Public Power Would Gain Access to Direct Payment of Tax Credits under Energy, Climate Deal

by Paul Ciampoli
APPA News Director
August 1, 2022

Public power utilities, rural electric cooperatives, the Tennessee Valley Authority, state and local governments, and other tax-exempt entities would have access to refundable direct payment tax credits under an energy and climate agreement announced on July 27.

The agreement was unveiled by Senate Committee on Energy and Natural Resources Committee Chairman Joe Manchin (D-WV) and Senate Majority Leader Charles Schumer (D-NY).

The climate and energy provisions will be included in budget reconciliation legislation. Senate Majority Leader Chuck Schumer (D-NY) hopes to begin debate of the measure on the Senate floor as early as this Wednesday, but key details remain to be ironed out. It is also unclear whether the measure will have the support of all 50 Democrats that will be needed to pass the bill and send it to the House for consideration.

Provisions of particular interest to public power include:

Tax Provisions

Internal Revenue Code (IRC) Section 45 – Electricity Produced from Certain Renewable Resources

Base credit of 0.5 cents per kWh, for wind, solar and geothermal construction of which begins after 2021 and through 2024. Credit is increased to 2.5 cents per kWh for facilities:

• Meeting wage and apprenticeship requirements;
• Construction on which begins before “60 days after the Secretary publishes guidance”’; or
• With a maximum “net output” of 1 MW.
• The credit is also increased for:
• Electricity produced in “energy communities”;
• Facilities meeting domestic content requirements; and
• Projects located in certain low-income communities or on Indian land.

IRC Section 48 – Energy Credit (ITC)

Base credit of 6% for projects after 2021 and through 2024. The credit is expanded to include energy storage, qualified biogas, microgrid controllers.

Credit is increased to 30 percent for facilities:

• Meeting wage and apprenticeship requirements;
• Construction on which begins before “60 days after the Secretary publishes guidance”’; or
• With a maximum “net output” of 1 MW.

The credit is increased for:

• Electricity produced in energy communities;
• Facilities meeting domestic content requirements; and
• Projects located in certain low-income communities or on Indian land.

Clean Electric Production Credit and IRC Section 48D – Clean Energy Investment Credit

• Creates an emissions-based incentive that would be neutral and flexible between clean electricity technologies.
• Available as either a PTC of up to 2.5 cents per kWh, or an ITC of up to 30 percent.
• Credits are available until the latter of 2032 or when the Secretary determines that the annual greenhouse gas emissions are equal to or less than 25 percent of the emissions produced in 2022.
• As per the PTC and ITC above, credit amounts vary for facilities meeting wage and apprenticeship requirements, domestic content requirements, and operating in “energy communities.”

IRC Section 6417 – Elective Payment of Applicable Credits

• Tax exempt entities can receive energy tax credits as a refundable direct payment.
• Generally, for current-law energy credits, direct payments are available for facilities placed in service after Dec. 31, 2022. For credits newly created under the IRA, direct payments are available for any credit for which the facility would otherwise qualify.
• Taxable entities can also qualify for direct payment of hydrogen, carbon capture, and advanced manufacturing tax credits.

Other tax provisions include the creation of a production tax credit for existing nuclear power facilities equal to up to 1.5 cents per kWh. The credit is reduced as the sale price of such electricity increases.

The agreement also calls for the creation of a new production and investment tax credits for clean hydrogen and will allow corporate taxpayers to transfer energy tax credits to another taxpayer in exchange for cash.

The agreement also imposes a tax equal to 15 percent of a corporation’s adjusted financial statement income. Financial statement income generally includes all interest and, so, this minimum tax would apply to other tax-exempt bond interest.

Funding

On the funding side, the deal calls for $1 billion in additional funding to the Rural Electrification and Telephone Fund for electric storage project loans. Up to 50 percent of such loans can be forgiven for projects meeting terms and conditions set by the Department of Agriculture.

It also includes $1 billion for loans and grants to promote underutilized renewable technologies in rural areas.

The agreement also includes $3.6 billion to authorize an additional $40 billion under the Department of Energy (DOE) loan office to support projects that support technology innovations to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases.

Other funding elements in the agreement include:

• $5 billion to the DOE to support retooling and repowering generation and transmission facilities.
• $2 billion to DOE to make loans to transmission that is in the national interest.
• $1 billion to DOE to make grants to states to help site transmission lines.
• $100 million to DOE to conduct analysis and planning for transmission.
• $125 million, $100 million, and $150 million to DOE, the Federal Energy Regulatory Commission, and Department of Interior, respectively, to hire personnel to permit projects.

The text of the bill and a variety of summaries can be found here.