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January 11, 2022 Pro Bono Matters

The Build Back Better Energy Tax Provisions

By Simon Moskovitz, LL.M. Student, Georgetown University Law Center

To mix gustatory metaphors, those following the attempted passage of President Biden’s Build Back Better agenda got a front row seat to DC sausage-making and yet left hungry, at the end of the day, with a big nothing-burger. For now, the Biden administration’s signature legislation—a $1.7 trillion (over ten years) social, economic, and climate bill—is shelved after suffering a major setback in the Senate from West Virginia Senator Joe Machin at the end of the legislative session.

At stake in the House version of the bill (embedded within Title XIII, Subchapter F) are approximately $500B of green energy incentives, most in the form of tax credits. Many of these credits are familiar, having been renewed many times since 1986 but now at risk. Section 45 investment tax credits (ITCs) and section 48 production tax credits (PTCs) may fully sunset by 2022 and 2023, respectively. Economists argue that this uncertain future can stymie utility-scale green energy projects and disincentivize developers and tax equity investors from investing in projects. Without renewal, both familiar and novel credits, including the 45Q carbon capture utilization and sequestration (CCUS) and hydrogen credits, may never be meaningfully utilized. Other completely new incentive structures tied to apprenticeship, wage, domestic sourcing, and energy community requirements would die altogether within the House Bill.

Nonetheless, there is reason for hope. Although in legislative limbo, many of the credits are likely to be renewed, or newly implemented. The first reason is historical. The section 45 ITC and section 48 PTCs have been renewed and extended no fewer than twelve times, dating back to 1986, under both Republican and Democratic presidents and congresses. Further, Senator Manchin has voted to extend such incentives in the past. The Senator’s primary qualms with the bill appear to be related to the Child Tax Credit. He generally supports green energy tax incentives—so long as he doesn’t view them as penalizing fossil fuel-and coal-heavy West Virginia.

With passage of Subchapter F within reach in 2022, it’s worth analyzing some of its primary features, assuming the bill ultimately sent to President Biden’s desk will closely mirror the House bill. If passed, the section 48 ITC can reach 30% and the PTCs to 100% of value until 2026. The current proposal creates, for both sections 45 and 48, a base rate and a bonus rate. The bonus rate is 6 times the base rate so long as new prevailing wage and apprenticeship requirements are met. For example, the section 48 ITC for wind starts at 6% and is increased to 30% if prevailing wage and apprenticeship requirements are met.

In general, the prevailing wage and apprenticeship requirements are the same across both section 45 and section 48. The prevailing wage requirements needed to achieve the bonus rate require that a project ensure that any laborers and mechanics employed by contractors and subcontractors are paid prevailing wages during the construction of the project and, in some cases, after the project is placed in service if repairs are needed. Apprenticeship requirements demand that a project ensure a minimum percentage of total labor hours are performed by qualified apprentices. Starting in 2022, 10% of applicable labor hours must be performed by apprentices, 12.5% in 2023, and 15% in subsequent years.

Other incentives are also available for developers and tax equity investors. A 10% domestic sourcing credit is available if a qualifying facility is domestically sourced—i.e., using steel, iron, or products manufactured in the United States. This credit is phased out, eventually being reduced to 0% in 2026.

Perhaps one of the biggest opportunities for a new credit is satisfaction of the energy community requirement. This allows a ten percent credit for any qualified facility placed in an energy community, where an energy community is defined as a census tract (or an area directly adjoining a census tract) where a coal mine has closed since December 31, 1999 or has been retired since December 31 2009. This extra credit appears easier to satisfy than the ten percent domestic sourcing requirement since a developer need only properly site a facility in a particular location. Between 2010 and 2025, 546 coal power plants will be retired. Between 2011-2015 alone, approximately 200 census tracts in the US have either retired coal plants or lost more than fifty coal mining jobs. The vast majority of these plants are located on separate census tracts and each census tract directly adjoins, on average, about 3-5 other tracts. In total, out of approximately 75,000 census tracts in the US, it’s safe to assume that at least 1,000 are considered energy communities as defined in the Build Back Better legislation. In practice, this extra 10% credit will be available based on a one-time siting decision made with advanced information at the beginning of a project.

A further benefit of these credits is that they are not mutually exclusive. Rather, it appears that developers and tax equity investors can layer these credits on top of one another. For example, a facility can reach a 50% ITC by simultaneously satisfying the wage, apprenticeship, domestic sourcing, and energy community requirements.

The past few years have been favorable to utility-scale renewable energy developers and investors. Revenue Ruling 2021-13 provided significantly more flexibility to taxpayers and investors by allowing a taxpayer to claim a 45Q tax credit for owning one component of carbon capture equipment within a single process train used to capture carbon. Notice 2021-41 generously extended the placed-in-service safe harbor to six years for any facility qualifying for Sections 45 and 48 ITCs and PTCs that began construction from 2016 to 2019. The safe harbor was extended to five years for projects that began construction in 2020. This notice also eased requirements for continuity by consolidating continuity requirements available to facilities regardless of how they initially began start of construction.

Now, although stalled, it’s not unreasonable to expect that these section 45 and 48 energy tax credits will be renewed and extended. With new tax credits available, utility-scale renewable energy projects and facilities could retain momentum in coming years, much as fossil fuel projects and facilities have been supported with favorable tax laws for more than a century, so long as it remains palatable for Congress. 

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