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U.S. Senate passes Inflation Reduction Act, with support for hydro

U.S. Senate passes Inflation Reduction Act, with support for hydro

The U.S. Senate passed H.R. 5376, the Inflation Reduction Act of 2022, by a single vote. Vice President Kamala Harris cast the tie-breaking vote on August 7 for the $750 billion bill, with voting split along party lines.

In perhaps its most important provision for the hydropower sector, the bill would create tax parity with other renewables. In particular, incremental new hydropower generation would be eligible to receive a production tax credit (PTC) on par with what is available to wind generating resources. The provision could help spur development of generating capacity on existing, non-powered dams.

The Senate version of the bill contains many amendments from the original version, which was known as the Build Back Better Act. That act featured several hydropower incentives: $125 million for hydroelectric production incentives, $75 million for hydroelectric efficiency improvement incentives, $553.6 million for hydroelectric resiliency upgrades and $10 million for a pumped storage demonstration project to facilitate long-duration storage of intermittent renewable electricity

However, as the Baker Botts law firm explained recently, the new bill expands the PTC for hydropower projects that are placed in service after Dec. 31, 2022. The law firm said the act also eliminates what had been a 50% PTC reduction under current law for qualified hydroelectric production and marine and hydrokinetic renewable energy.

The Act also expanded application of the PTC to marine and hydrokinetic renewable energy by including energy derived from certain pressurized water pipelines and reducing the minimum required nameplate capacity rating for a qualified facility to 25 kW.

The bill that won Senate approval, however, left out a 30% Investment Tax Credits (ITCs) for environmental improvements at existing hydropower facilities. This omission could put at risk some 17.5 GW of installed capacity that is up for relicensing by 2035. Included was a similarly sized ITC for energy storage, including pumped hydro.

And the bill included $2 billion in direct loans for the new electric transmission lines, as well as an additional $760 million for grants to help facilitate transmission siting.

The bill also included a program to deliver grants, contracts and financial assistance agreements to entities that conduct drought mitigation activities in Arizona, California, Colorado, Idaho, Kansas, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Washington, and Wyoming. Priority is given to the Colorado River Basin and other basins experiencing comparable levels of long-duration drought.

The Build Back Better Act would have applied the investment tax credit to “hydropower environmental improvement property,” but the new act does not. Thus, Baker Botts said, the ITC remains available for such property (if at all) only by electing the ITC in lieu of the PTC under Section 48(a)(5).17.

The legislation will now go to the House of Representatives, with a vote scheduled for Friday, Aug. 12. It is not expected that the House will make further changes to the legislation, which would then send the bill to President Joe Biden for his signature.