The Inflation Reduction Act of 2022 reflects a significant step toward meeting the United States’ greenhouse gas emission reduction targets from the Paris Convention and recognizes the indispensable role that nuclear power must play to achieve that commitment. The act contains several key provisions that bolster a broad spectrum of new and existing activities in the nuclear industry.
As a targeted benefit to the nuclear industry, the Inflation Reduction Act of 2022 (IRA) modifies the Internal Revenue Code (IRC or Code) to allow new production tax credits (PTCs) for existing nuclear plants. Perhaps just as important, however, the IRA allows for many technology-neutral credits related to renewable energy that focus not on specific technology, but on a low or zero-carbon footprint of such energy production. This includes credits focused on the production of clean hydrogen (which can be generated by nuclear reactors) and clean electricity (including future new-build nuclear power projects), and on the investment in clean energy (allowing certain nuclear facilities to qualify for investment tax credits (ITCs)). Many, though not all, of these credits are subject to reductions and/or enhancements based on certain standard-based incentives and disincentives.
Importantly, the IRA also introduces significant changes to the Code to allow for greater monetization of applicable tax credits, including those that relate to nuclear power. From a practical perspective, these changes may ultimately prove transformative to the nuclear industry in allowing access to the tax equity markets for project financing, which to date has been virtually nonexistent for largely technical reasons.
Finally, the IRA also provides additional funding to establish a domestic supply of High-Assay Low-Enriched Uranium (HALEU) fuel, which is needed by many next-generation reactors.
IRA Section 13105 creates a “zero-emission nuclear power production tax credit” in Section 45U of the Code (the Nuclear PTC) aimed at preventing the decommission of existing nuclear plants. The Nuclear PTC is available with respect to existing nuclear plants for electricity produced and sold for taxable years beginning after December 31, 2023, and before December 31, 2032.
Importantly, the credit is unavailable to an “advanced nuclear power facility” that qualifies for the advanced nuclear tax credit in IRC Section 45J (added by the Energy Policy Act of 2005). The advanced nuclear tax credit under Section 45J, which offers a maximum 1.8 cent per kWh credit, continues to be the only currently available generation credit for new nuclear electricity generation facilities not yet placed into service (the new 45Y and 48E zero emissions facility credits, each described below, are only available for facilities placed into service after December 31, 2024).
Although outside the scope of this summary, the limited “allocation” Section 45J credit was refreshed by Congress in 2018, and allocations still remain available for advanced nuclear reactors that are placed into service on a first in line basis (although the IRS has yet to update allocation guidance for the 2018 refresh legislation).
We have discussed before the benefits of using nuclear power to generate clean hydrogen and the Infrastructure Investment and Jobs Act’s creation of clean hydrogen hubs, at least one of which must use nuclear power to produce clean hydrogen. The IRA establishes a separate technology-neutral credit for the production of clean hydrogen in new Code Section 45V (the Clean Hydrogen PTC).
The Clean Hydrogen PTC provides a per-kilogram (kg) credit for qualified clean hydrogen produced at a qualified clean hydrogen production facility for a 10-year period for sale or use by the taxpayer as verified by an unrelated party. The applicable inflation-adjusted tax credit rate is multiplied by an “applicable percentage” based on the level of emissions associated with the production of the hydrogen (ranging from 20% to 100%).
The credit amounts resulting from these adjustments are shown in the following table:
|
Emissions border: solid;(kg CO2e per kg of hydrogen) |
Credit border: solid;(per kg of qualified clean hydrogen) |
|
<0.45 |
$0.60 |
|
0.45 to 1.5 |
$0.20 |
|
1.5 to 2.5 |
$0.15 |
|
2.5 to 4.0 |
$0.12 |
The amounts above may be multiplied by 5 if an applicable prevailing wage standard and an apprenticeship standard are met (each as described briefly below). The credit is available to any facility under construction before January 1, 2033. The facility must be owned by the taxpayer and must produce clean hydrogen in the United States.
Taxpayers can elect, in lieu of claiming a Clean Hydrogen PTC, to claim an ITC equal to a specified percentage of the cost of property placed in service under IRC Section 48. Furthermore, a taxpayer cannot receive the Clean Hydrogen PTC if the facility includes carbon capture equipment and the taxpayer receives the carbon capture tax credit established under IRC Section 45Q.
There is no apparent restriction on a taxpayer claiming both the Nuclear PTC and the Clean Hydrogen PTC, other than the “reduction amount” discussed above being utilized in the calculation of the Nuclear PTC.
IRA Section 13701 amends Section 45Y of the Code in a manner that could allow soon-to-be-deployed advanced reactors and small modular reactors (as well as new light water reactors) to qualify for the technology-neutral clean electricity production tax credit (the Clean Electricity PTC). It does so by changing the definition of “qualified facility” to mean any plant that is placed into service after December 31, 2024, and produces zero greenhouse gas emissions. Because eligibility is based on emissions rates instead of generation technology, nuclear facilities may use the Clean Electricity PTC.
The amount of the credit is equal to 0.3 cents per kWh of electricity produced and sold to an unrelated person or, if equipped with a metering device owned and operated by an unrelated person, sold, consumed, or stored by the taxpayer. The amount of the credit is multiplied by 5 (to 1.5 cents per kWh) if prevailing wage standards and apprenticeship standards are met (each as generally described below). These amounts are indexed to inflation. The credit may be increased by 10% if the facility is located in an energy community, defined below, and by another 10% if a domestic content standard is met, each as generally described below.
While a taxpayer may claim the credit for 10 years, the credit itself will phase out when the secretary of energy determines that annual greenhouse gas emissions from electrical generation is equal to or less than 25% of emissions in 2022 or in 2032, whichever is earlier. Taxpayers cannot claim this credit if they claimed other tax credits like the advanced nuclear tax credit under Code Section 45J or the Nuclear PTC in Section 45U, among others.
IRA Section 13501 revives and expands the now dormant Code Section 48C investment credit for expenditures on advanced energy production facilities. Under this program, the US Department of the Treasury may authorize up to $10 billion of Section 48C credits, although the amount authorized for facilities located outside of an energy community, described below, may not exceed $6 billion.
Eligible facilities include plants that manufacture or recycle renewable energy generation equipment; energy storage equipment; grid modernization equipment; carbon capture and sequestration equipment; certain electric, fuel cell, or hybrid vehicles and equipment; other energy conservation equipment; and equipment designed to refine, electrolyze, or blend any fuel, chemical, or product that is renewable or low carbon and low emission. The credit also applies to qualifying expenditures that reequip an existing industrial or manufacturing facility with equipment designed to reduce greenhouse gas emissions by at least 20%, or that reequip, expand, or establish a critical materials (designated pursuant to the Energy Act of 2020) processing, refining, or recycling facility. The tax credit rate is 30%, subject to an 80% reduction if the facility does not satisfy the wage and apprenticeship standards described below.
Accordingly, Section 48C may be of new interest to nuclear industry equipment manufacturers—although it cannot generally be “stacked” with the other tax credits described herein.
IRA Section 13502 establishes an advanced manufacturing PTC (the Manufacturing PTC) for applicable components produced and sold after 2022. The credit applies to a qualifying component (either individually or integrated into another eligible component) produced within the United States or a US possession and sold to an unrelated person.
While not specific to the nuclear industry, qualifying components for this purpose include finished equipment and component parts of electricity inverter equipment and energy storage equipment. Critical minerals, including certain rare earth metals, will also be treated as eligible components.
The applicable credit rate is based on the type of component produced and sold, and facilities that elected to apply the Section 48C credit will not be eligible for the Section 45X credit. The Section 45X credit will remain at its maximum rate until 2030, at which time it will step down by 25% per year until it expires in 2033. However, such phase-out and expiry do not apply to certain critical materials.
Like Section 48C, Section 45X may be of interest to nuclear industry equipment and component manufacturers.
IRA Section 13702 provides a front-loaded Clean Electricity ITC for energy production and storage. The credit is equal to 6% of a qualified investment in any qualified facility or energy storage technology, and may be increased to 30% for low-capacity energy storage or upon the satisfaction of the prevailing wage and apprenticeship standards. Furthermore, the credit may be increased by 10% if the facility is located in an energy community, and by another 10% if a domestic content standard is met, each as generally described below.
The Clean Electricity ITC is drafted in a way that allows investments for advanced reactors to qualify for the credit. A qualified facility includes those that (1) are used for the generation of electricity; (2) are placed in service after December 31, 2024; and (3) produce a greenhouse gas rate of zero. The change in definition for a qualified facility allows advanced reactors to access similar tax incentives that have been available to other renewable energy sources previously.
As noted above, many of the tax credits described herein are subject to standard-based incentives that could significantly impact the amount of the applicable tax credit. These include a prevailing wage standard, an apprenticeship standard, an incentive to utilize “domestic content,” and an incentive to locate a facility in an “energy community.” The particulars of these tests or standards vary to some degree between credits, but generally are consistent with the below descriptions.
Prevailing Wage Standard: This standard bases wage requirements on the US Department of Labor’s published prevailing rates for relevant work in a particular locality (prevailing wage requirements), which apply to any laborers, mechanics, contractors, or subcontractors employed or hired by the taxpayer.
Apprenticeship Standard: The apprenticeship standard requires that qualified apprentices (participants in registered apprenticeship programs under the National Apprenticeship Act) participate in an increasing percentage (based on beginning of construction year and generally maxing out at 15%) of total labor hours of the construction, alteration, or repair work (both contractor and subtractor) with respect to a facility. A good-faith efforts standard could also apply to deem satisfaction of the qualified apprentice requirement in certain circumstances.
Domestic Content: The domestic content standard requires that any steel, iron, or manufactured product that is a component of the facility be produced in the United States, as determined under the federal Buy America requirements standards.
Energy Community: An energy community is a “brownfield site” or an area determined by Treasury or under census measurements where there had been significant employment related to fossil fuel, extraction, processing, transport, or storage (including where a coal mine/coal-fired electric power plant closed or possibly where a nuclear plant has previously been decommissioned other than for spent fuel management purposes). Energy communities for these purposes include places where coal power plants were closed after December 31, 1999, or retired after December 31, 2009, if certain unemployment levels are met.
Many advanced reactor companies are looking at siting new reactors at retired coal plants. These coal-to-nuclear projects may be eligible for this enhancement to credits. As is the case for much of the IRA, Treasury/IRS guidance will be necessary to effectively implement these rules for the energy industry broadly (including the nuclear industry).
The IRA provides that the credits discussed above are generally refundable at the election of certain eligible entities. Aside from limited exceptions for the Clean Hydrogen PTC under Section 45V and the advanced manufacturing PTC under Section 45X, only tax-exempt and US federal, state, local, or tribal governmental entities (including Alaska Native Corporations) and corporations operating on a cooperative basis engaged in furnishing electricity to persons in rural areas are eligible for the refundable credit.
For the nuclear industry, this rule is most immediately likely to benefit tax-exempt utility owners by removing the inability to monetize tax credits as a disincentive to building, owning, and operating otherwise tax credit–eligible projects and businesses. As to energy infrastructure fund investment and other pooled investment vehicles with tax exempt investors, however, the refundable credit provisions of the IRA do not adequately address certain technical tax partnership matters that need to be resolved for investment to be workable. This clarity will need to be provided by Treasury and the IRS in implementing regulations and/or other guidance.
The IRA also allows for taxable entity project owners (generally, those not eligible to claim refundable credits) to sell all or a portion of certain tax credits (including those discussed above) with respect to a particular year for cash. This ability to directly sell all or a portion of the tax credits has the potential to fundamentally simplify and streamline the market for renewable energy “tax equity” project financing, which currently includes complex tax-driven structures (e.g., partnership flips, sale-leaseback, and inverted leases) to monetize tax credits that may become much less prevalent once credits can be directly sold.
As applied to nuclear project financing, the sale of tax credit provisions of the IRA may prove to be revolutionary and allow meaningful access to the tax equity markets for the first time.
Under current law, a “tax equity” investor must be a true project development joint venture “partner” (among other common law–based requirements) to effectively be compensated for its capital investment with a disproportionate share of project tax credits and must take on true partner equity risk in the joint venture. Due to perceptions as to the costs and risk-reward economics of nuclear power generation (among other market factors) versus utility-scale solar and wind projects, these technical common law requirements have proven unworkable for nuclear project finance transactions.
On their face, the tax credit sale provisions of the IRA would appear to allow investors to discard this unworkable true partner paradigm and enjoy the type of no-risk, “pure play” tax credit purchase commercial arrangement they have long desired. This new flexibility will hopefully allow nuclear projects to be viewed on a level playing field as to other renewables projects.
Market practice will no doubt take time to develop around the documentation and structures for these pure-play tax credit purchases, and there remain numerous technical questions that will need to be addressed by Treasury and the IRS in implementing regulations and/or guidance for these transactions in order for a robust credit marketplace to develop.
Along with the tax credits above, the IRA allocated $150 million to the US Department of Energy’s (DOE’s) Office of Nuclear Energy “to carry out activities for infrastructure and general plant projects.” The IRA also allocated money through 2026 to support the development of a domestic HALEU fuel supply. Most advanced nuclear reactor designs require HALEU, a uranium fuel that is more power dense than the fuel used in the current reactor fleet. Currently, the domestic HALEU supply is constrained and much of the current HALEU supply is sourced from Russia. The IRA addresses this issue by allocating $700 million dollars in funding to DOE to develop a domestic HALEU supply chain.
The majority of funding, $500 million, will be allocated to environmental impact reduction work and public relations initiatives, and to support collaboration between the National Laboratories and the private sector. Another $100 million will be allocated to research, development, and safety initiatives. Finally, an additional $100 million will directly support HALEU availability for civilian domestic research, development, demonstration, and commercial use. The advanced reactor community has advocated for this kind of support for years, but this is the first big appropriation to support the domestic HALEU supply.
Morgan Lewis represents clients in all aspects of the nuclear industry and uranium fuel cycle. We will continue to closely follow developments in these areas.
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