The Inflation Reduction Act (IRA) is the latest lever energy and utilities can pull to potentially speed up the pace of the cleaner energy transition. Nearly $370 billion in available tax credits, incentives and other financing could help to accelerate your investments in renewables, hydrogen, fleet electrification, adoption of technologies like carbon capture and storage, reduction of emissions or the exploration of new lines of business and partnerships. Beyond furthering your decarbonization efforts, the act’s funding mechanisms, which include a 15% book-income alternative minimum tax (BMT) on corporate profits for the nation’s largest companies and larger excise taxes, could profoundly affect the cost of doing business for energy and utility companies.
The potential impacts reach across C-suite focus areas and touch many parts of the business, including capital projects, new technology and product development, shareholder returns, revenue and rates for regulated companies, supply chain and workforce. It is important for leaders to align on an approach to the IRA, while considering it within the context of other grants and incentives available for clean energy and related investments, such as the Infrastructure Investment and Jobs Act and CHIPS Act. The strategic decisions made while planning for 2023 could have lasting impacts and result in taking big steps forward in the energy transition.
The Inflation Reduction Act may help to spur the industry’s advancement of cleaner energy with the greatest acceleration likely coming from energy and utilities’ strategic reinventors.
The industry’s strategic reinventors can help to amplify today’s progress by seizing the opportunity to further develop or commercialize solutions related to clean energy. Momentum is also likely from those who have already placed big bets on the energy transition. As an example, those who moved early on the research and development of hydrogen now have the green light to keep the momentum going, thanks to the act’s 10-year production tax credit for clean hydrogen.
Over the long run, the IRA may encourage a flood of deal activity and investor interest in areas such as carbon capture, a technology that may be less expensive and more attractive because of tax credits. Likewise, a provision that allows for the transfer of credits to another entity may lead to an uptick in companies forming new partnerships, seeking joint ventures or exploring new markets to expand or evolve their portfolio.
The most strategic and proactive leaders will likely connect the dots between the provisions available to energy and utility companies under IRA, other available funding and their own enterprise-wide sustainability and growth goals. Here, we highlight some of the key provisions of the IRA by C-suite focus area. But, you might find it valuable to view all business focus areas, as the insights might help inform your cross-enterprise thinking.
The IRA presents the opportunity to further deliver on the carbon reduction commitments you’ve made to investors and other stakeholders, while continuing to support your environmental, social and governance (ESG) goals. It offers new levers to pull as you pursue growth — something more than 80% of energy and utilities executives said is a top priority in the August 2022 PwC Pulse Survey.
For those who develop new products and services or companies that stand to see an increase in demand for what they offer, the growth possibilities are obvious — like for mining companies that produce critical minerals central to the energy transition such as lithium and nickel. For others, there are strategic questions to answer. Will we use the IRA to make some already-planned investments more quickly and more economically? Or will we significantly change our business model by moving in new directions?
The act reinstates, extends or modifies tax credits and incentives — including those for renewable energy (wind, solar, etc.), carbon capture and sequestration, clean hydrogen, nuclear, energy storage and more. They’ll be in place for 10 years, offering a bit more certainty and a clear time horizon for planning new investments. After that, it’s unclear if lawmakers will extend the IRA’s provisions. As energy and utility capital investments tend to have lengthy lead times and asset depreciation considerations, chief executives should consider this window of opportunity and how it factors into the long-term strategy.
What to do now
If the tax credits and incentives within the IRA were pieces on a chessboard, tax leaders would help to orchestrate the most strategic moves. With so many Investment Tax Credit (ITC), Production Tax Credit (PTC), carbon capture provisions and other incentives on the table, tax leaders have an incredible opportunity to offer strategic guidance that may change capital investment decisions and cash flow for years to come. For instance, energy and utility companies may be able to take advantage of multiple incentives, but there are rules limiting taking multiple credits for the same activity. Meanwhile, tax leaders want more guidance from the Department of Treasury on which credits are stackable, how the new so-called “direct pay” and transferability features work (including interaction with the BMT), how to meet prevailing wage, apprenticeship and domestic content requirements that garner credit enhancement and how to define a “facility.”
As a tax leader, you can play a vital role in helping your organization decide which incentives would be most beneficial and for what investments. It may also be important to work across the organization — from supply chain and construction to risk and workforce — to confirm that domestic sourcing, wage, apprenticeship and other requirements are met, putting your company in a position to claim desired incentives.
Beyond tax credits and incentives, several revenue-raising components of the act can affect tax strategies for the short term. This includes a provision imposing a 15% minimum tax on corporations with average annual adjusted financial statement income in excess of $1 billion over three tax years. Other provisions on the radar include a 1% excise tax on certain repurchases of corporate stock, methane emissions tax and a Superfund financing tax — each with different impacts based on your role within the energy and utilities industry.
What to do now
The IRA’s impact on the cost of doing business is far-reaching. Beyond potentially making it easier and more economical to advance your company’s cleaner energy agenda, provisions within the act could have implications for your margins and cash flow. The IRA’s 15% minimum tax on corporate profits requires a deeper assessment of how it’s calculated, where the 15% gets applied and how you protect your business and value for shareholders. Also, your operating costs could change as your energy or utility company continues to decarbonize. Offering the same product that is decarbonized, versus one that is not, could come at a price differential with profit and loss (P&L) implications. Of course, it depends on how much the end customer values the decarbonized products. For instance, sought-after sustainable aviation fuel can cost four to five times as much as standard fuel, which can offset the cost to produce the product, add more margin and have a positive impact on P&L. Conversely, if there is no price premium to capture, the cost to produce decarbonized products can have a negative impact.
The act also allows more flexibility with direct pay for qualifying companies and transferable credit options, which could have a significant impact for companies relying on financing arrangements for energy-related projects. While not a requirement of the provision, the ability to transfer credits to another entity may encourage energy and utility companies to form new partnerships or joint ventures to gain more access to clean energy, tap into new revenue sources or explore new business configurations. For instance, we could see more partnerships where a traditional energy or utility company teams up with a small, modular reactor provider offering nuclear as a zero-carbon backup to wind and solar. Or, more hydrogen producers and nuclear operators forging symbiotic relationships where the output from nuclear supports hydrogen production. All players in these scenarios could potentially benefit from IRA incentives.
What to do now:
A key focus of the IRA is to onshore or bring more clean energy manufacturing and production to the US, with the intent of eventually bringing down costs and relieving supply chain bottlenecks. It also offers incentives for projects that meet certain domestic content requirements — meaning products or materials made in the US — as well as projects that are in specific, traditionally underserved communities. Specifically, the act calls for an additional 10% bonus production and investment tax credits for facilities or properties that meet requirements. In circumstances where American-made products and materials are unavailable or excessively costly, exceptions apply allowing foreign-produced materials that adhere to strict guidelines against human rights abuses.
Companies that are expanding solar installations, for example, must confirm imports comply with standards that guard against forced labor. As a result, companies that want to use the IRA to accelerate their energy transition may have to step up transparency and secure continuity of supply for their materials. Beyond supply considerations, the cost of operating your business could change as your company continues to decarbonize in new or expanded ways.
What to do now
With innovation comes the potential for new risks and new vulnerabilities. The IRA nudges companies to move faster in deploying existing or new technologies, possibly triggering a need to adjust business models to include more clean energy. It takes energy and utilities’ already complex cyber landscape and may introduce even more complex connections to the grid and energy infrastructure, new business ventures or third-party relationships and other factors that could lead to business risk. Additionally, with funding potentially coming from government grants, compliance risk should be on your radar. It will likely be important to confirm that awarded funds are appropriately distributed for the intended use.
For oil and gas companies, or utilities running power plants, abating and containing methane emissions is becoming an area of heightened risks. For those who already need to to report greenhouse gas (GHG) emissions to the Environmental Protection Agency (EPA), the IRA introduces charges for facilities with emissions above thresholds set by the act. This marks the first time the federal government has directly imposed a charge, fee or tax on GHG. Additionally, the IRA calls for the EPA to track companies’ voluntary carbon reduction commitments to confirm that they are based on empirical data and accurately represent the methane emissions. This expands the EPA’s current involvement and adds another government entity seeking data-backed information beyond the proposed disclosures to the Securities and Exchange Commission. To help the industry achieve its emission reduction goals, the IRA earmarks millions for methane mitigation and monitoring in the form of grants, rebates, loans and other financial assistance.
What to do now
For years, the industry’s human capital leaders have faced two key dynamics: a retiring workforce and competition for talent with the technical and strategic capabilities needed to usher in a cleaner energy future. The IRA adds a third dynamic to the mix: wage and apprenticeship requirements for workers hired for projects eligible for tax credits. To realize the full value of the tax credits and incentives contained in the act, you must employ a certain number of registered apprentices and pay specific workers a “prevailing wage,” which refers to the average wage for the area of employment or union pay scale.
The act structures many new and existing clean-energy provisions as two-tiered incentives with a base rate and a bonus rate equal to five times the base rate. To qualify for the bonus rate, energy and utilities must satisfy the prevailing-wage requirements during construction and for each year during the 10-year credit period, as well as apprenticeship requirements throughout the project. During a transition period, companies have some latitude on these labor rules.
What to do now
Because of the potential implications across your company, it’s important for leaders to align on a holistic strategy that can cover the entire enterprise — from finance, tax and deals to operations, supply chain, risk and more. The collaboration could help your company further shape its cleaner energy future.
We’ve seen acceleration like this happen within the industry before — like when stimulus funding following the 2008-2009 financial crisis helped to spur the rollout of millions of smart meters for utilities. Notably, impacts from the IRA could be broader and deeper across many aspects of the energy, utilities and resources value stream.
Global Energy Advisory Leader, PwC US
Principal, Energy, Utilities and Resources Cyber, Risk and Regulatory Leader, PwC US