Update: Climate bill — which could cut microgrid costs 10% to 50% — passes US Senate on Sunday

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“This is a big, big deal,” said Cameron Brooks, executive director of Think Microgrid about the Inflation Reduction Act (IRA), an inflation and climate bill that’s now before Congress and expected to cut microgrid costs. His comments echoed the views of numerous microgrid industry members.

climate bill

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“Combining all the impacts, this bill will cut the cost of microgrids by 10% to 50%,” said Yashar Barut, CEO of Power Market Solutions and former director,

The bill includes up to 50% in investment tax credits (ITC) for microgrid components, the ability for investors to sell tax credits to third parties — rather than getting involved in complicated partnerships — and a higher production tax credit (PTC).

Update: The Senate passed the bill Sunday 51-50 with Vice President Kamala Harris casting the tie breaking vote. It now goes on to the House, where it is expected to win approval this week.

It also includes the expansion of the ITC to include microgrid controllers as well as standalone energy storage and other technologies, said Ken Irvin, an attorney and co-leader of Sidley Austin’s global energy practice.

“The support offered by the IRA through this tax credit helps foster development of a range of energy and decarbonization technologies, which often work best in microgrid configurations,” said Irvin. “Microgrids are an exciting, potent means to further decarbonize our electricity supply and to help add reliability.”

Prospects for climate bill improve

A few industry members cautiously predicted the bill will pass both the U.S House and Senate. But prospects for its passage appeared to improve considerably Thursday when Sen. Kyrsten Sinema (D-Ariz.) said she was ready to move forward with the bill with some modifications, largely centered around removing certain tax increases for hedge fund managers and corporations. Sinema’s vote is necessary for the Democrats to maintain their narrow margin to win passage.

Brig Daniels, a professor of law at Brigham Young University, said, “It seems like this time Congress just might get a climate bill over the line.” Sen. Joe Machin D-W.Va, who blocked previous efforts to get a climate bill passed by Congress, is a co-sponsor of the bill, which will help it pass, he said.

Passage of the bill would require 50 votes — likely all Democrats — and a vote from vice president Kamala Harris if there’s a 50-50 tie to pass, said Rob Hong, co-founder and CEO of Sapling Financial Consultants. He expected a vote as soon as this week. The Washington Post reported that the vote could take place Saturday.

If passed, the measure might help make up for some of the environmental losses associated with the U.S. Supreme Court’s recent decision striking down portions of the Clean Air Act, said Daniels.

“New legislation aimed specifically at climate change would address the central concern the (Supreme) Court has flagged — the Clean Air Act does not explicitly state its aim (or one of its aims) is addressing climate change. Because of this, it is all the more vital that Congress takes action and passes this bill,” said Daniels.

“We believe Congress can and must pass the Inflation Reduction Act immediately. We cannot waste another day without passing the single largest investment in clean energy, environmental justice and climate action,” said Hebah Kassem, acting director of the Sierra Club’s Living Economy program, in an email.

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How it would cut microgrid costs

Changes to the ITC represent some of most powerful measures to boost microgrids. Originally, the ITC for solar and other renewables, which are often included in microgrids, was slated to drop from the 30% level of 2019 to 10% for projects started through the end of 2023, said Hong. The bill proposes increasing the ITC to 30% and offers additional adders that can increase the ITC to 50% of eligible costs. The adders are related to sourcing components in the U.S., meeting labor and apprenticeship requirements and focusing on environmental equity, he said.

While most industry members expect the measure to cut microgrid costs, Rob Howard, CEO of ClearGen — a clean energy financing company — has concerns about the effects of the conditions required to obtain the adders, or the highest level of ITC benefits.

“I would be careful about leaping to the assumption that the legislation, as proposed, will reduce the costs of microgrids, because many of the tax credits are dependent on labor and manufacturing requirements that could increase the gross cost of projects, particularly larger projects,” said Howard.

Projects sized less than 1 MW will not be expected to comply with the labor and manufacturing requirements, he noted.

The bill provides investment tax credits for a range of resources that can be used within microgrids, including stand alone battery storage, microturbines, linear generators, combined heat and power, small wind energy, fuel cells and microgrid controllers. In addition, transmission and distribution upgrades that are required to build microgrids will be eligible for ITC benefits, said Barut.

According to Hong, the bill:

  • Invests about $369 billion in energy security and climate change
  • Has a goal of lowering energy costs, increasing clean energy production and reducing carbon emissions by 40% by 2030
  • Provides a production tax credit (PTC) of 2.5 cents/kWh on some sources of electricity, including wind, closed-loop biomass and geothermal and 1.3 cents/kWh for others. This applies only to projects started before Jan 1, 2022. The new bill will extend this to projects through Jan 1, 2025
  • Includes adders for the PTC that can increase the amount by 20%
  • Offers $30 billion in targeted grant/loan programs for states and electric utilities to accelerate the transition to clean electricity, which should increase the demand for microgrids
  • Includes a $27 billion clean energy technology accelerator for investments in technologies and energy efficiency improvements. “The clean energy technology accelerator can result in new technologies that will lower the cost of the microgrid itself, again thus reducing per-kWh price and increasing savings,” said Hong.
Selling tax credits big plus

Another plus for the bill is changes in the way third parties can sell the tax credits associated with projects. “The ability to simply sell tax credits to third parties stands to significantly reduce the friction and complexity associated with monetizing tax credits, relative to the financing structures employed at present,” said Howard.

Barut agreed, saying that the ability to sell tax credits directly to another party is as important as the extensions of the ITC. That’s because microgrid projects can be quite small compared to the transaction cost required in forming tax credit transfer entities. “That process can wipe out as much as 20% of the tax credit on top of the tax credit discount, which can be more than 30% for small tax credits,” he said.

The industry members overall are thrilled with the bill.

Craig Lewis, founder and executive director of Clean Coalition called the bill “amazing.”

Best thing that ever happened to microgrids

And Barut of Power Market Solutions said that it’s the best thing that ever happened to the microgrid industry.

“This bill will advance microgrid development more than any other previous renewable energy law,” said Barut.

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Comments

  1. At http://www.aaecorp.com we are looking to work with investors to offer micro-grid installations.

  2. Tim Kaminski says:

    But the ITC rates have been knocked down to a “Base Rate” of 6%. To get the 30%, a bunch of additional conditions need to be met. Do you have analysis on what those conditions are? The bill, as passed, is difficult to decipher.
    Back last year, the talk was ~$320B in ITCs. But this bill, as scored by the Congressional Budget Office, “only” shows $50.858B in ITC costs. (Sec. 13702, https://www .cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf). So, the signed bill isn’t nearly as good on ITCs as previous versions.

    • Elisa Wood says:

      Hi Tim,
      I asked Cameron Brooks of Think Microgrid your question. Here is the answer that he provided.

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