Biden Administration Proposes Extended and Expanded Tax Incentives for Renewable Energy

The Biden administration has proposed a number of renewable energy tax incentives in its recently released Green Book on tax proposals for its fiscal year 2022 budget. The proposals would extend current expiring tax credits and provide several new tax credits and optional direct payments as part of the administration’s policy to “prioritize clean energy” and reduce carbon emissions.

The proposals cover renewable energy, electricity transmission, energy manufacturing, nuclear and low-carbon hydrogen, transportation, and energy efficiency incentives for residential and commercial buildings. The administration also proposes to extend the tax credits for carbon sequestration. Most would be effective for tax years beginning after December 31, 2021. Below is a brief summary of the proposals.

Production and Investment Tax Credits

The Biden administration proposes to extend existing production and investment tax credits as well as implement new credits to promote investment in electricity transmission and energy manufacturing. Each of these proposals would provide the taxpayer with the option of a direct payment in lieu of the credit.

• Extend and enhance renewable energy PTC and ITC: Extend the IRC Section 45 production tax credit (PTC) and the 30 percent IRC Section 48 investment tax credit (ITC) for properties that begin after December 31, 2021 and before January 1, 2027. Both the PTC and ITC would phase down to zero by 20 percent a year over five years starting in 2027. For the ITC, the proposal would expand eligible property to include stand-alone energy storage in 2022 with a minimum of five kilowatt hours of capacity.
• New ITC for electricity transmission: Provide a new 30 percent ITC in qualifying electric power transmission property placed in service after December 31, 2021 and before January 1, 2032. Qualifying electric power transmission property would include overhead, submarine, and underground transmission facilities meeting certain voltage and capacity criteria. Qualifying property would also include any ancillary facilities and equipment necessary for the proper operation of the transmission facility.
• New ITC for energy manufacturing: Authorize an additional $10 billion of ITCs under IRC Section 48C for eligible property used in a qualifying advanced energy manufacturing projects. The proposal would allocate $5 billion of those funds to projects in coal communities. It would also revise the definition of a qualifying advanced energy projects to include: industrial facilities; recycling in addition to production; and expanded eligible technologies, including but not limited to energy storage and components, electric grid modernization equipment, carbon oxide sequestration, and energy conservation technologies. The proposals would also revise selection criteria to include evaluating wages for laborers and additional consideration for projects that create jobs in communities impacted by the closure of coal mines or coal power plants.

Nuclear and Low-Carbon Hydrogen

The Biden administration also proposes to expand existing production credits for nuclear energy and implement a new production credit for low-carbon hydrogen. The proposals would also have a direct payment option.

• Expand credit for existing nuclear generation: Expand the IRC Section 45J to provide up to $1 billion in PTCs for electricity generation from eligible existing nuclear power facilities. Eligible facilities would bid to receive credits over two-year windows with a solicitation of bids every two years. The first two-year crediting window would commence on January 1, 2022, and the last crediting window would commence on January 1, 2030.
• New PTC for low-carbon hydrogen: Implement a new low-carbon hydrogen PTC of $3 per kilogram for 2022 to 2024 and $2 per kilogram from 2025 to 2027, indexed to inflation. The credit would apply to each kilogram of qualified low-carbon hydrogen that is produced by the taxpayer for an end use application in the energy, industrial, chemicals, or transportation sector and from a qualified low-carbon hydrogen production facility. The hydrogen must also be produced during the six-year period beginning on the date the facility was originally placed in service. “Low carbon” refers to hydrogen produced using zero-carbon emissions electricity and water as a feedstock, which includes renewables and nuclear, or hydrogen produced using natural gas as a feedstock and with all carbon emitted in the production process captured and sequestered.

Transportation

Several tax credit proposals aim to promote zero-emissions vehicles and charging infrastructure. The administration also proposed a PTC for reduced-emissions aviation fuel.

• New tax credit for heavy-duty and medium-duty ZEVs: Expand the IRC Section 30D credit for “qualified plug-in electric drive motor vehicles” to include medium-duty and heavy-duty zero-emission vehicles. This would include battery electric vehicles and fuel cell electric vehicles. The credit would be based on the class of vehicles and the year of credit. The taxpayer would also have a direct payment option.
• Extend and enhance electric vehicle charging station credit: Modify and expand the 30 percent tax credit for electric vehicle charging stations. The proposal would allow taxpayers to claim the tax credits on a per-device basis, increase the tax credit limit on individual devices to $200,000, and extend the tax credit for five years through December 31, 2026. It would also extend by five years the $1,000 tax credit for refueling property installed at a taxpayer’s residence. The taxpayer would have a direct payment option.
• New PTC for sustainable aviation fuel: Implement a new PTC of $1.50 per gallon for sustainable aviation fuel that achieves at least a 50 percent reduction in emissions relative to conventional jet fuel for fuel produced after December 31, 2021 and before January 1, 2028. A supplementary credit would be available on a sliding scale depending on the emissions reduction relative to conventional jet fuel with a maximum credit of $1.75 per gallon for fuel with 100 percent emissions reduction.

Other Energy Efficiency and Residential Incentives

The Biden administration also proposes to extend and implement a number of tax credits aimed at promoting energy efficiency in residential and commercial buildings.

• Extend residential energy efficiency credit: Extend the 30 percent nonrefundable Residential Energy Efficiency Credit under IRC Section 25D for property placed in service after December 31, 2021 and before January 1, 2027. The credit would then phase out over five years. The proposal would also expand residential energy efficient property to include qualified battery storage technology of at least three kilowatt hours of installed capacity.

• Nonbusiness energy property: Extend the IRC Section 25C nonbusiness energy property tax credit five years and increase the lifetime limit to $1,200 for property placed in service after December 31, 2021 and before January 1, 2027. It would also modify the definitions of eligible qualified energy efficiency improvements and residential energy property expenditures and update the required energy efficiency standards.
• Credit for construction of new energy efficient homes: Increase the IRC Section 45L tax credit for an energy efficient home from $2,000 to $2,500 and extend the credit five years to December 31, 2026. The proposal would also modify and expand the eligible dwelling units.
• Energy efficient commercial buildings: Increase the maximum IRC Section 179D deduction per square foot from $1.80 to $3.00 for qualifying property placed in service after December 31, 2021. It would increase the partial deduction rate from $0.60 to $1.00 per square foot for qualifying property placed in service after December 31, 2021. It would also adjust the required efficiency standard from 50 percent to 30 percent of a building’s total annual energy reduction.
• Mechanical insulation labor costs: Create a new general 10 percent business tax credit for qualifying mechanical insulation labor costs. The credit would be available for labor costs incurred after December 31, 2021 through December 31, 2026.

Expand and Enhance Carbon Sequestration Credit

Although not related to renewable energy, carbon sequestration factors into the Biden administration’s plan to reduce carbon emissions. As part of this policy, the Biden administration would extend the IRC Section 45Q “commence construction” date by five years. This extension would require qualified facilities to begin construction by January 1, 2031. The proposal would also provide an enhanced credit for carbon oxide captured from hard-to-abate industrial carbon oxide capture sectors such as cement production, steelmaking, hydrogen production, and petroleum refining. The enhanced credit for industrial capture would not apply to ethanol, natural gas processing, or ammonia production facilities. The proposal would also provide an enhanced credit for direct air capture projects. The taxpayer would also have a direct payment option.

Outlook

The Biden administration’s renewable energy proposals are only one part of a series of proposed changes to both corporate and individual taxes. Actual legislation requires negotiations that would likely result in changes to the scale and scope of the tax credits. Nonetheless, tax policy is a central component of the administration’s efforts to promote renewable energy and reduce carbon emissions. The energy tax proposals in the Green Book also align with existing proposals in Congress, including those in the Clean Energy Act for America and the GREEN Act. This alignment makes the Green Book an important source of guidance on possible future legislation.

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