Will Clean Renewable Energy Tax Proposals be Enacted by Congress in 2021?
The Biden Administration is pushing forward with a $3.5 trillion plan to provide significant initiatives intended to reform and expand current law tax incentives and create new energy tax incentives that are designed to encourage companies to invest in clean renewable energy solutions and source energy from clean renewable sources. As the Biden Administration looks to pull away from the dependence on fossil fuels, it has made energy a primary focus, and the White House has set an aggressive goal to reduce emissions by 50% by 2030 against a 2005 baseline as part of the plan set forth in accelerating decarbonization of the US economy and sourcing energy from clean renewable sources.
The Senate Finance Committee (SFC) has approved energy tax legislation in the Clean Energy for America Act (CEAA) sponsored by Chair Wyden (D-OR) that is intended to promote technology-neutral policies with incentives based on defined metrics for emissions reductions and climate outcomes. Two other senior members of the SFC have also released a bipartisan discussion draft with a proposed Energy Innovation Tax Credit, which aims to simplify the current tax incentives structure and provide a technology-inclusive platform via a flexible Investment Tax Credit (ITC) or Production Tax Credit (PTC), designed to promote innovation across a range of clean energy technologies, including generation, storage, carbon capture, and hydrogen production.
This True Alert will detail the Biden and SFC initiatives designed to support and encourage investment in clean renewable “green” energy and will review the prospects for enactment of these policies in 2021. If enacted, these proposals could have broad economic impacts on many industries, primarily the fossil fuels business. While some businesses will benefit from new incentives, others will see increased taxes due to repeal of items like credits and deductions currently allowed. Businesses are advised to monitor developments in this area as Congress works to advance the $1.2 trillion infrastructure legislation and the proposed $3.5 trillion budget reconciliation bill that may include many of these policies.
- The SFC Clean Energy for America Act includes proposals to reduce emissions in the areas of clean renewable electricity, clean renewable transportation, and energy efficiency and conservation.
- The following current law renewable and alternative energy credits/deductions would be extended and, in some cases, modified by the Biden Administration proposals:
- Renewable electricity production credit
- Renewable energy investment credit
- Credit for qualifying advanced energy manufacturing
- Electric vehicle charging stations credit
- Construction of new energy-efficient homes
- Energy-efficient commercial buildings deduction
- Carbon oxide sequestration credit
- Nonbusiness energy property credit
- Residential energy-efficient credit
- The following new energy incentives are proposed by the Biden Administration:
- Credit for investment in electricity transmission infrastructure
- Credit for electricity generation from existing nuclear power facilities
- Business tax credit for new medium- and heavy-duty zero emission vehicles
- Credit for production of sustainable aviation fuel
- Credit for low-carbon hydrogen production
- Mechanical insulation labor costs credit
- Several current-law tax incentives that benefit fossil fuel producers would be repealed by both the SFC CEAA and the Biden Administration proposals.
- The Superfund excise taxes would be reinstated and increased under the Biden Plan.
- Under the Biden Administration proposals, the following credits would have a direct pay option, thereby applied as a cash payment of tax; providing more flexibility to developers in financing eligible projects:
- Renewable electricity production tax credit
- Investment tax credit for certain renewable energy property
- Credit for electricity transmission investments
- Allocated credit for electricity generation from existing nuclear power facilities
- Credits for qualifying advanced energy manufacturing
- Credits for heavy- and medium-duty zero-emissions vehicles
- Production tax credit for low-carbon hydrogen
- Carbon oxide sequestration credit
- Vehicle charging station credit
What is the Path Forward for Reaching a Consensus on and Advancing Clean Energy Priorities?
The Biden Administration has released an explanation of its proposals for incentivizing clean energy, which were first highlighted in the release of the American Jobs Plan and the Made in America Tax Plan. The Senate Finance Committee has approved the Clean Energy for America Act (“CEAA”), which outlines a plan that would reset the current law regime for incentivizing clean energy.
Both approaches represent committed support for green energy tax initiatives, but reflect two different approaches for reaching their goals. The Administration proposals would extend and enhance current law tax credits, while the SFC legislation would adopt several new technology-neutral green energy tax incentives.
The SFC bill would replace all the tax credits for specific energy types with a technology-neutral tax incentive that would benefit low emitters. It would create an emissions-based incentive that is applicable to a broad variety of clean energy technologies, for which taxpayers can choose between the PTC or the ITC that will be provided based on the ratio of the carbon emissions generated over the amount of electricity generated. Unlike the existing PTC and ITC requirements or the Administration proposals, the Senate PTC/ITC benefits would be available to any qualifying power facility of any technology (e.g., wind, solar, power and heating systems, qualifying grid improvements, stand-alone storage facilities, etc.) if the facility is carbon neutral, which means that carbon emissions are at or below zero.
In light of the unanimous opposition from Republicans in the SFC to the Wyden legislation, it may be challenging to get agreement for its inclusion in the bipartisan infrastructure bill. The prospects for these proposals would then appear to be more promising in the Democratic budget reconciliation legislation, but the cost of the CEAA of $260 billion over 10 years could be an issue.
There are two potential vehicles for clean energy proposals that will potentially advance in Congress before the end of the year – the bipartisan infrastructure package and the budget reconciliation bill, that is intended to include proposals from the Biden Administration American Families Plan, and those proposals from the American Jobs Plan that are not included in the infrastructure bill.
The Senate Budget Committee has announced an agreement among Democrats on the parameters of a budget plan that would cover the budget reconciliation legislation. A summary of that agreement indicates that it includes tax credits for clean energy and electric vehicles as well as a “polluter import fee.” The plan reportedly also includes a clean-energy standard that could require utilities to generate power from carbon-free sources, the creation of a civilian climate corps, and a clean energy accelerator to fund green-energy projects. The summary released by a committee representative says, “The proposed FY 2022 Budget Resolution meets the president’s climate change goals of 80% clean electricity and 50% economy-wide carbon emissions by 2030, while advancing environmental justice and American manufacturing.”
Senate Finance Committee – Clean Energy for America Act
On May 26, 2021, SFC Democrats approved by a vote of 14-14 along party lines, the Clean Energy for America Act (“CEAA”), which is legislation that was proposed by Chair Wyden (D-OR). The bill would consolidate over 40 current-law energy-related tax provisions into a small group of “technology-neutral” incentives, while repealing several tax provisions that benefit fossil fuel producers. The Joint Committee on Taxation, which issued a technical description of the bill, (JCX-31-21/June 17, 2021) estimated the cost of the bill to be $260 billion over ten years.
The legislation provides tax credits for electricity production and investments, incentives for transportation, including electric cars and clean fuels, and tax breaks for energy efficient homes and buildings.
SFC Ranking Republican Crapo (R-ID) expressed his preference for a bipartisan discussion draft that he had released in the spring with SFC Democratic member Sheldon Whitehouse (D-RI) that would establish an “Energy Sector Innovation Credit” (ESIC) available as either a 40% ITC or a 60% PTC for “low market penetration” technologies across a broad range of energy technologies, including generation, storage, carbon capture, and hydrogen production. As a technology matures in the marketplace, the ESIC would phase out for that specific energy source. Senator Crapo stated that he agrees on the need to streamline energy tax incentives and the benefits of a technology-neutral system, but does not agree with taxpayer support of cost-competitive technologies.
Some SFC Republicans also opposed the repeal of tax incentives that benefit the fossil fuel industry.
Fossil Fuel Incentives Repealed
The CEAA would repeal several current-law tax incentives that benefit fossil fuel producers including (but not limited to):
- Expensing of intangible drilling costs
- Rules allowing for “percentage depletion”
- Deduction for tertiary injectants
- Amortization of geophysical and geological costs
- Credits for marginal oil wells and advanced coal projects
- Amortization of G&G expenses
- Enhanced oil recovery credit
The bill would also modify the foreign tax credit rules applicable to “dual-capacity” taxpayers; the foreign base company oil-related income rules; and the treatment of foreign oil and gas extraction income with respect to the global intangible low-taxed income (GILTI) regime.
Clean Electricity Proposals
The CEAA would establish a clean electricity production tax credit (PTC) equal to 1.5 cents per kilowatt hour of electricity produced and sold in the 10-year period after a qualified facility is placed in service or a clean electricity business investment tax credit (ITC) equal to 30% of qualified investments with respect to qualified facilities and grid improvement property. The new tax credits would generally apply to qualified facilities placed in service and qualified investments made after December 31, 2022.
In order to qualify for either the PTC or the ITC, facilities and investments generally could not have a greenhouse gas emissions rate greater than zero as defined in the bill. Taxpayers could elect to receive the tax credits as direct refunds as long as they inform the Treasury Department of the intent to do so prior to the date on which the facility begins construction.
Several current-law temporary clean energy tax incentives would be modified to phase out or expire over the next few years.
Clean Transportation Proposals
The bill would create a technology-neutral “clean fuel production credit” that is applicable to qualifying fuel produced after December 31, 2022, and is designed to incentivize the production of transportation-grade fuels that are cleaner in terms of their lifecycle emissions than the current US national average. The level of the incentive depends on the lifecycle carbon emissions of a given fuel. This proposal would also:
- Remove the per-manufacturer cap on the plug-in electric vehicle (EV) tax credit;
- Make the credit refundable for individuals; and
- Create a 30% nonrefundable credit for commercial operators purchasing EVs.
The bill would provide short-term extensions to the current-law second generation biofuel producer credit and to the credit for alternative fuel and alternative fuel mixtures during the transition to the new system.
Energy Efficiency and Conservation Proposals
The bill would modify the current law tax incentive under section 45L for energy-efficient new homes by setting the credit’s value at either $2500 for homes meeting the latest requirements of the Energy Star program or $5000 for homes meeting the Department of Energy’s Zero Energy Ready program.
It would also reform the section 25C credit for nonbusiness energy property, replacing it with an “energy-efficient home improvement credit” that would provide a credit of up to $500 per improvement, subject to an annual cap of $1500 for all improvements.
The bill would also expand the section 179D deduction for energy-efficient buildings.
The Biden Administration Proposals
The American Jobs Plan and the Made in America Tax Plan outlined several significant tax incentives for renewable energy and related infrastructure projects, but detailed summaries were not included. On May 28th, the Treasury Department issued its “General Explanations of the Administration’s Revenue Proposals,” which is known informally as the Green Book. The Green Book provides details of tax proposals included in the Administration’s Fiscal Year 2022 budget submission to Congress.
The proposals that are included highlight that the Administration has prioritized the incentivization enhancement of clean energy production and related infrastructure. Existing tax credits for renewable energy are expanded and extended. Several new tax credits are proposed. Many of the proposals would give taxpayers the option of electing a cash payment in lieu of a tax credit, which is the “Direct Pay” option.
Categories of proposals that address clean energy issues include:
- Repeal of credits and incentives for the oil and gas industry
- Incentives for renewable and alternative energy production and investment
- Incentives for low-emission vehicles
- Extended and enhanced incentives for energy-efficient building projects
- Superfund excise taxes and Oil Spill Liability Trust Fund
The repeal of the fossil fuel provisions would partially offset the cost of production and investment tax credits related to renewable and alternative energy property, credits for production of certain alternative fuels, and incentives to promote low- and zero-emission vehicles.
One of the concepts that applies to several of the Biden proposals is the “direct pay” option, which allows taxpayers to elect a cash payment in lieu of a particular tax credit. The Green Book does not include a detailed explanation of how this option would work, but it could require the IRS to implement a system for administration. The direct pay option is expected to help increase business investment in these clean energy projects, because it would give developers more flexibility in financing eligibility projects.
Another concept which is included in the Biden green energy plan is to work with Congress on measures to “pair these credits with strong labor standards, benefitting employers that provide good-paying and good-quality jobs.” In addition, there is support for a requirement that construction of new facilities, equipment, and resources must utilize a certain percentage of domestic content. There is n consensus among Democrats in the House and Senate, however, about whether these concepts should be included in green energy legislation.
Repeal of Fossil Fuel Credits and Incentives
The Administration’s budget would repeal the following credits and incentives which are described as providing undue tax benefits to the oil and gas industry:
- The enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project;
- The credit for oil and gas produced from marginal wells;
- The expensing of intangible drilling costs;
- The deduction for costs paid or incurred for any tertiary recovery method;
- The exception to passive loss limitations provided to working interests in oil and natural gas properties;
- The use of percentage depletion with respect to oil and gas wells;
- Two-year amortization of independent producers geological and geophysical expenditures, instead allowing amortization over the seven-year period used by integrated oil and gas producers;
- Expensing of exploration and development costs;
- Percentage depletion for hard mineral fossil fuels;
- Capital gains treatment for royalties;
- The exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels;
- The Oil Spill Liability Trust Fund excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and
- Accelerated amortization for air pollution control facilities.
Effective Dates: The repeal of these incentives generally would be effective for taxable years beginning after December 31, 2021. In the case of royalties, the provisions would be effective for amounts realized in taxable years beginning after December 31, 2021. The repeal of the exemption from the corporate income tax for publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels would be effective for taxable years beginning after December 31, 2026.
Tax Credits for Renewable Energy Production and Investment including Solar and Wind
Renewable Electricity Production Tax Credit – Current law tax credit
The proposal would extend the full (100% value) section 45 Production Tax Credit (PTC) for qualified facilities (i.e., wind, open-loop biomass, closed-loop biomass, municipal solid waste, geothermal, hydropower, and marine and hydrokinetic), when construction begins after December 31, 2021, and before January 1, 2027. Starting in 2027, the credit rate would begin to phase down to zero over five years. The credit would completely phase out for facilities commencing construction after December 31, 2030. Taxpayers would have the option to elect a cash payment in lieu of the tax credits (direct pay option).
Renewable Energy Investment Tax Credit – Current law tax credit
The proposal would extend the section 48 investment tax credit (ITC) for investments in solar and geothermal electric energy property, qualified fuel cell power plants, geothermal heat pumps, small wind property, offshore wind property, waste energy recovery property, and combined heat and power property. In 2022, the ITC would be expanded to include stand-alone energy storage technology that stores energy for conversion to electricity and has a capacity of not less than five kilowatt hours.
The credit would be restored to the full 30% rate for eligible property that begins construction after December 31, 2021, and before January 1, 2027. After 2026, the credit rate will begin to phase down to zero over five years using the same schedule as for the PTC. Taxpayers would have the option to elect a cash payment in lieu of the tax credits (direct pay option).
Electric Transmission Infrastructure Credit – New tax credit
The Administration believes that a major overhaul of the US electricity transmission system is necessary in order to facilitate the initiatives to reduce carbon emissions and transition to green energy sources. There is no current law tax credit for investments in transmission infrastructure used to deliver electricity from where it is generated to where it is used.
In order to incentivize investment in the electric grid, the proposal would create a new investment tax credit equal to 30% of a taxpayer’s investment in qualifying electric power transmission property. Qualifying electric power transmission property would include overhead, submarine, and underground transmission facilities meeting certain criteria, including a minimum voltage of 275 kilovolts and a minimum transmission capacity of 500 megawatts. Qualifying property would also include any ancillary facilities and equipment necessary for the proper operation of the transmission facility. Taxpayers would have the option to elect a cash payment in lieu of the tax credits (direct pay option). The proposal would apply to property placed in service after December 31, 2021, and before January 1, 2032.
Electricity Generation from Existing Nuclear Power Facilities – New tax credit
Section 45J provides an allocated PTC for the first 8 years of operation of new advanced nuclear power facilities, but there is no tax credit for generation of electricity from existing nuclear power facilities. The current law credit is based on the amount of electricity produced and sold by the advanced nuclear power facility.
The proposal would create an allocated production credit for electricity generation from eligible existing nuclear power facilities that bid for the credits. The credits would be allocated to plants that would bid for the credit every two years between January 1, 2022, and January 1, 2030. They would be targeted to economically at-risk facilities to prevent the early retirement of nuclear facilities and would continue through 2030. Taxpayers would have the option to elect a cash payment in lieu of the allocated tax credits (direct pay option).
Credits for Qualifying Advanced Energy Manufacturing – Current law tax credit
Section 48C was enacted in 2009 and provided tax credits for eligible investments in qualifying advanced energy projects that expanded or established a manufacturing facility for the production of certain renewable energy resources, electric grids and storage for renewable energy, carbon dioxide capture and sequestration equipment, and other advanced energy properties, but the amount of funding available was limited. The proposal would modify and expand section 48C with the definition of qualifying advanced energy project being revised to include:
- industrial facilities
- recycling in addition to production
- expanded eligible technologies, including but not limited to energy storage and components, electric grid modernization equipment, carbon oxide sequestration, and energy conservation technologies.
An additional $10 billion of section 48C tax credits would be authorized for investment in eligible property used in a qualifying advanced energy manufacturing project with $5 billion to be allocated to projects in coal communities. Applicants would have the option to elect a direct payment in lieu of the section 48C tax credits.
Electric Vehicles & Charging Infrastructure
Incentives for Heavy- and Medium-Duty Zero Emission Vehicles – New tax credit
The proposal would provide a new business tax credit for new medium- and heavy-duty zero-emission vehicles, including battery electric vehicles and fuel cell electric vehicles. Similar to the section 30D (plug-in electric vehicle) tax credit, vehicle manufacturers would submit to the IRS the medium- and heavy-duty vehicles eligible for the credit. The vehicle must be acquired for use or lease by the taxpayer and not for resale, the original use of the vehicle must commence with the taxpayer, and the vehicle must be used predominantly in the US. For each vehicle class, the tax credit would be a set amount per vehicle depending on the class and the purchase date. Taxpayers would have the option to elect a cash payment in lieu of a general business credit (direct pay option).
Electric Vehicle Charging Station Credit – Current law tax credit
The proposal would modify and expand the section 30C tax credit for electric vehicle charging stations. Taxpayers would be allowed to claim the tax credits on a per-device basis (i.e., electric vehicle supply equipment, or ESVE, also called a port or a charger), and the tax credit limit on individual devices would be increased to $200,000. The tax credit would be extended for five years through December 31, 2026. Taxpayers would have the option to elect a cash payment in lieu of the general business tax credits (direct pay option). The proposal would extend for five years, but not increase, the $1000 tax credit for refueling property installed at a taxpayer’s residence.
Tax Credit for Sustainable Aviation Fuel – Current law tax credit
The proposal would create a production tax credit of $1.50 per gallon for sustainable aviation fuel that achieves at least a 50% reduction in emissions relative to conventional jet fuel for fuel produced after December 31, 2021, and before January 1, 2028. A supplementary credit of up to 25 cents per gallon would be available on a sliding scale depending on the emissions reduction relative to conventional jet fuel.
Credit for Low-Carbon Hydrogen Production – New tax credit
Hydrogen can be used as a fuel source and can produce or store electricity, and it is considered to be a key element to the Administration’s decarbonization goal. The proposal would introduce a new low-carbon hydrogen production tax credit. For purposes of this credit, “low-carbon” refers to hydrogen produced using zero-carbon emissions electricity (renewables or nuclear) and water as a feedstock, or hydrogen produced using natural gas as a feedstock and with all carbon emitted in the production process captured and sequestered.
Construction of a qualified facility must have begun before the end of 2026 for the facility to be eligible for the credit, and the credit would be available for six years from the date a low-carbon hydrogen facility is placed into service. The hydrogen may be sold to an unrelated third party or, if directly consumed by the taxpayer that owns the facility, the production must be independently verified.
The credit would be indexed annually for inflation, and taxpayers would have the option to elect a cash payment in lieu of the tax credit (direct pay option).
Carbon Oxide Sequestration Credit – Current law tax credit
The 45Q tax credit for carbon capture sequestration was recently revised to increase investments in carbon oxide sequestration. The IRS and Treasury have published guidance and regulations to provide clarification on how to qualify for the credits. Under current law, qualified facilities must begin construction by January 1, 2026, in order to qualify for the credit, which is then available for 12 years after the date the qualifying carbon capture equipment is placed in service.
The proposal would extend the “commence construction” date for the existing section 45Q credit by five years requiring that qualified facilities must begin construction before January 1, 2031. The credit would also be enhanced for carbon oxide captured from hard-to-abate industrial carbon oxide capture sectors such as cement production, steelmaking, hydrogen production, and petroleum refining. The enhanced credit for industrial capture would not apply to ethanol, natural gas processing, or ammonia production facilities. The proposal also includes an enhanced credit for direct air capture projects. Taxpayers would have the option to elect a cash payment in lieu of the carbon sequestration credit (direct pay option). The proposal would be effective after December 31, 2021.
Extended and Enhanced Incentives for Energy-Efficient Building Projects
Construction of New Energy-efficient Homes – Current law tax credit
The proposal would increase the section 45L tax credit for an energy-efficient home from $2000 to $2500 and extend the tax credit for five years to December 31, 2026. The proposal would also modify and expand the dwelling units eligible for the credit.
Energy-efficient Commercial Buildings Deduction – Current law deduction
The proposal would increase the maximum section 179D deduction per square foot from $1.80 to $3 for qualifying property placed in service after December 31, 2021. The partial deduction rate would be increased from 60 cents to $1 per square foot for qualifying property placed in service after December 31, 2021. The required efficiency standard in relation to the reference building’s total annual energy reduction would be adjusted from 50 percent to 30 percent.
Mechanical Insulation Labor Costs Credit – New tax credit
The proposal would create a new general business tax credit for qualifying mechanical insulation labor costs that would be equal to 10 percent of the mechanical insulation labor costs paid or incurred by the taxpayer during a taxable year. Mechanical insulation labor costs would include the labor cost of installing mechanical system that is placed in service in the US and that satisfies certain energy loss reductions. The credit would be available for labor costs incurred after December 31, 2021, through December 31. 2026.
Consumer-focused Energy Efficient Incentives
Nonbusiness Energy Property Credit – Current law tax credit
The proposal would extend the section 25C tax credit for five years and increase the lifetime limit to $1200 for property placed in service after December 31, 2021, and before January 1, 2027. For qualified energy efficiency improvements, the credit rate would be increased to 15% and the credit amounts for certain types of residential energy property expenditures would also be increased. The proposal would also modify the definitions of eligible qualified energy-efficiency improvements and residential energy property expenditures and update the required energy-efficiency standards for such property.
Residential Energy-efficiency Credit – Current law tax credit
The proposal would extend the section 25D residential energy-efficiency credit and expand the definition of residential energy-efficient property to include qualified battery storage technology of at least three kilowatt hours of capacity installed in a residence. Beginning in 2022, the credit would return to the full 30% rate for property placed in service after December 31, 2021, and before January 1, 2027, and the credit would be phased out over the next five years.
Superfund Excise Taxes and Oil Spill Liability Trust Fund – Prior law rules
The proposal would reinstate the three Superfund excise taxes at twice the previous rates for periods beginning after December 31, 2021, and through December 31, 2021. Also, the Superfund excise tax on domestic crude oil and imported petroleum products would be expanded to other crudes such as those produced from bituminous deposits as well as kerogen-rich rock. Finally the eligibility of the Oil Spill Liability Trust Fund from drawback would be eliminated. The proposal would be effective after December 31, 2021.
This slate of proposals from the Biden Administration and Congress represent a variety of incentives that are designed to encourage investment in lower-carbon technologies in energy production and transportation, and other elements of infrastructure, that are intended to advance the US economy toward the climate-related goals that are supported by the Administration. If you have any questions about the information in this True Alert, please contact a member of your TPC engagement team.