approved Build Back Better Act: Clean Energy & Infrastructure Provisions
On November 19th, the House approved the Build Back Better Act (BBBA), H.R. 5376, by a vote of 220-213 on party lines. The $1.7 trillion bill includes a package of targeted individual tax relief, clean energy incentives, and increased spending on healthcare, education, childcare, and other programs. The legislation is currently being considered in the Senate, where changes are expected to be made to many of the bill’s provisions.
In a True Insight published earlier this month, we summarized the status and timeline for the BBBA and provisions in the bill affecting individuals. We also published this True Insight that provides details of the House-approved version of the BBBA with respect to business and corporate tax issues and international tax issues. In this True Insight, we will provide details on the clean energy tax incentives included in the BBBA.
Green Energy Provisions
The BBBA includes a package of renewable, clean energy and energy-efficiency tax incentive proposals. The House-approved version of the BBBA retains nearly all of the clean energy incentives (with modifications) that were included in the Ways & Means Committee-approved bill, which was approved in September, but some new credits were also included. With the changes, the overall cost of the energy proposals increased by nearly $52 billion over the 10-year period.
The changes were a result of removing the proposed $150 billion in spending for the Clean Energy Payment Program (CEPP) from the earlier version of the material from the House Energy and Commerce Committee. The drafters replaced this program with enhancements to the clean energy tax incentives proposals.
Earlier this year, both the House and Senate produced their own version of green energy legislation with different approaches. A previous True Insight includes details about these bills. The BBBA combines these two approaches by providing that the existing technology incentives would be extended and enhanced for the first five years (through 2026) and serve as a transition to the framework envisioned in the Senate bill, which would provide technology-neutral production, investment and energy-efficient tax incentives after 2026.
The BBBA also extends and enhances the carbon sequestration tax credit (Section 45Q) and creates a new tax credit for hydrogen production. It adds a “direct pay” option for certain tax credits and expands the definition of “qualifying income” for purposes of the publicly traded partnership rules to include income derived from various renewable energy activities.
Two-Tiered Incentive Structure
The green energy section of the BBBA structures some of the tax credits in two tiers: a base rate and, if certain requirements are satisfied, a higher rate that is five times the base rate. The higher rate generally applies only to those projects which meet the prevailing wage and apprenticeship requirements during applicable periods or satisfy other exceptions. Two narrow exemptions (including for small projects) from the prevailing wage requirements are allowed, but otherwise, the base rate applies to all other projects.
Prevailing Wage and Apprenticeship Requirements
Under the “prevailing wage requirements,” the taxpayer must ensure that laborers and mechanics employed by contractors and subcontractors working on the construction of the facility are paid the prevailing wages in the locality as determined by the Secretary of Labor. Under the “apprenticeship requirements,” the taxpayer must ensure that no fewer than the applicable percentage (10% for projects which begin construction in 2022, 12.5% for 2023, and 15% thereafter) of total labor hours are performed by qualified apprentices. These requirements must be met for the entirety of the 10-year credit period.
Domestic Content Requirements
A taxpayer may claim an increased credit with respect to energy property placed in service after December 31, 2021, if the property meets the domestic content requirements. The credit increase for the Production Tax Credit (PTC) is 10% of the amount otherwise allowable. The credit increase for the Investment Tax Credit (ITC) is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements).
The domestic content requirement would stipulate that, with respect to a project for which a tax credit is claimed, the taxpayer ensure that any steel, iron or manufactured product that is part of the project at the time of completion was produced in the United States. Steel and iron that are not part of a manufactured product must be 100% produced in the United States. Whether a product is manufactured in the United States is determined by reference to the percentage of the total cost of components that are mined, produced or manufactured in the United States.
Direct Pay Election
The BBBA would make a direct pay election available for several credits. With this election, a taxpayer treats tax credits generated by the relevant project as equivalent to a payment of tax on the taxpayer’s tax return when filed. To the extent the return shows payment of tax in excess of the amount due, the taxpayer will be entitled to a refund of the excess.
The direct pay option is available for these credits:
- Section 48 ITC
- Section 45 PTC
- Section 45BB Clean Electricity PTC
- Section 48F Clean Electricity ITC
- Section 45Q Credit
- Section 30C Credit for Alternative Fuel Vehicle Refueling Property Credit
- Section 48C Advanced Energy Project Credit
- Section 45W Zero-Emission Nuclear Power Production Credit
- Section 45X Clean Hydrogen PTC
- Section 48D Transmission Property Credit
- Section 45AA Advanced Manufacturing Production Credit
- Section 45CC Clean Fuel Production Credit
Taxpayers who make a direct payment election with respect to Sections 45, 45Q, 45X, or 45BB must make a one-time, irrevocable election to have this section apply during the taxable year the facility is placed in service. Generally, in order to be eligible for a direct payment equal to 100% of the otherwise available credit with respect to the Section 45 PTC, the 48 ITC, and Section 48E transmission property, the domestic content requirements must be met.
The direct pay provision applies to projects placed in service after 2021. Projects can make elections starting 270 days after the date of enactment. Rather than opting to carry forward credits to years when their credits can offset their tax liability, taxpayers could request a refund for the deemed payment of tax upon completion of construction.
Extension of the Section 45 Production Tax Credit
Extension of the PTC and Reinstatement of the Solar PTC: The BBBA would extend the PTC to projects beginning construction before January 1, 2027, and placed in service after 2021. The PTC for solar projects expired in 2006, but would be reinstated for projects beginning construction before January 1, 2027. The PTC for wind energy would be increased to the full applicable credit rate through the end of 2026.
After 2026, the incentive would transition to a technology-neutral PTC under Section 45BB as discussed below.
The PTC for the following facilities would be extended through the end of 2026:
- Closed loop and open loop biomass
- Landfill gas (municipal solid waste)
- Trash (municipal solid waste)
- Qualified hydropower
- Maine and hydrokinetic renewable energy facilities
- Geothermal energy
Credit Structure: The full PTC, which is 2.5 cents/kWh of electricity produced, would be available if the prevailing wage and apprenticeship requirements are met for the entire 10-year credit period. Otherwise, the base rate of 0.5 cents/kWh of electricity produced would apply.
Extension of the Section 48 Investment Tax Credit
Extension of the ITC: The BBBA would extend the ITC to projects beginning construction before January 1, 2027, for projects placed in service after 2021. After 2026, the incentive transitions to a technology-neutral ITC under Section 48F, which is discussed below.
Credit Structure: For most ITC eligible property, including solar, storage, geothermal, fuel cell, CHP, offshore wind, small wind, microturbine, biogas, and microgrid controllers, a 30% ITC would be available if prevailing wage and apprenticeship requirements are met (and satisfied through the five-year anniversary of the date the project is placed in service). If the requirements are not met, the ITC would be limited to 6%.
Expanded ITC Eligible Property Definition: The definition of ITC eligible property is expanded to include energy storage technology, linear generators, dynamic glass, interconnection property, qualified biogas property, and microgrid controllers, and for projects with a maximum net output of less than 5MW interconnection property.
Bonus ITC: Taxpayers would be eligible for an additional 10% ITC if certain domestic content requirements are met or if the energy property is located in an “energy community” (i.e., historically coal communities but not oil and gas) or a low-income community.
New ITC for transmission property: A new ITC under Section 48D is available for certain transmission property beginning construction after December 31, 2021, and placed in service before January 1, 2032. The ITC is 30% if prevailing wage and apprenticeship requirements are met, and 6% if they are not met.
Qualifying electric transmission property includes transmission lines capable of transmitting electricity at a voltage of not less than 275 kilovolts, or that are superconducting lines, in either case with capacity of not less than 500 megawatts, as well as certain related transmission property.
New Technology-Neutral Clean Electricity Tax Credits
The BBBA creates an emissions-based incentive that would be neutral and flexible between clean electricity technologies. Taxpayers could choose between a PTC under Section 45BB or an ITC under Section 48F, based on the carbon emissions of the electricity generated. Any power facility of any technology could qualify for these credits if the facility’s carbon emissions are at or below zero.
These credits are based on the approach taken in the Clean Energy for America Act, which was introduced earlier in 2021 by SFC Chair Wyden (D-OR). That approach involves consolidating many of the existing energy tax credits into more comprehensive “technology neutral” incentives for clean energy, clean transportation fuels, and building energy efficiency.
Section 45BB Clean Electricity Production Tax Credit
New Credit: The technology-neutral PTC under new Section 45BB would be available for the production of clean electricity produced at a qualified facility beginning construction after December 31, 2026, for which the greenhouse gas emissions rate is not greater than zero, and which is sold to an unrelated person or sold, consumed, or stored by the taxpayer. A qualified facility does not include any facility for which a 45Q credit, a PTC, or an ITC is allowed.
Amount of the PTC: The credit rate would be 2.5 cents/kWh of electricity produced if prevailing wage and apprenticeship requirements are met and 0.5 cents/kWh of electricity produced if they are not met. The PTC would be available for ten years following the date the facility was placed in service.
Bonus PTC: Taxpayers would be eligible for an additional 10% PTC if the domestic content requirements are met or if the qualified facility is located in an “energy community.”
Phaseout of the PTC: The PTC would phaseout the later of 2031 or when emission targets are achieved, which means the incentives will be phased out over three years when the electric power sector emits 75% less carbon than 2021 levels. Facilities would be able to claim a credit at 100% value in the first year, then 75%, then 50%, and then 0%.
Section 48F Clean Electricity Investment Tax Credit
New credit: The technology-neutral ITC under Section 48F would be available for qualified investment in an electric generating facility or any energy storage property beginning construction after December 31, 2026, and for which the greenhouse gas emissions rate is not greater than zero. The definition of “energy storage property” is the same as that for the Section 48 ITC. Recapture rules apply in the event the greenhouse gas emissions rate for a qualified facility is greater than 10 grams of CO2e (carbon dioxide equivalent) per kWh. A qualified facility does not include any facility for which a 45Q Credit, a PTC, an ITC, a 45J credit, a 45BB credit, a 48A credit, or a 48D credit is allowed.
Amount of the ITC: The credit rate is 30% if prevailing wage and apprenticeship requirements are met, and, if not, then the credit rate is 6%.
Bonus ITC: Taxpayers would be eligible for an additional 10% ITC if the domestic content requirements are met or if the qualified facility is located in an “energy community.”
Phaseout of the ITC: The clean electricity ITC would begin to phaseout for qualified facilities beginning construction in the first calendar year after the later of (1) the calendar year in which the Secretary determines that the annual greenhouse gas emissions from the production of electricity in the US are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the US for calendar year 2021 and (2) 2031.
New Technology-Neutral Clean Fuel PTC
The BBBA creates a new technology-neutral incentive for the domestic production of clean fuels with the level of the incentive based on the lifecycle carbon emissions of a given fuel. Lifecycle emissions take into account the “well to wheel” emissions profile, from production of the feedstock for the fuel through its use in a vehicle. Fuels will qualify for the credit if the fuel’s lifecycle emissions are at least 25% less than the current nationwide average. New Section 45CC contains the rules for this new credit.
Zero emission fuels would qualify for a base incentive of $0.20 per gallon or gallon equivalent. Sustainable aviation fuel that meets certain ASTM standards and is not derived from palm oil would qualify for a base incentive of $0.35 per gallon or gallon equivalent. Qualifying production is limited to production in the US of fuel that is used or sold.
The base incentive amounts are increased to the extent a fuel’s lifecycle emissions are below zero and reduced to the extent they are above zero, phasing out ratably between zero and the baseline emissions rate. Between the date of enactment of the BBBA and 2030, qualifying fuels would have to become increasingly cleaner in order to qualify for the credit.
The credits will phaseout the later of 2031 or when emissions targets are achieved. Thus, the incentives would be phased out over three years when the transportation sector emits 75% less carbon than 2021 levels. Facilities would be able to claim a credit of 100% in the first year, then 75%, 50%, and finally 0%.
New Advanced Manufacturing ITC and PTC
The BBBA creates a new ITC of up to 25% for advanced manufacturing facilities, and an advanced manufacturing PTC for eligible components. These new credits are included in the energy title of the bill despite the fact that they are industry-specific credits that are not connected to energy results.
The credit rate for the ITC would be 5% with an enhanced ITC of 25% for taxpayers meeting the prevailing wage and apprenticeship requirements. The ITC would be available for property for the manufacturing of semiconductors and semiconductor tooling equipment, including buildings and equipment that are integral to such manufacturing, for construction beginning before January 1, 2026.
The PTC would be available for each eligible component that is produced and sold. Eligible components include solar polysilicon, wafers, cells, and modules, as well as wind blades, nacelles, towers, and offshore foundations. The amount of the PTC allowed for eligible components is increased by 10% if the final assembly of the components is at a facility in the US that operates under a union-negotiated collective bargaining agreement.
The PTC is available for components produced and sold before January 1, 2027. For components sold after that date, the PTC is reduced by 25% each year until it expires.
Extension of the Section 45Q Carbon Capture Credit (45Q Credit)
Extension of the 45Q Credit for 6 years: The BBBA would extend the 45Q Credit to projects beginning construction before January 1, 2032 (rather than the current law expiration date of December 31, 2025).
Lower carbon capture requirements: Most facilities would be eligible for the 45Q Credit if they capture at least 12,500 metric tons of qualified carbon oxide during the taxable year. Electric generating facilities have a higher threshold for capture, and a direct air capture facility has less stringent requirements.
Credit amount: If the prevailing wage and apprenticeship requirements are met, the 45Q Credit amounts are increased to $85/metric ton for qualified carbon oxide disposed of by the taxpayer in secure geological storage and $60/metric ton for qualified carbon oxide used by the taxpayer as a tertiary injectant and disposed of in a qualified enhanced oil or natural gas recovery project. If the new requirements are not met, the credit amount is $17/metric ton for secure geological storage and $12/metric ton for use as a tertiary injectant.
Direct air capture facilities beginning construction after December 31, 2021, which capture at least 1000 metric tons of qualified carbon oxide in a year would qualify for an even higher 45Q Credit.
Effective Date: These amendments to Section 45Q would only apply to facilities or equipment where construction begins after December 31, 2021.
New Section 45X Clean Hydrogen Production Tax Credit
New Credit: The BBBA creates a new ten-year PTC under new Section 45X that would be available for the production of clean hydrogen produced after December 31, 2021, by a taxpayer at a qualified facility beginning construction by December 31, 2028. A taxpayer cannot benefit from both the clean hydrogen PTC and the 45Q Credit, but is able to take both the PTC or ITC and the 45X clean hydrogen PTC.
Election of ITC-in-lieu of PTC: A taxpayer may elect to have the qualified clean hydrogen facility treated as energy property eligible for the ITC but would not then be eligible for the Section 45X credit.
Amount of the Credit: If prevailing wage and apprenticeship requirements are met, the credit rate is $3/kilogram, multiplied by an applicable percentage, which is 100% if the lifecycle greenhouse gas emissions rate is less than 0.45 kilograms of CO2e (carbon dioxide equivalent) per kilogram of hydrogen. If the requirements are not met, the credit rate is $0.60/kilogram.
New Section 45W Zero-Emission Nuclear Power Production Tax Credit
The BBBA creates a new PTC under Section 45W for the production of electricity from a nuclear facility (other than an advanced nuclear power facility under Section 45J). The provision includes a base credit rate of 0.3 cents/kilowatt hour and a bonus credit rate of 1.5 cents/kilowatt hour for electricity produced by the taxpayer and sold to an unrelated person during the taxable year but the credit is reduced as the sale price of such electricity increases. This provision terminates on December 31, 2027.
Revision & Expansion of the Section 48C Advanced Energy Project Credit Revision and Expansion
The BBBA would revive the Section 48C qualified advanced energy property credit at a base rate of 6% and a bonus rate of 30% of the basis of energy property, which allows Treasury to allocate an additional $5 billion in credits for each year from 2022 through 2023 and $1.875 billion for each year from 2024 through 2031. It reserves $800 million in credits for each year from 2022 through 2023 and $300 million in credits for each year from 2024 through 2031 for projects in automotive communities, as well as $800 million for each year from 2022 through 2023 and $300 million for each year from 2024 through 2031 for projects in energy communities.
Projects would receive a base credit rate of 6% of qualified investments in qualified advanced energy projects. To receive a bonus rate of 30%, taxpayers must satisfy prevailing wage and apprenticeship requirements. The Secretary of the Treasury would determine allocations to projects each year with a requirement that property is placed in service within four years of the date of allocation.
Extension of the Renewable Fuels Credits
The BBBA includes an extension through 2026 of:
- The income and excise tax credits for biodiesel and biodiesel mixtures at $1.00 per gallon;
- The $0.10 per gallon small agri-biodiesel producer credit;
- The $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures;
- The second generation biofuel income tax credit.
Greening the Fleet and Alternative Vehicles
The BBBA creates several new incentives including:
- New refundable tax credit for individuals for new qualified plug-in electric drive vehicles
- New refundable tax credit for previously owned qualified plug-in electric drive motor vehicles
- New credit for qualified commercial electric vehicles
- Extension of the credit for purchases of qualified-fuel-cell motor vehicles
- Extension of the alternative fuel vehicle refueling property credit and the zero-emissions charging infrastructure credit
- Reinstatement and expansion of the employer-provided fringe benefits for bicycle commuting
- New credit for certain new electric bicycles
Section 7704 Green Energy Publicly Traded Partnerships
The BBBA would expand the definition of “qualifying income” for publicly traded partnerships from certain income derived from minerals and natural resources to include certain income derived from green energy. Such income includes (1) income from the generation of energy eligible for the PTC, (2) income from the operation of energy property eligible for the ITC, (3) income from certain activities related to renewable fuels, and (4) income from facilities eligible for the 45Q credit.
With the possibility that this legislation will be enacted in the near future, businesses are well advised to monitor reports on the negotiations between Congress and Treasury related to these proposals.
If you have questions about any of the information in this True Insight, please contact a member of your TPC engagement team.