The Inflation Reduction Act of 2022 (IRA) is the most consequential energy and climate legislation in decades. Notably, it includes $369 billion in new spending for energy security and climate change measures. The climate provisions are intended to increase employment, decrease inflation, and support progress toward achieving a net-zero economy by 2050. The energy and climate provisions can benefit district energy systems by reducing the cost of upgrading and decarbonizing. The major opportunities lie in tax incentives or direct payments to tax exempt and governmental entities in lieu of a reduction in tax liability. The IRA also establishes funding for climate-related grants and technical assistance. The incentives are different from prior energy tax incentive legislation in five respects: 1. The IRA energy tax credit program is longer term. Historically, technology-specific energy credits were authorized for a few years and then periodically given short-term extensions. While the IRA provides for another short-term extension of many of the technology-specific tax credits, for the most part in 2025 it transitions to technology-neutral credits. The exception is geoexchange, for which credits extend through 2034. 2. The credits are limited unless the project meets requirements for payment of prevailing wages and employment of qualified apprentices. 3. Many of the tax credits included in the IRA allow direct payments in lieu of a reduction in tax liability ("direct pay") for tax exempt and governmental entities. 4. The IRA provides additional flexibility for taxable entities with an option to monetize the credits by transferring them to an entity with greater tax liability. 5. Credits are increased for use of U.5.-made materials and equipment and/or for siting facilities in economically disadvantaged areas.
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