US SENATE TO CONSIDER TAX CREDIT LEGISLATION UNDER CLEAN ENERGY FOR AMERICA ACT
The Clean Energy for America Act (the “CEAA” or the “bill”), which would consolidate more than 40 existing energy incentives into three emissions-based provisions that incentivize clean electricity, clean transportation, and energy efficiency was advanced by the Senate Finance Committee on May 26, 2021. The bill now moves to the full U.S. Senate for consideration and approval.
To incentivize clean electricity, the CEAA would provide an emissions-based, technology-neutral tax credit for electric generation facilities that achieve a net zero or net negative carbon emissions standard. Any qualifying electric generation facility would be eligible to claim a production tax credit of up to 2.5 cents (as adjusted for inflation) per kilowatt hour (“KWh”) produced or an investment tax credit of up to 30 percent of the qualifying cost for the new facility.
To incentivize clean transportation, the CEAA would expand the existing credit program for battery and fuel cell electric vehicles (including commercial vehicles) and electric vehicle charging stations. It would also provide a technology neutral tax credit for U.S. production of clean transportation fuel that requires achieving a net zero emissions target by 2030 to qualify.
To incentivize energy efficiency, the CEAA would create a program that focuses on construction of energy-efficient homes and commercial buildings. Incentives under the program would be performance-based, where the value of tax incentives increases as more energy is conserved.
Clean Electricity Credits
The CEAA proposes a new technology-neutral tax credit program focused on the generation of clean electricity which allows taxpayers to choose between a production-based credit (the “Clean Electricity Production Credit”) or an investment-based credit (the “Clean Electricity Investment Credit,” and together, the “Clean Electricity Credits”). The program would move beyond traditional forms of renewable energy, such as wind and solar, and would incentivize development of clean electricity from other sources, including hydrogen facilities. Specific details concerning the Clean Electricity Credit program are discussed in more detail below.
- Clean Electricity Production Credit. The proposal creates a 2.5 cent per KWh production tax credit for electricity produced by the taxpayer at a qualified facility and either (1) sold to an unrelated person during the taxable year or (2) consumed or stored by the taxpayer during the taxable year, provided that if there is no third-party sale, the qualified facility must be equipped with a metering device owned and operated by a person unrelated to the taxpayer. In order to be eligible for this credit, electricity must be produced in the United States or a possession of the United States. The credit would be available for electricity produced during the ten-year period beginning on the date that the qualified facility is originally placed in service, and the 2.5 cent per KWh credit rate would be adjusted annually for inflation in any calendar year beginning after 2021.
- Clean Electricity Investment Credit. The proposal would provide a 30 percent investment tax credit for qualified investments with respect to any grid improvement property or qualified facility, as described below. Grid improvement property is defined as any “energy storage property” or “qualified transmission property” that satisfies certain wage and workforce requirements. Energy storage property is defined as depreciable property built or acquired by the taxpayer (1) that receives, stores and delivers electricity, or energy for conversion to electricity, provided that such electricity is sold to or stored for an unrelated person by the taxpayer, (2) the original use of which commences with the taxpayer, (3) which has a capacity of not less than 5 KWh, and (4) which is placed in service after December 31, 2021. Qualified transmission property is (1) any overhead, submarine or underground transmission property which is capable of transmitting electricity at a voltage of not less than 275 kilovolts, and (2) any other equipment necessary for the operation of such property, including equipment listed as a “transmission plant” in the Uniform System of Account for the Federal Energy Regulatory Commission, other than any property used for the distribution of electricity between substations and end-use customers. The investment tax credit would increase to 40 percent for a qualified facility or grid improvement property placed in service within certain disadvantaged communities that have a maximum output of less than 5 megawatts (“MW”).
A qualified facility is defined as any facility: (1) that is used for the generation of electricity, (2) that is originally placed in service after December 31, 2022, (3) for which the greenhouse gas emissions rate is not greater than zero, and (4) in the case of any facility with a maximum output equal to or greater than one MW, which meets certain wage and workforce requirements. The bill provides that a facility placed in service before January 1, 2023 can be a qualified facility, but only to the extent of the increased amount of electricity produced at the facility by reason of either a new power unit placed in service after December 31, 2022 or any efficiency improvements or additions of capacity placed in service after December 31, 2022. However, a qualified facility does not include any facility for which a credit determined under Section 45, 45J, 45Q or 48, or the new clean electricity investment credit (discussed above) is allowed for the taxable year or any prior taxable year.
- Direct Pay. Taxpayers claiming Clean Electricity Credits could make an irrevocable election to receive credit benefits in the form of a cash payment (i.e., on a “direct pay” basis). This election should streamline matters for developers facing uncertainty about forecasted taxable income or availability of tax equity financing. The election, however, must be made prior to the date on which construction begins on the qualified facility.
- Microgrids. The Clean Electricity Investment Credit provides special incentives for microgrid property equal to 30 percent of the qualified investment multiplied by the relative avoided emissions rate with respect to such microgrid. For this purpose, a “microgrid” is an electric distribution system which (1) is contained within a clearly defined electrical boundary and has the ability to operate as a single and controllable entity, (2) has the ability to be managed and isolated from the applicable grid region in order to withstand larger disturbances, and (3) has a maximum net output of no more than 20 MW.
- Recapture. The Clean Electricity Investment Credit is subject to recapture if the greenhouse emissions rate for a qualified electric generation facility is determined to be significantly higher than reported for purposes of claiming the credit.
- Phase-out. If the Secretary of the Treasury, in consultation with the EPA Administrator, determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2021, the amount of the credit is reduced according to the following schedule: by 25 percent for a facility the construction of which begins during the second calendar year following the determination, by 50 percent for a facility the construction of which begins during the third calendar year following the determination, and by 100 percent for facilities the construction of which begins during any subsequent calendar year.
Carbon Capture and Sequestration
The CEAA proposes updates to the Section 45Q tax credit for carbon capture and sequestration, which would seek to eliminate roadblocks hampering use of the current credit program. Key elements of the proposed changes follow below.
- Direct Pay. Many developers of Section 45Q projects cannot use tax credits due to lack of taxable income. Monetizing Section 45Q credits through use of traditional tax equity structures has proven difficult and expensive. The bill would allow developers to elect to take tax credits in cash, regardless of taxable income. Proposed transition rules indicate the “direct pay” election would apply only to carbon capture facilities placed in service after December 31, 2020.
- Incentives for Smaller Projects. The bill would extend Section 45Q credits to facilities without regard to a minimum number of tons of carbon dioxide captured, so long as 75 percent of emissions are captured from a power generation facility (or 50 percent of carbon dioxide emissions, for any other facility). This change could benefit smaller ethanol plants, gas processing facilities or other industrial projects that fail to qualify for Section 45Q credits due to lack of scale.
- Enhanced Oil Recovery. Under current law, Section 45Q credits are made available where carbon dioxide is utilized by upstream oil and gas companies for enhanced oil recovery (“EOR”) operations. The bill would repeal eligibility for Section 45Q credits in the case of EOR, requiring instead that operators permanently sequester or utilize carbon dioxide for other qualifying purposes as described under current legislation. This change would apply prospectively to property constructed after December 31, 2026. Thus, existing EOR projects could seek to claim grandfather status based on prior construction in-service dates.
- Beginning of Construction Date. Under current law, a developer must begin construction of a Carbon Capture Facility before January 1, 2026 to qualify for the Section 45Q credit. The bill would eliminate the beginning of construction requirement entirely. In lieu of a fixed sunset date, the Section 45Q credit would be subject to phaseout once emissions levels in the United States have been reduced by 75 percent, when compared with 2021 baseline levels. Existing facilities would be grandfathered, and developers would have at least 12 months to begin construction on any new projects without forfeiting benefits under the transition rule.
- No Double Benefit alongside Clean Electricity Credits. The bill would clarify that Section 45Q credits could not be claimed if Clean Electricity Production Credits or Clean Electricity Investment Credits were already being claimed for the same facility. For example, suppose a developer constructs a blue hydrogen electric generation facility that meets a zero-emissions standard solely because all greenhouse gas emissions are processed by carbon capture equipment and secured in underground storage. The developer could claim the Clean Electricity Investment Credit or the Section 45Q credit, but not both.
- Increased Credit Amount for Direct Air Capture Facilities. Under the CEAA, Section 45Q credits for direct air capture facilities would be increased to $175 per ton where carbon dioxide is secured in underground storage, or to $150 per ton where carbon dioxide is utilized, with rates adjusted for inflation after 2026. The bill would eliminate the requirement that direct air capture facilities remove any minimum tons of carbon dioxide to qualify for Section 45Q credits.
- Private Activity Bonds. The bill adds a new category of tax-exempt private activity bonds for carbon capture and storage and direct air capture projects.
- Labor requirements. The bill sets forth minimum wage requirements based on Department of Labor standards and requires that 15 percent of the total labor hours for constructing a credit-eligible facility be performed by qualified apprentices.
- Clean Fuel Production Credit. A new credit would be available for “transportation fuel” (defined as fuel suitable for use as a fuel in a highway vehicle or aircraft) that is produced after December 31, 2022. The amount of the credit would vary depending on the lifecycle carbon emissions of the given fuel. Generally, for transportation fuel sold before January 1, 2030, the credit would equal the product of (1) $1.00 per gallon of transportation fuel produced and sold by the taxpayer (as adjusted for inflation) and (2) the emissions factor for such fuel (that is, an amount equal to the quotient of (A) an amount equal to the baseline emissions rate, minus the emissions rate for such fuel, divided by (B) the baseline emissions rate). To qualify for the credit, the transportation fuel must be produced at a qualified facility and sold by the taxpayer to an unrelated person (1) for use by such person in the production of a fuel mixture, (2) for use by such person in a trade or business, or (3) who sells such fuel at retail into the fuel tank of another person. The credit would be subject to phase-out if the annual greenhouse gas emissions from the transportation of persons and goods annually in the United States are determined to be equal to or less than 25 percent of the annual greenhouse gas emissions from the transportation of persons and goods in the United States for calendar year 2021.
- Fuel Cell Vehicle Credit. Section 30B provides a credit of up to $8,000 for any light duty qualified fuel cell vehicle placed in service before December 31, 2021. A fuel cell vehicle combines oxygen from the ambient air with hydrogen fuel to power an electric motor with zero emissions. The CEAA proposes to extend the Section 30B credit indefinitely, subject to a new phase-out rule (which replaces the December 31, 2021 sunset date), if the Secretary of the Treasury, in consultation with the Secretary of Transportation, determines that the total annual sales of new qualified fuel cell motor vehicles and new qualified plug-in electric drive motor vehicles in the United States exceed 50 percent of the total annual sales of new passenger vehicles in the United States, the amount of the fuel cell vehicle credit is reduced according to the following schedule: by 25 percent for a vehicle purchased during the second calendar year following the determination, by 50 percent for a vehicle purchased during the third calendar year following the determination, and by 100 percent for a vehicle purchased during any subsequent calendar year.
- Alternative Fuel Refueling Property Credit. Section 30C(a) provides a credit of 30 percent of the cost of any qualified alternative fuel vehicle refueling property placed in service by the taxpayer during the taxable year, subject to a credit cap. The key changes in the bill would be to increase the Section 30C credit cap from $30,000 to $200,000, in the case of qualified property that is depreciable property, and to expand the definition of qualifying fuels to consist of hydrogen and any transportation fuel for which the Clean Fuel Production Credit is allowed.
- Electric Vehicles (“EV”) Credits.
The proposal extends and modifies the Section 30D credit for new qualified plug-in electric-drive motor vehicles (the “EV Credit”) and eliminates the EV Credit’s limitation on the number of credit-eligible EVs a manufacturer can sell. In addition, beginning January 1, 2022, the proposal makes the EV Credit a refundable personal income tax credit for vehicles acquired on or after such date. The proposal includes a new credit for qualified commercial EVs, which would provide a non-refundable tax credit of 30 percent of the incremental cost of an electric vehicle over the cost of a comparable vehicle intended for a similar usebut powered by a gasoline or diesel internal combustion engine. To be a qualified commercial EV, the vehicle must (1) be depreciable, (2) meet all the requirements of Section 30D currently applicable to plug-in four-wheeled EVs, electric motorcycles and fuel cell electric vehicles (other than the weight limitation), and (3) have a battery that has a capacity of at least 10 KWh that is capable of being recharged from an external source. The credit would be available for vehicles acquired after December 31, 2021.
The EV Credit and Commercial EV Credit would be subject to a phase-out if the Secretary of the Treasury, in consultation with the Secretary of Transportation, determines that the total annual sales of new qualified commercial EVs in the United States exceed 50 percent of the total annual sales of new commercial vehicles in the United States, the amount of the commercial EV credit would be reduced according to the following schedule: by 25 percent for a vehicle purchased during the second calendar year following the determination, by 50 percent for a vehicle purchased during the third calendar year following the determination, and by 100 percent for a vehicle purchased during any subsequent calendar year.
Currently, the Code contains a number of tax incentives to encourage energy efficiency (e.g., Sections 48, 25C, 45L, 179D). Certain of these incentives are scheduled to expire within the next three years and are only applicable to specific types of improvements, utilizing largely antiquated standards. The CEAA’s energy efficiency proposals are aimed to dramatically increase residential and commercial efficiency, with a shift toward cleaner forms of heating and cooling. Key elements of the proposed changes are described in more detail below.
- Credit for New Energy Efficient Residential Buildings. Reforming the current incentive for energy efficient new homes, the bill requires that new homes meet the latest national program requirements of either (1) the Energy Star program for new residential construction, which provides a $2,500 credit or (2) the Department of Energy’s Zero Energy Ready program, which provides a $5,000 credit.
- Energy Efficient Home Improvement Credit. The Energy Efficient Home Improvement credit provides homeowners with a tax credit equal to the lesser of 30 percent of the cost or $600 per improvement, with an overall annual limit of $1,500 for all home improvements.
- Enhancement of Energy Efficient Commercial Buildings Deduction. Currently, Section 179D provides the only major incentive for energy efficiency, with a per-square-foot tax deduction for certain energy efficient building components. Section 179D was recently permanently extended, and the CEAA builds on this extension by providing taxpayers with increased flexibility. Taxpayers will qualify for an incentive, so long as they make at least a 25 percent improvement over the required baseline, with the deduction limitation increasing for larger efficiency gains. Of note, the bill also conforms the calculations of earnings and profits and taxable income for real estate investment trusts (REITs) to allow REITs to fully pass through the benefit of the deduction.
- Enhancement of Energy Credit for Geothermal Pumps. The CEAA makes permanent the credit for geothermal heat pump systems in commercial buildings and increases the credit to 30 percent.