On October 28, House Democrats unveiled a new draft of H.R. 5376, the Build Back Better Act. Democrats hope to pass the $1.75 trillion package through the filibuster-proof reconciliation process without any Republican support. You can read the entirety of the bill here, or a section-by-section summary here.
When compared to an earlier version of the reconciliation package, the new draft of the Build Back Better Act contains dramatic changes to many of the provisions focused on energy and environmental issues.
For organizational purposes, this alert is formatted as follows:
- Energy Tax Provisions & Incentives
- Select Subtitles (Air Pollution, Hazardous Materials, and Energy)
- What’s Next
It is important to note negotiations remain ongoing and anything within this alert is subject to change at any time. Your team at Michael Best Strategies is monitoring the evolving situation and will provide updates as they take shape. As always, please do not hesitate to reach out with any questions.
Energy Tax Provisions & Incentives
The updated draft of the Build Back Better Act has several tax incentives for clean energy technology research, adoption, and installation. It extends the Production Tax Credit (PTC) and Investment Tax Credit (ITC), representing valuable rebate opportunities for homeowners and businesses alike.
The length of the PTC extension depends on the energy source. The PTC for landfill gas, trash, qualified hydropower, geothermal, and marine and hydrokinetic renewable energy facilities is extended through the end of 2026. The PTC for wind energy is increased to the full applicable credit rate through the end of 2026. The PTC for solar is revived and extended through 2026. The legislation also extends the ITC, allowing taxpayers to claim a 6% base tax credit or a 30% bonus credit rate for the cost of energy property and qualified electric transmission property.
The bill also establishes the following two new renewable energy tax credits:
- Advanced Manufacturing Production Credit: A PTC is offered for the manufacturing of eligible renewable energy components, such as solar wafers, cells, modules, and polysilicon, and wind blades, nacelles, towers, and offshore foundations. Credits are determined based on mass or watt capacity. Eligible components that are produced and sold prior to January 1, 2027 receive the full credit. After January 1, 2027, the credit for components sold reduces by 25% each year, until the credit ends in 2030.
- Clean Electricity Production and Investment Credit: This credit for emission-based incentives is neutral between clean energy technologies and allows taxpayers to choose between a PTC under section 45BB and an ITC under section 48F. Any power facility is eligible if its carbon emissions are at or below zero. Credits are set to phase out in 2031 or when specific carbon emission level goals are achieved.
The bill also clearly defines qualified income for publicly traded partnerships. It does not eliminate the master limited partnership (MLP) structure, a type of publicly traded partnership that bolsters traditional energy entities and in fact expands the structure to green energy entities.
Additionally, new and extended tax credits for renewable fuels, alternative vehicles, and investments in workforce training for green industries and technologies are included in this version of the bill. These include:
- Zero-Emission Nuclear Power Production Credit: A tax credit for electricity produced by a qualified nuclear power facility. The tax base credit is 0.3 cents/kilowatt hour and a bonus credit rate of 1.5 cents/kilowatt hour for electricity that is produced by one party and sold to a separate party. The credit expires on December 31, 2029.
- Extension of Credit Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels: Under this provision, income and excise tax credits for biodiesel and biodiesel mixtures are extended through 2026, and the credit is $1.00 per gallon. Regarding alternative fuels, the provision extends the excise tax of $0.50 per gallon through December 31, 2026.
- Clean Hydrogen Production Credit: Clean hydrogen produced in a qualified clean hydrogen facility is now eligible for a tax credit. The credit amount is determined based on the level of CO2 equivalent emissions per gallon of hydrogen.
- Qualified Commercial Electric Vehicles Credit: A new credit for qualified commercial electric vehicles placed into service by the taxpayer. The credit is 30% the cost of the electric vehicle and will be in effect until December 31, 2031.
- Qualified Fuel Cell Motor Vehicles Credit: Extends the credit for purchasing qualified fuel cell motor vehicles through 2031. The provision does specify that qualified vehicles only include those not of a character that is subject to depreciation.
- Alternative Fuel Refueling Property Credit: Extends the alternative fuel vehicle refueling property credit through 2031. Additionally, it expands the credit for zero-emission charging and refueling stations with a base credit of 6% for expenses up to $100,000 and 4% for expenses over $100,000. The bonus credit level is 30% for expenses up to $100,000 and 20% over $100,000.
- Extension if the Advanced Energy Project Credit: Qualified projects receive a base credit rate of 6% of qualified investments in qualified advancement in energy projects. If additional requirements surrounding wages for workers expanding or upgrading a manufacturing plants and apprenticeship programs are met, then projects may receive a bonus rate of 30%.
- Reinstatement of Superfund Tax: The Hazardous Substance Superfund Financing rate on crude oil and imported petroleum products is reinstated beginnings on December 31, 2021. The superfund rate is $0.164 per gallon and is indexed for inflation. Under this provision the superfund is authorized until December 31, 2029.
- Clean Electricity Production and Investment Credit: This credit for emission-based incentives is neutral between clean energy technologies and allows taxpayers to choose between a PTC under section 45BB and an ITC under section 48F. Any power facility is eligible if their carbon emissions are at or below zero. Credits are set to phase out in 2031 or when specific carbon emission level goals are achieved.
- Clean Fuel Production Tax Credit: A technology-neutral credit for the domestic production of clean fuels. The specific credit amount is determined by the lifecycle carbon emissions of the given fuel. For fuel to be eligible, its lifecycle emissions must be at least 25% less than the current US average. Additionally, between now and 2030 qualifying fuels must continue to decrease their lifecycle emissions to continue to be eligible for the credit.
- Home Energy Performance-Based, Whole-House Rebates and Training Grants: $360 million is allocated towards a grant program that awards States which implement programs that partner with non-profits to provide training courses and opportunities to support home energy efficiency upgrade construction services to train workers to support home energy efficiency retrofits and $5.89 billion is allocated towards state energy offices to provide rebates for any home energy efficiency retrofits. Eligible retrofit rebates are available for high-efficiency natural gas heating, ventilation, HVAC systems, and water heaters over the next six years.
- High-Efficiency Electric Home Rebate Program: $2.26 billion is allocated to rebates for homeowners engaging in qualifying electrification projects, and $3.8 billion is targeted at projects taking place in tribal and low-income communities. $4 million is provided to raise awareness of the rebate program and $220 million is budgeted towards the program’s administration, along with any necessary technical support.
Build Back Better Act: Air Pollution
There were several changes to provisions within the Air Pollution section of the Build Back Better Act. Primarily, changes were in size and scope of specific programs.
The change to the methane fee provision was the most notable change for many stakeholders. In this latest version of the reconciliation bill, the legislation imposes a new fee on methane emissions from petroleum and natural gas facilities above a certain threshold. The methane emission thresholds are anything over 0.20% of the natural gas sent from facility to sale or 10 metric tons of methane per million barrels of oil from facility to sale. The fees incrementally increase annually starting at $900 per ton of emission in 2023 to $1200 per ton of emissions in 2024 and finally to $1500 per ton of emission in 2025 and each year thereafter.
This version of the methane fee differs from the initial draft reconciliation text from September. The original proposal that made it into legislative text set a $1500 flat fee for each ton of emission reported each calendar year.
In addition to the new fee, Congress also allocated $775 million for grants, loans, and rebates for financial and technical assistance to reduce methane and other greenhouse gas emissions from petroleum and natural gas systems.
This section also provides $5 billion to fund the replacement of heavy-duty vehicles in communities within nonattainment areas, which are defined by the EPA as not having consistently met the clean air level set in the National Ambient Air Quality Standards. It establishes grants and tax rebates to replace Class 6 & 7 heavy-duty vehicles with zero-emission vehicles.
Funding is allocated to reduce air pollution at ports ($3.5 billion), reduce greenhouse gases ($29 billion), address air pollution in schools and low-income communities (over $150 million), and over a billion dollars to the EPA for grants, system upgrades, tribal air pollution monitoring efforts, establishing standards for transparency in environmental products, and testing for environmental and public health effects of transportation fuels.
Build Back Better Act: Hazardous Materials
The updated legislative text totally cuts the $10 billion and $50 million in funds to address Superfund National Priority List sites and toxins in schools respectively. The bill also trimmed the initial $5 billion for environmental and climate justice block grants to a funding level of $3 billion.
Also included in this section is $190 million for investments in waste reduction infrastructure, with specific incentives for low-income and disadvantaged communities.
Build Back Better Act: Drinking Water
Though this section was initially one of the least controversial pieces of the reconciliation package, significant cuts were made to the new draft language in order to halve the size of the package from $3.5 trillion to $1.75 trillion.
Funding levels were initially at $30 billion for lead service line replacement and $2.5 billion for grants related to water system resiliency efforts, state programs, reducing lead in school drinking water systems, tribal drinking water infrastructure, areas affected by natural disasters, containment monitoring, and other purposes.
In the new version, $9 billion is allocated for lead reduction grants, lead filtration stations at schools, and $225 million to states and tribal entities for providing assistance to low-income households that pay a significant proportion of household income for drinking water and wastewater services.
Build Back Better Act: Energy
The energy section of Build Back Better was overhauled significantly during this most recent round of negotiations. As expected, the Clean Energy Performance Plan has been stripped out of the updated proposal. This was one of progressive Democrats’ key priorities that Senator Joe Manchin (D-WV) opposed.
On building modernization, funding to facilitate resiliency, energy efficiency, renewable energy, and grid integration improvements, funding drastically decreased from $3.2 billion in September to $500 million. However, the $300 million allocated to facilitate the adoption of the latest building codes and encourage the adoption of zero energy and equivalent stretch codes remained unchanged.
Zero-emission vehicle infrastructure grants were dealt a significant blow in the latest round of negotiations, as well. Funding for the Plug-in Electric Drive Vehicle program was scrapped and, in its place, $200 million is now provided to advance the development of direct-current, fast-charging infrastructure. In addition, funding directed at increasing electric vehicle supply equipment decreased from $2 billion to $600 million. Among the provisions dropped were $1 billion in grants dedicated to education and outreach for an increase in electric vehicle supply equipment and $500 million to provide financial assistance to state energy offices to develop a supplementary transportation plan to include in a state energy conservation plan.
The updated text provides $200 million in funding to advance the development of hydrogen fueling equipment via the DOE’s State Energy Programs. This funding is primarily targeted at rural and disadvantaged communities. The updated language also provides $40 billion in guarantee authority to the DOE’s Loan Programs office for eligible projects, along with an additional $3.7 billion to supplement any costs during these guarantees. This represents an increase from the $30 billion originally guaranteed and the $3 billion allocated to cover guarantee costs.
There were also several increases in funding for key programs aimed at reducing global emissions. Funding for the Advanced Technology Vehicles Manufacturing program increased from $1 billion to $3 billion. Funding for the Energy Community Reinvestment Financing Program, which will provide financial support to eligible entities so that they may facilitate low-carbon reinvestments in energy communities, has also increased from $2 billion to $5 billion. An increase from $1 billion to $3.5 billion in funding for domestic manufacturing conversion grants, which promote the domestic production of zero-emission vehicles, was also included. Funding for the Energy Community Reinvestment Financing Program, which establishes a program providing financial support to eligible entities to facilitate low-carbon reinvestments in energy communities, was also increased from $2 billion to $5 billion. Finally, $200 million was provided to the tribal loan guarantee program, as well as an increase in the program’s loan guarantee cap to $20 billion.
In terms of transmission modernization, $2 billion is now allocated to distribute grants and loans to construct new high-capacity transmission lines and upgrade interties between the various connections. This is a significant reduction from the $8 billion allocated to grants and loans for long-distance transmission lines in the original reconciliation bill. Of that $2 billion, $1.5 billion is for grants and $500 million is for loans. Funds can be used for construction or upgrading of projects that support a more robust/resilient electric grid and the integration of electricity from a clean energy facility into the grid.
Unchanged from the original proposal, the Build Back Better Act provides $800 million to distribute grants to state, local, and tribal governments for the purpose of:
- Studying and analyzing the impacts of covered transmission projects
- Examining alternate transmission siting corridors
- Hosting negotiations on covered transmission projects
- Any relevant regulatory issues
- Economic assistance for communities affected by the construction and operation of these projects
Further, $50 million is provided to states in the form of technical assistance and grants to evaluate both the improvement and expansion of organized wholesale electricity markets. This funding will also be used to align existing organized wholesale electricity markets policies with relevant state policies.
This funding is half of the original $100 million initially allocated to states for technical assistance grants. Another $100 million is provided to the Energy Department to perform transmission planning, modeling and analyses regarding the development of interregional and offshore wind transmission projects and to convene stakeholders to address the development of such transmission projects. The bill also includes $200 million for efforts at the Energy Department and FERC to speed up environmental reviews, especially for offshore wind projects.
Build Back Better Act: What’s Next
The only certainty about the Build Back Better Act is that nothing is certain. While this alert provides key details on major provisions within the most recent legislative proposal, negotiations and adjustments were already in the works within hours of the framework and legislation’s release. Further adjustments and corrections to the proposed legislation are anticipated. All eyes remain on Senators Manchin and Sinema, along with progressive Democrats in the House, as congressional leadership walks the tightrope of securing the votes for passage of the bipartisan infrastructure deal and the timing of the reconciliation package.
