November 2022 Ontario Electricity Market Update: US Inflation Reduction Act - Implications for Ontario’s Energy Sector

November 30, 2022
Michael Killeavy

On August 12, 2022 the US House of Representatives passed the Inflation Reduction Act (IRA), which was signed into law by President Biden on August 16, 2022.  The legislation is touted as climate change legislation and some experts maintain that it will set the US on a path to a 40 percent reduction in greenhouse gas emissions by 2030.  While the legislation is wide ranging, it contains specific provisions for clean energy development.  These provisions make clean energy investment in the US very attractive at a time when Ontario is desperately trying to attract new investment to close the looming capacity and energy gap that we have reported on in previous editions of the Ontario Market Update.

The primary benefits for clean energy in the IRA are the tax incentives it provides to renewable energy and energy storage.  The IRA extends production tax credits (PTC) and investment tax credits (ITC) for projects that are placed into service between 2021 and 2024.  The IRA establishes a base level for these credits and provides for bonus adders if project satisfy certain requirements.  For example, for projects under 5 MW of capacity, the base rate ITC is 6%; however, there are adders for paying prevailing wage rates and supporting apprenticeship programs, meeting certain domestic content requirements, being located in energy communities (brownfield sites, former coal and current oil and gas communities), and low-income communities.  The combined effect of these adders raises the ITC to a maximum value of 70%. Similarly, the base level PTC is $5/MWh, which can increase to a maximum of $30/MWh if certain project requirements are met, such as paying prevailing wages and supporting apprenticeship programs, meeting certain domestic content requirements, and being in energy communities.  The IRA also allows for the monetization of these credits – tax-exempt organizations can elect to receive direct payments of cash for their credits and entities that are not tax-exempt can do a one-time transfer of tax credits for a direct cash payment.  Solar energy projects are now also eligible for PTC, too, which might be a more attractive credit for utility-scale solar than ITC given the amount of energy they can generate over ten years.

Energy storage projects will receive a significant boost from the IRA.  For the first time ever, energy storage projects are considered to be eligible for ITC if they are larger than 5 kW and begin construction before 2025.  This effectively decouples energy storage projects from solar projects, since under past legislation only energy storage paired with generation was eligible for ITC. This legislative change should promote greater expansion of standalone energy storage projects since there is now direct financial support to lower capital expenditures and such projects will now enjoy greater flexibility in siting.

Despite the recent Fall Economic Statement from Canada’s federal government, Ontario has nothing like the clean energy support that exists in the US.  The Canadian government announced in this statement that it intends to implement an investment tax credit for clean technologies.  This tax credit would be in the form of a refundable tax credit.  The tax credit would be worth 30 percent of the capital cost of eligible equipment; however, this 30 percent credit rate will only be available if certain yet to be announced labour conditions are met.  Failing that, the credit will be at the lower rate of 20 percent.  Eligible equipment includes wind and solar energy equipment and includes energy storage, too.  

The disparity of investment incentives between the US and Canada is stark.  For example, Canada lacks a production tax credit, which would benefit large, utility scale projects and provide an incentive for providing energy.  While the tax credit announcement in the Fall Economic Statement is welcome, the rules around its application have yet to be determined, so it is unlikely that proponents to the current IESO procurement will be able to benefit from them, which means Ontario ratepayers cannot benefit from them.  The fact remains that the US has a much more welcoming investment climate than Ontario, which is a concern given the need to attract investment in storage and generation projects to close Ontario’s supply gap.  Only time will tell if these badly needed investment dollars get spent in Ontario or south of the border.