Inflation Reduction Act Offers Expanded Energy Tax Credits

President Biden on Aug. 16 signed into law the Inflation Reduction Act (IRA), which will extend and expand various energy tax incentives and give public power utilities direct access to such credits through a refundable direct payment tax credit.

The U.S. House on Aug. 12 passed the IRA after the U.S. Senate passed the bill earlier in August.

The Joint Committee on Taxation estimates the value of energy-related tax incentives to be worth $25 billion in 2022 alone. However, because public power utilities are exempt from tax, they have not been able to take advantage of these incentives for projects they own. As a result, using the tax code to incentivize energy investments has excluded public power and cooperative utilities serving nearly 30 percent of all retail utility customers in the United States.

Instead, to take advantage of these energy tax incentives, tax-exempt, community-owned utilities have had to enter into power purchase agreements with third party developers — who often themselves would enlist a tax equity partner to monetize energy tax credits.

The result has been profound, according to the American Public Power Association (APPA). For example, recent surveys of public power utilities showed they own just two percent of the non-hydropower renewable energy used to serve their customers: the remaining 98 percent had to be secured through power purchase agreements.

The IRA corrects this by allowing tax-exempt entities to claim energy tax credits directly. Public power has long supported this approach, which will lead to lower costs, local jobs, and more equitable energy service for all customers. The IRA will benefit millions of utility customers nationwide served by not-for-profit, community-owned public power utilities.

“In addition to extending and expanding a variety of critical energy tax incentives, this piece of legislation will ensure that all utilities can benefit from these incentives, which encourage the critical energy investments they need to continue to use cleaner generating technologies,” said APPA President & CEO Joy Ditto. “In the end, this makes these incentives fairer and more effective.”

Power purchase agreements will continue to be useful tools and many public power utilities will continue to use them to secure access to energy facilities. But having the option to own and operate their own facilities means public power utilities can make the best choices on behalf of the more than 49 million Americans and thousands of businesses they directly serve.

Benefits for MEAG Power & Participants

The new law also includes a tax credit for owners of existing nuclear facilities, which would include Vogtle units 1 & 2, and Hatch units 1 & 2. The base credit is 0.3 cents/kWh, with a bonus credit rate of 1.5 cents/kWh with the satisfaction of prevailing-wage and apprenticeship requirements.

As the price of electricity increases, the credit is reduced. The credit-reduction formula reduces the credit by 16% of the excess revenue from electricity produced and sold greater than 2.5 cents/kWh times the amount of electricity produced and sold during the year. This applies to electricity produced and sold between Jan. 1, 2024, and Dec. 31, 2032 (8 years).

The IRA does not apply to Vogtle 3 & 4, because they will receive previously established 45j tax credits.

MEAG Power is in the process of analyzing the new law and estimating the potential savings that the existing nuclear tax credit could provide.

On Sept. 27 from 2-3 p.m. EDT, the APPA will host a one-hour webinar “Public Power and the Energy Tax Provisions of the Inflation Reduction Act.” Registration is free and only open to APPA utility members. More information about the webinar, including a link to register can be found here.