IRA’s Clean Electricity Tax Credits (Sections 48E and 45Y) are an under-appreciated boon for new nuclear power

The Inflation Reduction Act (IRA) should make an important contribution towards mitigating future inflationary periods. It accomplishes this beneficial goal by providing important support for facilities that increase US clean electricity production. The key sections of the Inflation Reduction Act are new IRS code sections 45Y and 48E.

Respectively, these are called the Clean Electricity Production Credit and the Clean Electricity Investment Credit. The eligibility requirements for each of these provisions is similar. Production credits under 45Y apply to “facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero.” The investment tax credits under section 48E expands the eligibility to include “qualified energy storage technologies.” (As most of us understand, storage technologies cannot generate electricity.)

The revolutionary aspect of the IRA is that these new tax credits break a thirty-year habit of creating energy credits that are targeted towards specific energy technologies. This new program is not a wind program, not a solar program, not a geothermal, not a storage program, not a nuclear program, and not a biofuels program. It is a clean energy program with a common criteria – the facility cannot emit greenhouse gases.

The mechanisms for Sections 45Y and 48E are modeled after the existing tax credit programs (26 U.S. Code § 45 and 26 U.S. Code § 48) for selected renewable energy technologies. Specifically the credits are:

• Inflation adjusted with a base year of 1992 (45Y’s PTC only. 48E is 30% of project cost. Value will track cost inflation)
• Transferable
• Eligible for direct pay
• Available for all qualifying facilities with no limitations on program totals
• Paid for the first 10 years after the facility begins operating (45Y PTC only)
• Part of the tax code and not a spending program that requires annual appropriations

In addition to those important credit features, facilities that qualify for Sections 45Y and 48E (a group that includes new nuclear power generation facilities) can be treated as 5-year properties under the modified accelerated cost recovery system (MACRS). For those of us who are not tax accountants, it’s difficult to understand the monetary value of this provision, but perhaps readers can help with example computations.

The base year for inflation adjustment is an important feature whose value has been under reported. Here is the applicable paragraph from 26 U.S. Code § 45Y:

(3) Inflation adjustment factor

The term “inflation adjustment factor” means, with respect to a calendar year, a fraction the numerator of which is the GDP implicit price deflator for the preceding calendar year and the denominator of which is the GDP implicit price deflator for the calendar year 1992. The term “GDP implicit price deflator” means the most recent revision of the implicit price deflator for the gross domestic product as computed and published by the Department of Commerce before March 15 of the calendar year.

26 U.S. Code § 45Y – Clean electricity production credit

After applying the inflation adjustment, the current value of a production tax credit that is described in the text of the law as $15/MWh is $28.60/MWh. (2022 GDP Implicit price deflator is 129.381; 1992 is 67.889. Inserting those numbers into the equation described above yields an inflation adjustment factor of 1.906.) Qualifying for an inflation-adjusted PTC, especially one with a base year of 1992, is a new experience for nuclear facility owners.

Transferable credits can be bought or sold. This feature is important because the entities that build and own clean electricity generating facilities are often at at a stage in their development where they do not pay significant annual income taxes. Young companies or those that are making large investments aimed at becoming bigger companies would not be able to benefit from tax credits if they were not transferrable.

The direct pay feature is important for generating facility owners that are not required to pay income taxes and cannot benefit from many tax credit programs. These include tax-exempt organizations; states; political subdivisions; the Tennessee Valley Authority; Indian Tribal governments; Alaska Native Corporations; and rural electricity co-ops.

Though RE-targeted tax credits have usually been available to eligible facilities without limits, this attribute is a new one for nuclear facilities. The 26 U.S. Code § 45J – Credit for production from advanced nuclear power facilities created by the Energy Policy Act of 2005 included limitations that reduced its effectiveness as an incentive for building new nuclear power plants. There was a maximum annual credit for each facility ($125,000/MW of capacity) and a national maximum of 6,000 MW of capacity (equivalent to less than 6 conventional sized reactors).

Aside: For the Vogtle reactors (AP1000s rated at 1117 MWe), which will be the only nuclear units receiving the 45J PTC, the limit is ~ $140 M/yr. If the units operate at an industry-standard 92% capacity factor, the $18/MWh non-inflation adjusted PTC will pay just $15.60/MWh) End Aside.

These new credits from the IRA go into effect for facilities that begin operating after 12/31/2024. Effectively that means that all new nuclear generating facilities that are not already under construction will be eligible to receive the credits. Unless the IRA is repealed or amended, facilities that begin operating before the end of 2032 will be eligible for Section 45Y and 48E credits. The law also includes an automatic extension – if greenhouse gas emissions from US electricity production are greater than or equal to 25% of the sector’s 2022 greenhouse gas emissions, the credit programs will remain in effect. (See Note 1 below)

It seems likely that achieving a US electricity sector greenhouse gas emission level that is ≤ 25% of 2022 totals will be the criteria that triggers a phase out of the program. Here is the phaseout schedule:

(2) Phase-out percentageThe phase-out percentage under this paragraph is equal to—

(A) for a facility the construction of which begins during the first calendar year following the applicable year, 100 percent,

(B) for a facility the construction of which begins during the second calendar year following the applicable year, 75 percent,

(C) for a facility the construction of which begins during the third calendar year following the applicable year, 50 percent, and

(D) for a facility the construction of which begins during any calendar year subsequent to the calendar year described in subparagraph (C), 0 percent.

26 U.S. Code § 45Y – Clean electricity production credit

There are provisions that prevent facilities from receiving tax credits from more than one program. There are also provisions that allow for bonus credits for meeting specified domestic content requirements, locating in an energy community or paying prevailing wages and offering apprenticeship programs.

The people and organizations that successfully lobbied and advocated for equal treatment of all clean electricity generating sources deserve a round of applause. These new credits are valuable and will reward those who are willing to invest the time, talent and treasure required to create new nuclear generating facilities.

Note 1: Credit-Suisse report titled “Treeprint US Inflation Reduction Act – A tipping point in climate action” p. 9 and 17