By Stefano Galiasso, Senior Associate and James O’Connor, Summer Analyst

As all of you most likely already know, the IRA was signed into law by the US President this week and will allocate a hefty $369 Billion over 10 years to support the energy transition. In our view, the bill is very focused on electrification and accelerates the business transformation imperatives of LDCs.

Fortunately, there are a lot of technological innovations that can come to rescue, abating CO2 point source emissions, generating alternative molecules that don’t carry greenhouse gas emission “penalties”, and identifying and mitigating fugitive methane emissions.

While a lot of the law is a continuation of existing wind and solar policies and the expansion / introduction of electric vehicle and home electrification policies (from air source heat pumps to home energy storage to electric grid expansion and innovation), we see the expansion of 45Q (CO2 capture tax credits) and the introduction of 45V (clean hydrogen production tax credits) as pivotal moments to kickstart the green molecule revolution.

In addition to the above, the law provides needed resources to help in obtaining environmental permits for infrastructure projects and introduces a “fugitive methane fee” that we think will make methane emission management necessary across the entire value chain.

Below is our analysis of the key elements of the law as they relate to LDCs:

45Q: Carbon Capture, Utilization, and Sequestration (CCUS)

• The deadline to begin constructing carbon sequestration projects to be eligible for credits has been extended to the end of 2032.
• Additionally, the amount of tax credits has been increased significantly, as listed below:

• Credit eligibility is relaxed for annual carbon capture requirements:
• For direct air capture facilities, the minimum annual carbon capture requirement is 1,000 metric tons
• For an electricity generating facility with a carbon capture capacity of at least 75% of the facility’s emissions, the minimum requirement is 18,570 metric tons
• For facilities with a carbon capture capacity of less than 75%, the minimum requirement is 12,500 metric tons

45V: Clean Hydrogen Production Tax Credit

• A new 10-year PTC in an amount of up to $3/kg of clean hydrogen produced after 2022.
• Existing facilities that did not produce clean hydrogen prior to 2023 can be updated and modified to produce clean hydrogen and claim the credits.
• Many developers are considering using their wind projects to power “green hydrogen” production projects. The Bill treats the use of electricity from renewable resources like wind turbines for the production of clean hydrogen as if it was sold to an unrelated party so that it would be eligible to claim the PTC.
• Under current law, the electricity use would not be considered a sale to an unrelated party and thus would not be eligible for the PTC.
• Clean Hydrogen incentives are not cumulative with carbon capture incentives, so a facility that produces clean hydrogen for example by sequestering CO2 will need to pick one of the two pathways

Methane Emissions Reduction Program

• Imposes fees to coerce better monitoring and mitigation of methane leaks, complementing the EPA’s expected update to oil and gas methane standards (see EPA Proposes New Source Performance Standards Updates, Emissions Guidelines to Reduce Methane and Other Harmful Pollution from the Oil and Natural Gas Industry)
• For oil and gas facilities that emit more than 25,000 metric tons of carbon dioxide annually, if methane emissions exceed the following limits:
• Oil and gas production facilities
• 0.2% of the natural gas sent to sale from from the facility, or
• 10 metric tons of methane per million barrels of oil sent to sale from the facility
• Oil and gas nonproduction facilities
• 0.05% of the natural gas sent to sale from the facility
• Natural gas transmission facilities
• 0.11% of the natural gas sent to sale from the facility
• the facility will be assessed a fee for each ton of methane above the limit;
• $900 per ton in 2024
• $1,200 in 2025
• $1,500 in 2026.

Funding Environmental Permitting

• The Bill included dedicated funding to increase permitting resources for the following agencies:
• $150 million to the Department of the Interior
• $100 million to the United States Forest Service
• $125 million to the Department of Energy
• $100 million to the Federal Energy Regulatory Commission
• $100 million to the Federal Highway Administration
• $20 million for NOAA
• $40 million for the EPA

Environmental Justice

• The Bill allocates over $60 billion to invest in disadvantaged communities
• Grants billions for community-led projects in environmental justice, affordable transportation, and neighborhood equity