Clean Energy's Bright Future: Harnessing the Power of New Possibilities

The following alert is included in Insights 2023, a collection of articles and videos addressing important emerging legal issues in the year ahead.

Every day, the world moves closer to a clean-energy future. And as the unprecedented shift away from fossil-based fuels and toward zero-carbon sources continues, it is the private sector, not governments, leading the way. 

Across all sectors of the global economy, corporations hope to cut their net carbon emissions to zero in the not-too-distant future. Capital providers and Wall Street investors have driven much of this change, which now extends even to traditional energy companies. No longer in the hands of early adopters and pure-play renewable energy developers, the transition to zero-carbon energy has gone mainstream.

While private industry and investors lead the way, governments are pitching in, too. The newly enacted Inflation Reduction Act (IRA) amounts to one of the most consequential clean-energy bills in recent memory, breathing new life into existing tax credits for proven renewable energy sources, such as wind, solar, and energy-storage solutions; creating new opportunities for investment in novel technologies; and boosting incentives for producing electric vehicles.

And beyond adding new tax credits and enhancing existing ones, the IRA creates greater flexibility and new opportunities for clients to capture the value of tax credits using structures tailored to their investment goals. For instance, the IRA permits taxpayers to transfer many of these tax credits to third parties and, in more limited instances, to claim refundable credits and receive cash payments from the Treasury. By allowing investors to realize value from tax credits in these new ways, the IRA will make renewable projects attractive to a broader array of investors and ultimately encourage additional investment in the industry.

Along with supporting investment in wind, solar, and other energy projects that traditionally have been and will continue to be supported by tax incentives, the IRA also creates significant tax credits for nuclear energy projects, which will likely encourage additional development of those projects. Combined, these credits and incentives are a game changer for utilities. One leading, integrated utility, for example, has projected that its nuclear plants in North and South Carolina will qualify for nuclear production tax credits of several hundred million dollars a year beginning in 2024. The utility could also have up to 17 gigawatts of connected solar power over the next 10 years, with each gigawatt of solar equal to about US$60 million in annual production tax credits. And the utility estimates that it could also make up to US$4.5 billion of storage investments over the next 10 years to qualify for investment tax credits.

The IRA’s structure also means it should continue to incentivize renewable energy investment even if the US economy slides into a recession. Traditionally, helping the environment is given low priority during challenging economic periods. But the IRA’s incentives will continue regardless of any downturn. For instance, by allowing developers and owners to transfer tax credits and claim certain refundable credits, the IRA expands the scope of taxpayers that can take advantage of those credits beyond companies with sufficient tax capacity to benefit from tax credits.

We stand at an inflection point in the global energy market: a confluence of proven green technologies, technological breakthroughs in the design and manufacturer of large storage battery systems, and the growing adoption of hydrogen. All this spells transformative change—change that we are already seeing with our clients on the ground. This transition, like any other, will have ups and downs, but there are tremendous opportunities for entities that are able to take advantage of the public and private incentives that have been created in this space.