How Manchin-Schumer would change energy, from oil to solar
Perhaps the biggest energy beneficiaries of the package would be wind and solar, which have clawed their way into the American mainstream and are now seeking to supercharge deployment. Wind and solar projects would effectively get a 10-year extension on tax credits for production and investment, while stand-alone energy storage would benefit through that period as well. In 2025, the existing production credit would morph into a technology-neutral version that could be claimed by wind, solar or storage companies. That baseline tax benefit could grow larger if developers also implement new standards for labor, made-in-America sourcing or environmental justice. For instance, solar, wind and storage facilities built especially for low-income communities could benefit from an increased credit of up to 20 percent.
Credit: By David Iaconangelo, Heather Richards, Carlos Anchondo, Peter Behr | E&E News | 07/29/2022 | www.eenews.net ~~
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The surprise climate deal struck between Democratic Sens. Joe Manchin (W.Va.) and Chuck Schumer (N.Y.) this week could transform the U.S. energy sector, slashing emissions and delivering historic investments in clean technologies – although it meets many demands of GOP lawmakers and conservative Democrats on fossil fuels.
The $369 billion “Inflation Reduction Act” contains new funding provisions and broad policy changes for nearly every segment of the energy sector, including wind, solar, hydrogen, carbon capture, and oil and gas.
In a press briefing yesterday, Manchin framed the new agreement – which would force the White House to hold several offshore lease sales – as a measure to bolster U.S. energy security.
“You have to be energy independent if you want to be a superpower in the world. That’s what China does and that’s what Russia has had, and they’re our two nemeses right now,” he said.
The deal is packed with incentives to boost low-carbon technologies, including delivering tax code reforms sought for years by renewable industries, chief among them a 10-year extension of wind and solar’s tax credits.
It would also offer new tax credits for domestic manufacturing of solar panels, wind turbine parts and other key equipment for growth of renewables. Energy storage projects sited separately from renewable generation would also take advantage of a new investment tax credit.
For federal land programs, the bill is a mixed bag of reforms and mandates: Answering the call of offshore wind proponents, the measure would undo a Trump-era moratorium on offshore wind leasing that bars new auctions in the southern Atlantic Ocean. Left in place, the moratorium would likely stymie the industry’s growth, according to observers.
On the other hand, the linking of renewables provisions with new leasing for oil and gas stoked opposition from many climate and reform advocates.
Autumn Hanna, vice president of Taxpayers for Common Sense, an organization that’s been pushing for federal oil and gas reforms for decades, said that approach could limit the Interior Department’s ability to make good decisions about federal lands.
“Those blanket policies on the surface seem very problematic,” she said, noting that the organization was still reviewing the text.
While the bill is being lauded as the most significant climate bill in U.S. history, its actual impacts to renewable deployment and emissions reductions are still being parsed out.
One analysis from the U.S. Energy Information Administration posted yesterday suggested that extending the investment tax credit to 2050 alone would lead to a 10 percent increase in solar energy in the nation – though the bill’s tax code incentives would extend far beyond the ITC.
Schumer said the bill would drive a reduction in the country’s carbon emissions of 40 percent by 2030, and represented “a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing.”
His estimate of emissions reductions aligned with those of some analysts.
Rhodium Group Associate Director Ben King said in an email the bill could “plausibly” put the country on track for a 40 percent emissions reduction, citing previous modeling. In a note yesterday, Rhodium said the new package could cut emissions 31 to 44 percent below 2005 levels in 2030, compared with 24 to 35 percent under current policy.
Jesse Jenkins, a Princeton University assistant professor who leads an energy-modeling collaborative known as REPEAT, said that while he and his collaborators were still reviewing the bill’s details, initial estimates indicated that it would “probably cut emissions to roughly 40 percent below peak US emissions” in 2005 if enacted.
“Without this bill, we’d be hopelessly far from our climate goals. I very much hope they get this across the finish line and to President Biden’s desk asap,” he added in an email.
Biden, who has staked much of his climate legacy on Democrats passing major legislation, urged lawmakers to pass the bill in remarks yesterday at the White House.
“Let me be clear: This bill would be the most significant legislation in history to tackle the climate crisis,” he said. “This bill is far from perfect. It’s a compromise. But it’s often how progress is made. … Pass it for the American people. Pass it for America.”
Manchin also called for swift passage, saying he had worked closely with Senate Republicans on permitting reforms and other aspects of the bill that could drive bipartisan support.
“It’s gonna have to be all politics to drive them to be opposed to it,” he said.
Republicans attacked the plan, saying it would worsen inflation.
“Democrats have outlined a giant package of huge new job-killing tax hikes, Green New Deal craziness that will kill American energy,” Senate Minority Leader Mitch McConnell (R-Ky.) said on the Senate floor yesterday. “A reckless taxing and spending spree that will delight the far left and hammer working families even harder.”
Here are six ways the bill could dramatically change the energy sector, including by shifting policies with oil and gas, renewables, carbon capture, methane, transmission, and hydrogen:
Oil and gas
Along with many climate-targeted policies, the bill has provisions that would boost oil and gas, sparking frustration from activists but fitting with Manchin’s priorities – and his attempts to mollify GOP lawmakers and avoid party-line opposition.
Perhaps most importantly, the package would force the president to redo an oil auction in the Gulf of Mexico from last year that was vacated by a federal judge. It would also force three additional offshore sales, two in the Gulf and one off the Alaska coast, that were canceled by the White House earlier this year.
The language stops short, however, of dictating specifically what the Biden administration does with its pending five-year offshore leasing plan, which will govern oil and gas leasing beyond this administration.
Erik Milito, president of the National Ocean Industries Association, said the bill was a compromise “grounded in reality” and “a serious path forward that lifts offshore energy of all types, to the betterment of our nation.”
Shell PLC Chief Executive Officer Ben van Beurden said during a conference call with reporters he was pleased to see the bill include future leases for offshore oil exploration.
Van Beurden and others in the industry have argued that the world’s oil producers need to invest more in new oil and gas sources to help bring down the price of fuel. Many experts also have noted the need for climate policymakers to focus on reducing demand for oil and gas rather than production, as cutting the supply of crude can have far-reaching economic consequences.
“In countries like the U.S. that have a very strong domestic supply position themselves, just curtailing domestic supply in the hope that somehow domestic demand will follow suit is not a realistic policy,” van Beurden said. “If you persist with basically curtailing supply, the only thing that will happen is you will import it from somewhere else.”
But with increasing climate risks pressing on society, several groups criticized the bundle of offers to oil and gas.
“This so-called deal forced by Senator Manchin is what we would expect when Congress is so closely divided and friends and beneficiaries of the fossil fuel industry have effective control over ‘climate’ policy,” said Food & Water Action Executive Director Wenonah Hauter in a statement. “We should not accept deals that strengthen the oil and gas industry to the detriment of us all.”
The bill would also dramatically reform the oil and gas program via royalty rate increases. The offshore oil and gas royalty rate would be set at 16.66 percent – with a maximum also in place for 10 years of 18.75 percent.
Onshore, the bill would strike the minimum oil and gas royalty set in 1920 of 12.5 percent and replace it with 16.66 percent. This is a sizable increase, though less than what greens have pushed for.
Bonding would also go up, as would fees. Additionally, for the first time on public lands, the bill proposes royalties be paid on released methane – unless it’s vented or flared for safety reasons or used on site, such as for electricity production at a well pad.
Hanna with Taxpayers for Common Sense said the reforms add up to a boon in terms of federal oil revenues.
“We’re definitely talking about real revenue here,” she said, noting a recent estimate from her organization that the federal government has missed as much as $13 billion in royalty revenue over the last 10 years alone by not increasing royalty rates on public lands to 18.75 percent.
But the reforms have angered already disgruntled members of the oil and gas sector who argue that the changes will kill oil and gas activity on federal lands.
Steve Degenfelder, a landman with the Kirkwood Oil and Gas firm in Casper, Wyo., said the deal is “not good for small companies” while also doing nothing for gasoline prices and inflation.
“It should be called the ‘O&G Exploration Reduction Act,’” he said.
‘An enormous sigh of relief’ for renewables
Perhaps the biggest energy beneficiaries of the package would be wind and solar, which have clawed their way into the American mainstream and are now seeking to supercharge deployment.
Wind and solar projects would effectively get a 10-year extension on tax credits for production and investment, while stand-alone energy storage would benefit through that period as well. In 2025, the existing production credit would morph into a technology-neutral version that could be claimed by wind, solar or storage companies.
That baseline tax benefit could grow larger if developers also implement new standards for labor, made-in-America sourcing or environmental justice. For instance, solar, wind and storage facilities built especially for low-income communities could benefit from an increased credit of up to 20 percent.
Any company that sought to claim the long-term credits, meanwhile, would have to pay their workers the equivalent of the prevailing wage or face penalties.
One casualty of negotiations was a separate investment tax credit for transmission lines – something that many grid and renewable experts said was important to improve the efficiency of a clean energy transition.
Another chief ask from renewable industries – direct pay options for developers – would be limited to tax-exempt entities in the case of wind, solar and storage, according to a breakdown of the bill provided by the American Clean Power Association (ACP).
Across the board, renewable representatives said the bill would unchain growth and begin a new chapter for their industries.
Heather Zichal, ACP’s CEO, called it “America’s biggest legislative moment for climate and energy policy” in a statement sent shortly after the breakthrough was announced Wednesday night.
“The entire clean energy industry just breathed an enormous sigh of relief. This is an 11th hour reprieve for climate action and clean energy jobs,” she said then.
In a separate statement on Wednesday, Greg Wetstone, president and CEO of the American Council on Renewable Energy, said it appeared that Congress was “finally rising to meet the climate challenge.”
Abigail Ross Hopper, president and CEO of the Solar Energy Industries Association (SEIA), predicted yesterday that the bill’s tax credit extensions were “likely to move us most of the way to our climate goals.”
Independent renewable analysts had a similar view. Pol Lezcano, a lead analyst for North American solar at BloombergNEF, said solar’s tax credits had proved to be “a big deal and makes the economics for solar especially attractive in states with great solar resources,” although his firm had not yet modeled how much of a boost the bill would give.
One new source of support for renewables would come through manufacturing tax credits offered to companies that make crucial foreign-sourced equipment, including battery anodes, solar cells and wind turbine blades.
Domestic manufacturers could earn new production tax credits that vary depending on the precise item, reaching deep into the supply chains to early-stage inputs like polysilicon and inverters, along with processing of dozens of critical minerals.
The credit would also be claimable for offshore wind vessels – targeting the ballooning demand for vessels to construct and service offshore wind farms planned on the Atlantic seaboard.
Yet the tax policies could turn out to be especially meaningful for the solar industry, which has been hit in the past year by bitter internal battles over trade policy and allegations of forced labor in the Chinese supply chain (Energywire, April 6).
One source of turmoil was a Commerce Department probe into tariffs on solar equipment from four Southeast Asian countries, which make up the majority of imported panels.
Requested by California-based panel-maker Auxin Solar in February, the probe was widely blamed for freezing industry growth this year, until Biden issued a preemptive two-year waiver on any new solar tariffs (Energywire, June 7).
Biden’s tariff move angered Auxin and its supporters, who called it a poor substitute for industrial policy and said it would give a free pass to Chinese-subsidized manufacturers.
But yesterday, Auxin’s CEO, Mamun Rashid, applauded the new bill’s provisions for U.S. solar manufacturers, saying it would be “a major catalyst” for the company’s own expansion.
“The law provides the certainty that we need to invest in new machinery and start to produce at scale. We’re very excited for this to become law and fully support the efforts to secure its passage by Congress,” said Rashid in a statement.
Nick Iacovella, senior vice president for communications at the Coalition for a Prosperous America, which backed Auxin’s tariff request, said the bill would be “a huge win for American solar manufacturers” if it became law.
Still, Rashid said that the subsidies for U.S. solar manufacturers would not diminish the importance of Commerce’s tariff probe.
“What we know is that we cannot out-subsidize China. Although this law provides certainty that the U.S. government supports the production of renewables here, China will not stop in its desire to be the global powerhouse in solar,” he added.
Solar developers, which have consistently opposed tariffs on panel imports, said the bill would offer incentives that would finally allow for sturdier, more reliable growth in U.S. solar manufacturing – a field that has risen and fallen over the years.
Hopper of SEIA said the bill would lead to “transformational investments” in U.S. companies. Within two to three years, she said, U.S.-based companies would open factories for everything from solar panels to inverters, and within five years, other components – ingots, wafers and cells – would follow.
“[W]e have had many conversations with manufacturers, who tell us this is exactly what they need to increase their investments in domestic manufacturing,” Hopper said in a statement.
Her expectations were largely echoed by Lezcano of BNEF, who said that while wafer and cell plants tended to take more time to build, they would likely follow from the blossoming of U.S. module factories.
Hydrogen’s big break?
In addition to targeting traditional renewables, the bill could lay important groundwork for the emergence of new technologies seen as part of the low-carbon toolbox by the Biden administration.
DOE’s Loan Programs Office, for instance, would get $3.6 billion in replenished authority for its loan guarantees, which back innovative but hard-to-finance types of low-carbon energy.
One such technology – “clean” hydrogen – would also get access to a new production tax credit, something that advocates have seen as crucial for the technology’s development (Energywire, July 27).
The package would define “clean” hydrogen as resulting from any process that emits 4 kilograms or less of CO2 for every kilogram of hydrogen.
That is a little under half of the typical CO2 emissions associated with hydrogen made from natural gas, the most common form of the fuel today.
At the 4-kilogram level of emissions, producers could claim 20 percent of the full tax credit.
Those that emitted less could receive a rising proportion of the credit, culminating at the full 60-cent credit per kilogram of hydrogen – the level that could be claimed if production involved 0.45 kilogram of CO2 or less.
Dan Esposito, a senior policy analyst at Energy Innovation, said the bill seemed to promote decarbonization of existing “dirty” hydrogen production facilities, via carbon capture.
Producers of “green” or renewable-based hydrogen, he added, would also be able to claim a far larger tax credit, giving them impetus to launch the first large-scale facilities.
He noted that the life-cycle emissions would be calculated in a way that would include drilling and transport of natural gas, if the hydrogen were produced using that fuel.
Jeff Bechdel, a spokesperson for Hydrogen Forward, said his coalition was “very pleased to see this incentive,” along with a tax credit for fuel cell vehicles.
“This will encourage further growth of clean hydrogen, which will play a critical role in addressing hard-to-decarbonize sectors like transportation, heavy industry, agriculture, and power generation,” he wrote in a statement. The coalition’s membership includes several hydrogen producers and equipment-makers as well as fuel cell vehicle manufacturers.
Some researchers, however, criticized what they saw as “very troubling” allowances for carbon emissions and the bill’s lack of constraints on how the hydrogen would be consumed.
“Although the bill provides a higher incentive for less-carbon intensive hydrogen, there is no other incentive for producers to pursue cleaner forms of hydrogen production,” said Abbe Ramanan, project director at the nonprofit Clean Energy States Alliance and Clean Energy Group.
“Given the research that is only just now coming out regarding the serious climate impact of hydrogen, this is incredibly short-sighted,” she added in an email.
Carbon capture and storage
The legislation includes a number of proposed changes to the federal 45Q tax credit, an incentive that provides a monetary value per metric ton of carbon dioxide that’s captured and stored, either in secure geologic formations or through enhanced oil recovery.
Under the bill, modifications to 45Q include an extension of the deadline for carbon capture projects – as well as direct air capture or carbon utilization projects – to start construction and still qualify for the credit. The measure would move the “commence construction” deadline from the end of 2025 to the end of 2032.
“Extending the commence construction window to qualify for 45Q would establish a critically needed investment horizon to give carbon management projects the time required to scale up between now and midcentury,” Madelyn Morrison, external affairs manager for the Carbon Capture Coalition, said in an emailed statement.
Other major changes to the tax credit include higher credit values for the industrial and power sectors – something that groups like the Carbon Capture Coalition, a collection of more than 100 organizations that support greater CCS deployment, have pushed for since last year.
The bill would raise the value of 45Q for industrial facilities and power plants that capture their carbon emissions to $85 per metric ton for CO2 stored in secure geologic formations, $60 per ton for the beneficial utilization of captured carbon emissions and $60 per ton for CO2 stored through enhanced oil recovery in oil and gas fields, according to a summary provided by the coalition.
The current credit value is $50 per ton that is sequestered geologically and $35 per ton stored through enhanced oil recovery.
The Carbon Capture Coalition called the changes to 45Q “monumental enhancements” in a statement, saying they could lead to greater deployment of different carbon management technologies, while some groups called for the controversial tax credit to be scrapped completely.
45Q is a “giveaway to polluters that entrenches and extends the life of emitting facilities like coal plants right as we need to urgently transition from fossil fuels,” said Steven Feit, a senior attorney with the Center for International Environmental Law.
“The tax credit should be eliminated, not expanded or extended,” Feit said.
The comments underscore a tension that persists around carbon capture, where carbon dioxide emissions are trapped from point sources like ethanol or power plants before they can enter the atmosphere.
Backers of carbon capture assert that changes to the tax credit are necessary, especially without a price on carbon, to increase the number of projects nationwide. But opponents of the technology point out that carbon capture does not address emissions of methane, for example, either from coal mines or during natural gas production.
A study released by the University of Wyoming earlier this month said that although the current level of 45Q helps to lower carbon capture costs, it is “not sufficient to promote widespread deployment of CCS.”
“To improve the viability of CCS retrofits substantially, the Section 45Q tax credit for geological sequestration should be boosted to $85 or higher per metric ton of CO2 with the payout term of up to 20 years,” the study said, which focused on deployment in Wyoming.
John Larsen, a partner at the Rhodium Group, said in a briefing yesterday organized by the Center for American Progress that proposed tweaks to 45Q are “a big deal.”
In addition to giving developers more time to be credit eligible, Larsen said increasing 45Q’s value would “unlock a much more diverse set of opportunities for carbon capture,” particularly for hard-to-tackle sectors like cement and steel.
On the same call with reporters, Leah Stokes, a professor at the University of California, Santa Barbara, said that beyond the industrial sector, carbon capture can help to address CO2 emissions from a new wave of planned natural gas power plants.
“When it comes to the power sector, there’s 220 proposed gas plants that have no kind of carbon mitigation,” Stokes said.
“If we build a lot of gas plants that don’t have any kind of capture technology on it, that’s not going to be good news,” Stokes added later. “So, whether or not we see any deployment in the power sector is I think a question mark, but it could potentially become a viable technology in the margins in the power sector.”
Other proposed changes to 45Q in the legislation include a direct pay option, where “companies can opt for a cash payment rather than a deduction on their tax liability,” according to the group Carbon180.
“The [bill] would allow [direct air capture] developers to receive direct compensation … for credits generated in the first five years – allowing recipients to benefit from credits regardless of what they owe in taxes,” said Rory Jacobson, deputy director of policy at Carbon180, in a statement.
“This is especially important to ensure that the credit can be accessed by startups and smaller businesses who have low tax liability,” Jacobson added.
Transmission’s ‘bizarre process’
The Schumer-Manchin proposal does not include a new investment tax credit (ITC) for long-distance high-voltage transmission lines proposed by some congressional lawmakers and endorsed by the Biden administration.
That proposal had been a top priority of the advocacy group Americans for a Clean Energy Grid, which said its upfront tax benefits to investors would jump-start long-delayed power line projects linking prime wind and solar energy sites to population centers.
A report issued by the American Council on Renewable Energy in May 2021 by Rob Gramlich and Michael Goggin of Grid Strategies LLC singled out 22 long-distance transmission projects with an estimated total cost of $33 billion that were far advanced in planning but held up by siting and permitting hurdles.
Half of these were likely to qualify for the 30 percent ITC proposed by House and Senate sponsors, limited to “regionally significant” lines, the ACORE report estimated. If fully used for renewable power, the lines could deliver 30 gigawatts of carbon-free power, the report said.
Gramlich has called a transmission tax credit a top clean energy priority.
”The ITC is what both utility and merchant developers said they could use to deploy transmission, so it is very unfortunate that didn’t make it in,” Gramlich said.
While some transmission developers can probably take advantage of the federal loan guarantees included in the Schumer-Manchin plan, “many cannot,” Gramlich said in an email yesterday.
“This legislation was a bizarre process to say the least,” he added.
Jenkins of Princeton saw the loss of the ITC proposal in less damaging terms.
“Cost isn’t the key barrier for transmission lines. There are numerous, cost-effective projects that just don’t get built. The real barriers are siting and permitting times and cost allocation,” Jenkins said in an email. The tax credit makes the financing a bit easier but is probably not a difference-maker in getting lines built, he added.
The bill would also place a fee on oil and gas companies’ excess methane emissions, charging operators if they emit more than 25,000 metric tons of carbon dioxide equivalent per year.
The “methane fee” would increase from $900 per metric ton of emissions reported for calendar year 2024 up to $1,500 for emissions reported for calendar year 2026 “and each year thereafter,” the legislation said. The methane fee would concern a variety of “applicable” facilities, including for offshore and onshore oil and gas production and liquefied natural gas import and export.
Kathleen Sgamma, president of the Western Energy Alliance – whose members operate on public and nonpublic lands across the West – said the specified dollar-per-ton fees are “arbitrary and unsupported.”
“Government technicians haven’t figured out how to set a meaningful cost of carbon that isn’t a rigged amount and these costs per ton are arbitrary,” Sgamma said in an email.
“Emissions are something that should be controlled and reduced, not treated as a revenue source for the government,” Sgamma continued. “Taxing an emission that is regulated under the Clean Air Act is unprecedented and amounts to double jeopardy.”
However, Peter Zalzal, senior counsel and associate vice president for clean air strategies at the Environmental Defense Fund, said the fee “reflects the economic harm that methane pollution inflicts on communities and the climate, and $1,500 per ton is a currently accepted [estimate] of the harms methane pollution produces.”
Nevertheless, Liz Bowman, a spokesperson for the American Exploration & Production Council, said the group doesn’t support a methane fee and directed E&E News to a September 2021 blog post authored by Anne Bradbury, AXPC’s CEO.
“While we are still digesting the 700+ pages of legislative text, we are very concerned about this bill’s potential negative impact on energy prices and American competitiveness, especially in the midst of a global energy crisis and record high inflation,” Bradbury said in a statement yesterday.
Similarly, Amanda Eversole, chief advocacy officer at the American Petroleum Institute, said in a statement that the trade group opposes “policies that increase taxes and discourage investment in America’s oil and natural gas.”
Todd Staples, president of the Texas Oil & Gas Association, said the group hopes the nation can focus on policies that encourage infrastructure development, like removing barriers to permitting and focusing on U.S.-produced oil and natural gas.
Aaron Weiss, deputy director at the Center for Western Priorities, said in an email he suspects “any pushback on methane royalties will reveal the gap between large and small producers.”
“The big companies are fine with it, it’s the smaller drillers that want to be free to flare and vent,” Weiss said, adding, “I’m optimistic that all of these provisions will survive any attempts to water down the bill.”
Reporters Mike Lee and Camille Bond contributed.
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