The second US stimulus bill, signed on December 27, 2020, (the “Relief Bill”) includes a number of measures relevant to the energy and power sectors, many of which have been the subject of considerable attention. (For example, we have written previously about the wind, solar and carbon capture features of the Relief Bill.) In addition, the Relief Bill included an amendment to Section 48 of the Internal Revenue Code (the “Code”) that expands the existing investment tax credit (“ITC”) program to include waste energy recovery property, allowing certain waste heat to power (“WHP”) projects to be eligible for ITCs. The US Department of Energy has estimated that there is nearly 9 gigawatts of WHP potential in the United States, and WHP can provide significant potential emissions reductions to the extent it displaces electricity generated with carbon-based fuels.
Generally, WHP is the process of converting the leftover heat generated from existing structures and processes into electricity. In the industrial sector, waste heat is generated by equipment such as kilns, furnaces, ovens and engines and as a byproduct of operations at field locations such as landfills, compressor stations and mines. The three major sources of waste heat energy are (i) thermal processes, such as furnace operation; (ii) a mechanical drive, such as a pipeline compressor station; and (iii) other systems, such as the exothermic reactions used to manufacture fertilizers.
Under the Relief Bill, waste energy recovery property is defined as “property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity” (emphasis added). By this definition, projects using the waste heat generated by power plants, for example, would not be eligible; however, projects using waste heat from sources such as manufacturing plants and landfills would potentially be eligible if the following additional requirements are met.
Waste energy recovery properties eligible for ITCs must:
- Have a capacity of 50 megawatts or less;
- Generally not be part of a combined heat and power (“CHP”) system property, as the Relief Bill prevents taxpayers from receiving ITCs available to both types of projects from one property. (There is a 10% ITC available for CHP projects.) If a taxpayer wishes to receive the waste energy ITC for a project that is part of a CHP system, the taxpayer must elect to not treat the property as a CHP system property for purposes of Section 48 of the Code;
- Have begun construction prior to January 1, 2024. Eligible waste energy recovery properties are entitled to a 26% ITC if construction begins in 2021 or 2022 and to a 22% ITC if construction begins in 2023 as long as such properties are placed in service by the end of 2025. Otherwise eligible waste energy recovery properties that begin construction after 2023 are not eligible for the ITC.