Inflation Reduction Act Benefits U.S. Offshore Wind Development

Only 42 megawatts of commercial offshore wind have been installed in the United States to date.[1] This could very well change with the enactment last month of the Inflation Reduction Act of 2022 (“IRA”). The IRA amended the federal government’s authority to grant offshore wind leases, provided new tax breaks for offshore wind developers and component manufacturers, and funded initiatives to study transmission infrastructure upgrades. It is a basket of carrots to encourage wind development and other clean energy generation.

Still, there are notable hurdles to large scale development of offshore wind power. The IRA, for example, does not make it any easier to permit offshore, or any other, cleantech projects. Nor does it require utilities to buy power generated by offshore wind. In that sense, it is a government-sponsored incentive program for developers, meant to make offshore wind development more profitable but no less challenging; especially if the Biden Administration hopes to meet its goal of deploying 30 gigawatts of offshore wind by the end of the decade – hundreds of times the current installed capacity nationwide.[2]

What Carrots are in the IRA for Offshore Wind Developers and Ancillary Contractors

1. Extending the Bureau of Ocean and Energy Management’s authority to lease offshore wind off the coasts of U.S. territories

The Outer Continental Shelf Act (“OCSLA”) grants the Department of Interior the authority to administer energy development in the Outer Continental Shelf.[3] Interior exercises that authority through the Bureau of Ocean and Energy Management (“BOEM”). The IRA grants BOEM authority to grant leases, easements, and rights-of-way for offshore wind projects in the outer continental shelf surrounding U.S. territories: Puerto Rico, Guam, the Northern Mariana Islands, the U.S. Virgin Islands and American Samoa.[4] The amendment will help these island territories transition from disproportionately relying on imported fossil fuels for electricity generation. In 2021, for example, Puerto Rico relied on natural gas, petroleum, and coal for 97% percent of its electricity use.[5] An initial call for information and nominations regarding wind lease sales for areas off the coast of U.S. territories must be made by September 30, 2025; BOEM will use this call to decide which areas to offer for leasing.[6]

2. Reopening portions of the Outer Continental Shelf to offshore wind leasing

The IRA nullifies prior Executive Orders that withdrew areas in the mid- to south Atlantic and the eastern Gulf of Mexico from offshore wind leasing. On September 8, 2020, President Donald Trump withdrew the coastal shelf of the South Atlantic, Florida, and the eastern Gulf of Mexico from lease offerings from July 2022 to June 2032;[7] on September 25, 2020, the Trump administration withdrew the coastal shelf of North Carolina from leasing for the same period.[8] The IRA reopens these areas to offshore wind leasing.[9]

3. Conditioning BOEM’s Authority to Grant Offshore Wind Leases on Offshore Oil and Gas Lease Sales

The IRA adds one major limitation to BOEM’s authority to grant leases for offshore wind development, conditioning this authority on ongoing lease sales for offshore oil and gas development. For the 10-year period following the IRA’s enactment, BOEM may only issue a lease for an offshore wind project if the agency has offered at least 60 million acres for oil and gas leasing on the Outer Continental Shelf during the previous year.[10]

This requirement complicates the planning of offshore wind lease auctions, but BOEM has taken steps to comply with the new condition. On September 14, 2022, BOEM accepted 307 bids for offshore oil and gas leases submitted during Lease Sale 257, which was originally held on November 17, 2021.[11] BOEM offered 80 million acres for bids in Lease Sale 257, but the sale was vacated by the District Court for the District of Columbia.[12] The IRA sidestepped the court decision and required BOEM to accept the highest bids from the sale.[13] If BOEM holds an auction for offshore wind leases within a year of Lease Sale 257–specifically, by November 17, 2022–the agency may be able to issue additional offshore wind leases this calendar year. Otherwise, issuance of further offshore wind leases will most likely await the next offering of oil and gas leases.

4. Direct and Indirect Tax Incentives

Tax breaks for renewable energy developments have for many years been subject to intermittent phase-out periods and extensions, hampering long-term investment decisions. Short-term incentives are particularly ill-suited to support offshore wind projects, which have extended approval and construction timelines. The IRA addresses this problem by providing a decade of tax breaks to support not only the development of offshore wind projects but also a domestic supply chain to deliver components for these projects.

4a. Extending the Investment Tax Credit and Production Tax Credit

The IRA extends the Investment and Production Tax Credits for eligible renewable energy technologies, which include offshore wind projects. The Investment Tax Credit allows project developers to deduct 6% of their investment costs in an offshore wind project,[14] or 30% if the Prevailing Wage and Apprenticeship Requirements are met.[15] Alternatively, project developers may claim the Production Tax Credit, which provides a credit of 1.5 cents per kilowatt hour of energy produced over ten years, assuming the Prevailing Wage and Apprenticeship Requirements are met; if not, the credit is .3 cents per kilowatt hour.[16] The final credit amounts are adjusted for inflation.[17]

Eligible projects must begin construction before January 1, 2025.[18] The credits will then be replaced by the Clean Electricity Investment Credit, which calculates deductions in the same manner as the Investment Tax Credit described above;[19] and the Clean Electricity Production Credit, which calculates deductions in the same manner as the Production Tax Credit described above.[20] These credits will phase out in 2032 or once the electric power sector emits 75% less carbon than 2022 levels, whichever comes later.[21]

All four credits provide bonuses to companies that construct offshore wind projects using methods that provide additional social benefits. To comply with the Prevailing Wage Requirement, companies must pay all laborers and mechanics prevailing wages as defined by the Department of Labor for a given locality and job type.[22] To comply with the Apprenticeship Requirement, qualified apprenticeships must perform 10-15% of total labor hours for a project, depending on when construction begins.[23]A 10% bonus is also available for offshore wind facilities that meet a domestic content requirement. The steel and iron must be produced in the United States, along with a certain percentage of the manufactured products integrated into the offshore wind facility.[24] Finally, a separate 10% bonus is available for projects in designated “energy communities,” which include brownfield sites and communities with elevated unemployment and historic employment in the fossil fuel industry.[25]

4b. Expanding the Advanced Energy Project Credit and Creating the Advanced Manufacturing Production Credit

The IRA expands eligibility for a credit for investments in new or upgraded factories that build specified renewable energy components. When these amendments become effective in 2023, qualifying facilities will include those that recycle as well as manufacture specified components, including wind turbines.[26] The credit is equal to 30% of the investment in projects that meet Prevailing Wage and Apprenticeship Requirements, and 6% otherwise.[27]

The IRA also creates a tax credit for businesses that produce products or materials used in clean energy production, including wind turbines, offshore vessels, and critical minerals. The credit applies to components produced and sold after December 31, 2022 and begins to phase out starting in 2030,[28] and the calculation of the tax credit varies by component.[29] For example, manufacturers of offshore wind vessels can receive a tax credit for 10 percent of the vessel’s sale price;[30] whereas for each turbine blade produced by a manufacturer, the company receives a credit of two cents multiplied by the rated capacity of the completed turbine, which represents the maximum amount of power a turbine can produce at a specific high wind speed.

The credits for shipbuilders may help alleviate construction hurdles for offshore wind development created by the Merchant Marine Act of 1920, more commonly known as the Jones Act. The Jones Act requires cargo shipped between U.S. ports to be carried by ships that are American-built, American-owned, and crewed by U.S. citizens or permanent residents.[31] None of the specialized vessels currently equipped to install offshore wind projects are Jones Act-compliant.[32] Until such vessels are built, foreign-flagged installation vessels will have to receive components from “feeder vessels” bringing cargo from U.S. ports to the installation site.[33] The advanced manufacturing production credit, along with other components of the IRA, will help encourage shipbuilding of Jones Act-compliant vessels.

4c. Making Certain Clean Energy Tax Credits Refundable or Transferable

The Act also increases the value of the tax breaks by allowing companies to transfer credits generated by a renewable energy project to an unrelated taxpayer.[34] Offshore wind project developers and component manufacturers do not always have sufficient tax liability to use the savings provided by tax credits. This provision allows companies to sell their credits to unrelated taxpayers who can use the credits to reduce their own tax liability.

The Act also permits companies to treat certain tax credits as equivalent to a tax payment on the taxpayer’s filed return, which makes the taxpayer eligible to request a refund of any overpayment.[35] This “direct pay” option is only available to tax-exempt entities, along with select government bodies.[36]

How the IRA Improves Interregional Planning for the Electricity Transmission System

Insufficient transmission capacity is a major obstacle to integrating offshore wind power with the electric grid. Offshore wind generates large quantities of intermittent electricity that must be connected to the onshore grid, and transmission infrastructure is not currently sufficient to manage the quantities of offshore wind anticipated to come online. For example, the last major study of offshore wind integration in New England estimated that the regional grid could integrate 5,800 MW of power generated by offshore wind without major upgrades,[37] but current regional decarbonization goals call for up to 30,000 MW of power generated by offshore wind by 2040-2050.[38] Likewise, California wants to develop offshore wind projects along the state’s North Coast, but additional transmission infrastructure will be needed to deliver electricity from this more isolated region to end users in central and southern California.[39]

The IRA provides $760 million to state, local or Tribal government entities with authority over siting, permitting, or regulating high-voltage interstate or offshore transmission lines.[40] Grants for these siting authorities can cover activities such as: studying the impacts of proposed transmission projects; evaluating alternative corridors; and participating in federal or state regulatory proceedings to evaluate proposed transmission projects.[41]

The IRA appropriates an additional $100 million to fund a planning body to analyze interregional electricity transmission and transmission infrastructure for offshore wind.[42] The body is directed to address several issues including the value of a planned national transmission grid optimized for the integration of offshore wind.[43]

Finally, the IRA also appropriates $2 billion for direct loans supporting transmission projects located in National Interest Electric Transmission Corridors designated by the Department of Energy.[44] The IRA’s impact on transmission line construction will be discussed further in a forthcoming article in this series.