On July 27, 2022, Majority Leader Schumer (D-NY) and Senator Manchin (D-WV) released the Inflation Reduction Act of 2022 (the “Act”), a reconciliation package designed to address climate change, taxes and health care, including establishing a 15% corporate minimum tax, tightening of the carried interest rules to tax gains of asset managers, and extending and expanding available tax incentives for clean energy. The Act must pass both the House and the Senate and is expected to be put on the Senate floor for a vote as early as the end of this week, where it will need the vote of every Democratic senator to pass.

This alert summarizes the highlights of the clean energy provisions in the Act, which include tax incentives for renewable energy, such as wind and solar, as well as clean energy activities such as carbon capture and low-carbon hydrogen production. The Act would revive certain clean energy provisions first seen in H.R. 5376, the House bill previously known as the Build Back Better Act (the “BBBA,” discussed by us here), and the Senate Finance Committee’s updates to the BBBA (discussed by us here).

Two-Tiered Incentives Structure

As first proposed by the BBBA, the Act structures various tax credits in two tiers: a base rate and, if certain requirements are satisfied, a higher rate that is quintuple the base rate.

The higher rate generally applies only to those projects which meet the prevailing wage and apprenticeship requirements during applicable periods or satisfy certain other exceptions. Projects which are exempted from the prevailing wage and apprenticeship requirements and, thus, also qualify for the higher rate, generally include (1) where applicable, projects with a maximum net output of less than one megawatt (as measured in alternating current) and (2) projects which begin construction prior to the 60th day after Treasury issues guidance regarding the prevailing wage and apprenticeship requirements.

Under the “prevailing wage requirements,” the taxpayer must ensure that laborers and mechanics employed by contractors and subcontractors working on the construction of the facility, and in many cases its alteration or repair for a period of years after construction, are paid not less than the prevailing wages in the locality in which such facility is located as determined by the Secretary of Labor. Under the “apprenticeship requirements,” the taxpayer must ensure that no fewer than the applicable percentage (10% for projects which begin construction in 2022, 12.5% for 2023, and 15% thereafter) of total labor hours of the construction, alteration and repair work are performed by qualified apprentices (generally, employees participating in a registered apprenticeship program). Both requirements have certain cure provisions and the apprenticeship requirement includes a “good faith efforts” exception.

Enhanced Credits for Domestic Content, Energy Communities, and Low-Income Housing

For certain types of credits, such as the production tax credit under Section 45 (the “PTC”) and the investment tax credit under Section 48 (the “ITC”), an additional credit amount is available if the “domestic content requirements” are satisfied. Under the domestic content requirements, the taxpayer must ensure that any steel or iron, or a sufficient portion of manufactured product, that is a component of the qualified facility or energy property, as applicable, is produced or deemed produced in the United States. Manufactured products are deemed produced in the United States if not less than an applicable percentage, ranging from 40% (20% for offshore wind) of the total costs for construction beginning before 2025 to 55% of costs for construction beginning after 2026 (2027 for offshore wind), of all manufactured products of the qualified facility or energy property, as applicable, are attributable to manufactured products (including components) which are mined, produced, or manufactured in the United States.

In the case of the PTC and the clean energy production credit under new Section 45Y, this additional credit amount equals 10% of the amount otherwise available to the taxpayer. In the case of the ITC and the clean energy investment credit under new Section 48D, this additional credit would increase the applicable credit rate by 2 percentage points for property that only qualifies for the base rate of underlying credit and 10 percentage points for property that qualifies for the higher rate of underlying credit.

There are also additional credit amount enhancements (also generally equal to 10% of the credit amount) for facilities located in energy communities or low-income communities. For this purpose, an “energy community” is (i) a brownfield site, (ii) an area which has (or at any time after 1999 had) significant employment related to the extraction, processing, transport, or storage of coal, oil or natural gas, or (iii) a census tract (or a directly adjoining census tract) where a coal mine closed after 1999 or a coal-fired electric generating unit closed after 2009. Qualification for the credit enhancement for low-income communities requires the taxpayer to meet the applicable criteria and apply to Treasury for an allocation of the capacity eligible for the credit each year.

If a project is eligible for both the credit enhancement for domestic content and for project location, the total ITC for the project could reach 50% for projects placed in service after 2022.

Credit Haircuts for Tax-Exempt Financing

For most clean energy credits, the available credit is reduced up to 15% to the extent the relevant facility is financed by tax-exempt debt and construction of the facility began after the date of enactment of the Act.

Extensions of the PTC and ITC for Wind, Solar and other Energy Property

The Act extends the PTC and ITC applicable to wind, solar, and certain other energy projects.

The PTC for geothermal and solar energy is revived. For geothermal, solar, wind, and other PTC-eligible projects placed in service after 2021 that begin construction before 2025 the “higher rate” of PTC credit for projects that meet, or are not subject to, the prevailing wage/apprenticeship requirements described in “Two-Tiered Incentives Structure” above is increased to the full applicable credit rate (for example, 2.6 cents per kWh in 2022), without any haircut.

The ITC for solar energy property and most other ITC-eligible property is extended, providing a rate of 30% (in the case of projects that meet, or are not subject to, the prevailing wage/apprenticeship requirements described in “Two-Tiered Incentives Structure” above) for projects placed in service after 2021 that begin construction before 2025. The credit is extended for geothermal heat pump property for construction beginning before 2035 (with a phased-down credit amount in the final two years).

Future Replacement of ITC and PTC with Similar Technology-Neutral Credits Under Section 45Y and 48D

For projects that begin construction after 2024, the traditional ITC and PTC generally no longer apply. They are replaced by a new technology-neutral clean electricity production tax credit (similar to the PTC) under new Section 45Y and a new clean energy investment tax credit (similar to the ITC) under new Section 48D. Eligibility for these credits generally requires that the facility’s greenhouse gas emissions be no greater than zero. These credits would begin to phase out after 2032 or, if later, the year in which Treasury determines that greenhouse gas emissions from production of electricity in the United States are no more than 25% of 2022 levels.

Extension and Increase in Section 45Q Tax Credit for Carbon Capture and Sequestration

The tax credit under Section 45Q for carbon capture and sequestration (the “45Q Credit”) would be extended for facilities that begin construction before 2033. Section 45Q would provide a credit at a rate of $85 per metric ton of carbon oxide captured for geological storage, and a credit at a rate of $60 per metric ton of carbon oxide captured and used by the taxpayer for enhanced oil recovery or other allowable use, in both cases for those facilities that meet, or are not subject to, the prevailing wage/apprenticeship requirements described in “Two-Tiered Incentives Structure” above. These rates, which would be effective starting in 2023, represent an increase over the current credit amounts of $50 and $35 per ton for sequestration or enhanced oil recovery, respectively, scheduled to apply in 2026 and later years.

With respect to qualified direct air capture facilities, the Act would also provide an enhanced 45Q Credit at a rate of $180 per metric ton for carbon oxide captured for geological storage and $130 per metric ton of carbon captured and used by the taxpayer for enhanced oil recovery or other allowable use (in both cases again assuming prevailing wage/apprenticeship requirements are met).

While the proposal does not increase the credit period from the existing 12 years, it does reduce the minimum annual capture thresholds that must be met in order to be a qualified facility to 12,500 tons for non-electricity producing facilities and to 18,750 tons (coupled with a 75% of emissions reduction requirement) for electricity-producing facilities, for those who begin construction after the date of enactment.

The amendments to Section 45Q contained in the Act are generally applicable to facilities placed in service after 2022. For facilities already placed in service, the Act also offers an election into the increased 45Q Credit for any facility currently in service and as to which no 45Q Credits have previously been claimed if the facility is located in a federally-declared disaster area and the disaster resulted in a cessation of operation of the facility.

New Tax Credit for the Production of Clean Hydrogen in Section 45V

The Act creates a new tax credit, in new Section 45V, for the production of clean hydrogen (the “Clean Hydrogen Production Credit”) by a taxpayer at a qualified facility beginning in 2023 during the ten-year period beginning on the date such facility is placed in service. The credit applies to hydrogen produced after 2022. Construction of qualified facilities must begin before 2033.

The amount of the Clean Hydrogen Production Credit is equal to the “applicable percentage” of $3.00 in the case of projects that meet, or are not subject to, the prevailing wage/apprenticeship requirements described in “Two-Tiered Incentives Structure” above, indexed to inflation, multiplied by the volume (in kilograms) of clean hydrogen produced by the taxpayer at a qualified facility during such taxable year. The “applicable percentage” depends on the reduction in lifecycle greenhouse gas emissions as determined by the Greenhouse gases, Regulated Emissions, and Energy use in Transportation Model (referred to as the “GREET model”), with the highest applicable percentage being 100% (if lifecycle greenhouse gas emissions are less than 0.45 kilograms of CO2e per kilogram of hydrogen) and the lowest being 20% (if lifecycle greenhouse gas emissions are between 2.5 and 4 kilograms of CO2e per kilogram of hydrogen).

A taxpayer may elect to treat a qualified clean hydrogen facility as energy property for purposes of the ITC in lieu of the Clean Hydrogen Production Credit, in which case the ITC shall equal the applicable percentage multiplied by the energy percentage, meaning that the credit rate would reflect the extent of the reduction in lifecycle greenhouse gas emissions, and the rate of 30% (in the case of projects that meet, or are not subject to, the prevailing wage/apprenticeship requirements described in “Two-Tiered Incentives Structure” above) would only apply if the facility emitted less than 0.45 kilograms of CO2e per kilogram of hydrogen. Under the Act, the Clean Hydrogen Production Credit would not be available for hydrogen produced at a facility which includes carbon capture equipment for which the 45Q Credit is allowed to any taxpayer.

Expansion of the ITC

For property placed in service after 2022, the Act expands the ITC to include:

• energy storage technology, which generally includes (i) property that receives, stores and delivers energy for conversion to electricity and has a minimum capacity of 5 kilowatt hours and (ii) “thermal energy storage property,” which generally means a system that is directly connected to a heating, ventilation, or air conditioning system, removes heat from, or adds heat to, a storage medium for subsequent use, and provides energy for the heating or cooling of the interior of a residential or commercial building, with electing utilities permitted to avoid tax normalization requirements if allowed by state or local law and regulatory bodies;


• qualified biogas property, which converts biomass into a gas which consists of (or is concentrated by such system to consist of) not less than 52% methane and captures such gas for sale or productive use;


• microgrid controllers, which are part of, and monitor and control the energy resources and loads on, qualified microgrids capable of (i) generating not less than 4 kilowatts and not greater than 20 megawatts of electricity and (ii) operating in connection with, as a single controllable entity with respect to, and independently (and disconnected) from, the electrical grid;


• linear generator assemblies, which generate electricity through electromechanical means without using rotating parts and have a minimum capacity of at least 1 kilowatt; and


• dynamic or electrochromic glass, which uses electricity to change its light transmittance properties in order to heat or cool a structure.

Hydro Incentives

The Act expands the PTC for hydropower projects placed in service after December 31, 2022. In particular, the Act eliminates the 50% PTC reduction under current law for qualified hydroelectric production and marine and hydrokinetic renewable energy. The Act also expands application of the PTC to marine and hydrokinetic renewable energy by (i) including energy derived from certain pressurized water pipelines and (ii) reducing the minimum required nameplate capacity rating for a qualified facility to 25 kilowatts.

The Act does not include the provision from the BBBA that would have applied the ITC to “hydropower environmental improvement property.” As a result, the ITC remains available for such property (if at all) only by electing the ITC in lieu of the PTC under Section 48(a)(5).

New Tax Credit for Production of Zero-Emission Nuclear Power in Section 45U

The Act creates a new tax credit, in new Section 45U, for the production of zero-emission nuclear power (the “Nuclear Power Production Credit”). In general, the Nuclear Power Production Credit equals a base rate of 0.3 cents per kWh of electricity produced at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the taxable year, less the “reduction amount.” If prevailing wage requirements (but not apprenticeship requirements) are satisfied, the amount of the Nuclear Power Production Credit otherwise available is quintupled.

The “reduction amount” is 80% of the excess of (x) gross receipts from the sale of electricity to an unrelated person during the taxable year over (y) the product of 2.5 cents and the number of kWh of electricity used to initially calculate the Nuclear Power Production Credit. Thus, the reduction amount has the effect of phasing out the Nuclear Power Production Credit as the price of electricity increases.

A qualified nuclear power facility means a facility owned by the taxpayer, which uses nuclear energy to produce electricity, is not an advanced nuclear power facility under Section 45J(d)(1), and is placed in service before the date of enactment of the Act.

The Nuclear Power Production Credit is inflation adjusted and applies to electricity produced and sold after December 31, 2023 and before December 31, 2032.

Monetizing Tax Credits

Credit Transfers (Sales of Credits)

One significant new change is that, starting in 2023, taxpayers will be able to transfer most clean energy tax credits to unrelated parties for cash. The cash consideration would not be taxable to the transferor and would not be deductible by the transferee. The transferee would take the tax credit into account in its first taxable year ending with, or after, the transferor’s taxable year for which the credit is determined.

Under current law, clean energy tax credits generally may not be transferred or sold. Allowing transferability of such tax credits could bring significant changes to the tax equity market by simplifying the structures used to allocate tax credits to tax equity investors and expanding the universe of potential investors.

3-Year Carryback

The Act extends the carryback period for most tax credits to three years as opposed to one year under current law.

Direct Pay Limited to Tax-Exempts, Government Entities, Carbon Capture and Hydrogen

The Act significantly limits the scope of taxpayers that would have been eligible under the BBBA to elect “direct pay.” “Direct pay” is an election to be treated as having made a payment of tax equal to the amount of the eligible tax credits and to request a tax refund for the deemed payment of tax rather than carrying forward such credits. While the BBBA had proposed to allow any taxpayer (including a partnership or S corporation) to elect direct pay, the Act enables direct pay treatment only to tax-exempt and certain government entities and those claiming the 45Q Credit, Clean Hydrogen Production Credit, and the advanced manufacturing production credit (with the latter three credits limited to the first five years of the credit period).

Fuel Credits and Sustainable Aviation Fuel Credits

The Act extends through 2024: (1) the income and excise tax credits for biodiesel and biodiesel mixtures at $1.00 per gallon, (2) the $0.10-per-gallon small agri-biodiesel producer credit, (3) the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures, and (4) the second generation biofuel income tax credit. It also creates a new sustainable aviation fuel (SAF) income and excise tax credit, applicable to sale or use of qualified mixtures after 2022 and before 2025.

The Act creates a new technology-neutral clean fuel production credit that applies after 2024 and before 2028. Fuels may qualify for the credit if their lifecycle emissions are sufficiently below the U.S. average.

Qualified Transmission Property, Publicly Traded Partnerships Are Not Addressed

The Act does not include the BBBA’s proposed tax credit for qualified transmission property. Similarly, the Act does not include the provision from the BBBA that would have expanded the definition of “qualifying income” for publicly traded partnerships to include certain income derived from clean energy.

Non-Clean Energy Tax Changes

The Act contains a few other tax changes outside of the context of clean energy and tax credits.

The Act would generally impose a corporate alternative minimum tax (AMT) of 15 percent on the adjusted financial statement income of a corporation with average adjusted financial statement income in any prior post-2021 tax year in excess of $1 billion. Corporations generally would be eligible to claim business tax credits and post-2019 financial statement net operating losses against the AMT, subject to limitations, and would be eligible to claim a tax credit against the regular corporate tax for AMT paid in prior years, to the extent the regular tax liability in any year exceeds 15 percent of the corporation’s adjusted financial statement income. This provision would be effective for taxable years beginning after December 31, 2022.

In addition, the Act would modify the taxation of most carried interests by (i) extending the holding period required to receive long-term capital gains treatment from gains attributable to carried interests to five years (or 3 years in the case of taxpayers with adjusted gross income of less than $400,000 and for gains attributable to carried interests with respect to a real property trade or business) and (ii) subjecting Section 1231 gains (e.g., gains from the disposition of real property and depreciable property) to these rules. The Act also would modify in a taxpayer adverse manner the way in which a taxpayer’s holding period in a carried interest is determined for this purpose, with the result that carried interests in entities that hold multiple investments may, as a practical matter, be required to be held much longer than 5 years or 3 years, as the case may be, in order to avoid being subjected to these rules.

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As the Act progresses to the Senate floor for a vote and, if passed, to the House for consideration and potential modification, we will continue to monitor developments and will provide further updates on the clean energy tax incentives package. In the meantime, Baker Botts would be pleased to assist you in your analysis of the Act and other clean energy tax incentive matters.

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