Clean Energy and Industrial Projects Can Access Billions in Tax Incentives… If They Can Identify the Right Ones

In the U.S. energy sector, tax incentives have emerged as a powerful tool to accelerate the transition towards a more sustainable and resilient energy infrastructure. In 2023 alone, the government funneled $18.8 billion into businesses using credits to accelerate the development and deployment of clean manufacturing and industry. 

However, not all companies understand the complex landscape they need to navigate to fully leverage the economic advantages of these incentives.

Representing nearly 15% of the funding for clean technology manufacturing and energy development in the US last year, the tax investment represents a significant portion of the funding for manufacturing and clean energy projects in 2023, bolstered by landmark legislations such as the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act.

Together, these represent an investment in advancing our energy infrastructure at the scale of the Apollo program, the Interstate Highway System, and The New Deal. And the largest portion of this investment, particularly from the Inflation Reduction Act, are a series of tax credits.

A standout example of these efforts is the $1.5 billion acquisition of American Electric Power’s unregulated renewables portfolio. This strategic move was partially financed through a substantial $580 million production tax credit transfer with Bank of America, showcasing the pivotal role of tax incentives in facilitating major clean energy transactions. Similarly, Arevon, a prominent developer in the renewable energy and energy storage sectors, is poised to leverage $500 million in tax credits for its extensive $2 billion project pipeline, highlighting the significant financial leverage these incentives can offer.

The government’s allocation of funds underscores a targeted approach to supporting the clean energy ecosystem. The $5.5 billion earmarked for clean energy and industrial manufacturing initiatives, including the utilization of the 45X advanced manufacturing tax credit, illustrates a strategic focus on enhancing domestic capabilities in key technology areas. 

Furthermore, the distribution of approximately $13 billion in credits to electricity generation projects reflects a concerted effort to bolster the production of clean energy through both established and innovative financing mechanisms. However, emerging technologies such as carbon management and clean hydrogen, while receiving a smaller share of the funding, are recognized for their potential to play a critical role in the energy transition.

The Intricacies of Tax Incentives

The suite of available tax incentives encompasses a broad spectrum of technologies and objectives. From the Production Tax Credit (PTC) and Investment Tax Credit (ITC), which have long supported renewable energy projects, to newer initiatives aimed at low-income communities and cutting-edge clean technologies, these incentives reflect a nuanced approach to fostering a diverse energy portfolio. The introduction of credits for nuclear power, clean electricity, and advanced energy projects further broadens the scope of supported activities, catering to a wide range of energy solutions.

Strategic Considerations and Trade-offs

However, navigating the tax incentive landscape requires careful consideration of the strategic implications and trade-offs involved. Taking some credits preclude an entity’s ability to take another credit such as the Production Tax Credit versus the Investment Tax Credit, the Advanced Energy Production Credit versus the Advanced Manufacturing Production Credit (and the ITC for that matter), as well as sector-specific incentives like the 45V/48Q credits for project like blue hydrogen, presents a complex decision-making environment for businesses. 

Opting for one tax credit may preclude the possibility of claiming others, necessitating a thorough analysis to identify the most beneficial financial strategy.

PTC vs. ITC

45/45Y Production Tax Credit (PTC):

• Advantage: Provides a per-kilowatt-hour (kWh) credit for electricity generated by qualifying renewable energy sources for the first ten years of a facility’s operation.
• Suitability: Best for projects with predictable, long-term electricity output. It’s particularly favored by wind energy projects due to their operational characteristics.
• Trade-off: The value is directly tied to production levels, meaning lower output results in fewer tax benefits, potentially impacting projects with variable generation profiles.

48/48E Investment Tax Credit (ITC):

• Advantage: Offers an upfront credit based on a percentage of the investment cost in qualifying renewable energy property.
• Suitability: Ideal for solar projects and other renewable technologies with significant upfront costs and where immediate tax relief can improve project economics.
• Trade-off: Requires substantial initial investment, and the benefit is received entirely at the project’s outset, without ongoing incentives based on performance.

AEPC vs. AMPC

48C Advanced Energy Project Credit (AEPC):

• Advantage: Offers a base credit of 6% of the investment value, which can increase to 30% for projects that meet prevailing wage and apprenticeship requirements, encouraging investment in the production or recycling of clean energy equipment and critical minerals.
• Suitability: Ideal for projects focused on establishing or upgrading facilities to produce or recycle clean energy equipment, vehicles, or process, refine, or recycle critical minerals, as well as projects aimed at reducing greenhouse gas emissions by at least 20%.
• Trade-off: Requires a detailed application process through the DOE, including submission of a concept paper, which may limit accessibility for some projects. Additionally, the focus on manufacturing and recycling facilities means it may not directly support the operational efficiency of clean energy generation. Cannot be combined with AMPC.

45X Advanced Manufacturing Production Credit (AMPC):

• Advantage: Provides an incentive on a per-unit basis for the domestic production of components for solar and wind energy, batteries, inverters, and critical minerals, aiming to cover approximately 10% of project costs.
• Suitability: Best for manufacturers engaged in the high-volume production of clean energy components, looking to capitalize on specific output and efficiency in the clean energy sector.
• Trade-off: Cannot be claimed by facilities already taking advantage of the AEPC or the ITC, potentially limiting its applicability for projects that might benefit more from immediate tax relief provided by other credits.

45V vs. 48Q for Blue Hydrogen

45V Clean Hydrogen Production Credit:

• Advantage: Offers a tax credit based on the carbon intensity (CI) of hydrogen production, with the potential to reach up to $3 per kilogram of hydrogen produced, depending on the CI and additional provisions met.
• Suitability: Particularly advantageous for hydrogen projects that can achieve low CI levels, potentially through the use of renewable natural gas (RNG) or abatement of upstream emissions, but complicated by the most recent proposed rule-making from the Department of Treasury featuring the three pillars of clean hydrogen: additionality, geographic proximity, and hourly matching.
• Trade-off: Requires meeting specific CI targets and possibly investing in additional technologies or processes to reduce emissions, which could entail higher upfront costs or operational complexities.

45Q Carbon Capture, Utilization, and Storage Credit:

• Advantage: Incentivizes carbon capture and storage projects with a credit for each metric ton of carbon dioxide that is captured and sequestered or utilized.
• Suitability: Suitable for projects capable of capturing significant amounts of CO2, including those associated with hydrogen production facilities.
• Trade-off: The focus is on the carbon capture aspect rather than the cleanliness of the hydrogen production process itself. Projects that can’t capture and sequester CO2 efficiently might find this credit less beneficial compared to 45V, which rewards low CI hydrogen production directly.

Competitive Grant Nature of 48C

The 48C tax credit also stands out from the rest. Unlike typical tax credits, the 48C operates more akin to a competitive grant, offering up to 30% of the qualified investment for eligible projects from a $10 billion fund. 

This credit’s unique structure, requiring a comprehensive application process, introduces an additional layer of complexity but also an opportunity for significant financial support. The upcoming announcement of the first round of 48C allocations ($4 billion), followed by a second round ($6 billion) anticipated to open for concept papers in April, underscores the ongoing and dynamic nature of government support for clean energy initiatives.

Energy Transition Finance can be your partner in navigating the non-dilutive financing options available for energy and industrial transition projects and technologies. Reach out to us to find out more.