Sweeping Inflation Reduction Act could transform energy development in Montana

The Inflation Reduction Act, which President Joe Biden signed into law Aug. 16 after it passed the U.S. Senate by the thinnest of margins, has been widely described as the most expansive piece of climate legislation in U.S. history.

The measure also reforms health insurance, prescription drug pricing and corporate tax structure, but the provisions that Biden has touted as “the biggest step forward on climate ever” reform the energy sector, largely by creating incentives for corporations, electric cooperatives and individuals to transition to cleaner sources of energy.

In an effort to understand what the IRA means for Montana, a net exporter of energy that supplies power to the grids of surrounding states in addition to Montana businesses and homes, Montana Free Press contacted stakeholders in the state’s energy industry for their read on particularly important pieces of the bill, which will funnel $7 billion into investments in clean power generation and storage into the state by 2030 according to the White House’s analysis.

FOSSIL FUEL DEVELOPMENT

The support of Sen. Joe Manchin, the moderate West Virginia Democrat who balked at the price tag for the Build Back Better Plan, a predecessor to the IRA, was critical to getting the bill on Biden’s desk, since Senate Republicans, including Montana Sen. Steve Daines, were unified in their opposition. Manchin’s influence is visible in elements of the measure aimed at supporting continued fossil fuel extraction, such as expanding offshore gas leasing in Alaska and the Gulf of Mexico and tying solar and wind development on federal land to fossil fuel development. Per the IRA, if federal agencies aim to open federal land to wind and solar farms, they must first offer up oil and gas leasing opportunities. (Federal land managers like the Bureau of Land Management aren’t required to ensure that oil and gas developers buy the leases, they just have to make them available for sale.)

The IRA also includes funding to help fossil fuel-dependent communities reduce existing emissions or ramp up their use of cleaner energy sources. In an email to MTFP, staffers for Democratic Sen. Jon Tester highlighted provisions like a $4 billion tax credit available to eligible clean energy producers working in coal communities and $5 billion in loan guarantees to help existing coal and natural gas plants improve efficiency, adopt environmental controls, or install carbon capture, utilization and sequestration equipment.

Oil and gas industry group the American Petroleum Institute acknowledged its appreciation for those policies, but criticized the act’s 15% corporate minimum tax and an $11 billion tax on crude oil and petroleum products, which would be collected through a reinstatement of the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products, as being “the wrong policies at the wrong time.”

“While the Inflation Reduction Act takes important steps toward new oil and gas leasing and investments in carbon capture and storage, it falls well short of addressing America’s long-term energy needs and further discourages needed investment in oil and gas,” API President and CEO Mike Sommers said in an emailed statement.

Energy analysts have highlighted the IRA’s emphasis on incentives, or “carrots,” but the act also includes one sizable new “stick”: a fee for emissions of methane, an atmosphere-warming gas that represents a smaller but much more potent source of greenhouse gas emissions than carbon dioxide. The Environmental Protection Agency has been tasked with collecting the fee, which escalates over a three-year period. In 2024, certain sectors of the oil and gas industry will be assessed $900 per ton of methane emitted. By 2026, that fee will be $1,500 per ton.

The methane emissions fee marks the first time the federal government will collect a fee associated with greenhouse gas emissions. Industry analysts say it could serve as a blueprint for regulation of other greenhouse gasses in the future.

The new fee is important in a Montana context because NorthWestern Energy — the state’s largest monopoly power company — unveiled a plan last year to build a new natural gas plant in Laurel that would add up to 175 megawatts of capacity to the grid. Natural gas is composed mainly of methane.

In an email to MTFP, NorthWestern spokesperson Jo Dee Black said the company has no current plans to pursue projects using tax incentives established by the IRA, but “will continue to evaluate all possible resources capable of meeting customer needs, which may include proposals that could possibly include using tax incentives available through the Act.”

Black also noted that NorthWestern’s current portfolio is 56% carbon free and that the company voluntarily joined the EPA’s Methane Challenge program as part of its effort to reduce “fugitive methane emissions.” According to the EPA, that program requires members to “transparently report systematic and comprehensive actions to reduce methane emissions.”

“Our natural gas system has a leak per mile rate that is better than the industry average, thanks to our investments in pipeline infrastructure and leak detection capabilities,” Black said, though she did not indicate whether the methane fee would compel the company to revisit its gas plant plans.

Montana Environmental Information Center Energy Policy Director Ian Lund said he’d like to see the fee that the federal government will levy on plants like the Laurel Generation Station reflected in NorthWestern’s planning documents that lay out how the company expects to meet demand with the various sources of energy it owns or acquires from other entities — for example, hydropower facilities, solar and wind farms, and the state’s first utility-scale battery project.

“NorthWestern is doing its resource procurement plan right now, and all of its cost assumptions have been locked in, but were essentially made obsolete by the passage of this bill,” Lund said. “The cost of solar, wind, batteries and even nuclear, is going to be much lower than what they currently have on there. On the other side, the methane rule will make a gas plant more expensive.”

Lund said MEIC is planning to submit a letter to NorthWestern asking it to incorporate the methane fee and investment incentives in its upcoming electricity supply plan, which the company is expected to release this fall.

RENEWABLE ENERGY, NUCLEAR ENERGY

The clean energy tax credits included in the IRA are “arguably the most impactful federal climate policies,” according to a Forbes piece written by Daniel Esposito, a policy analyst for nonpartisan climate policy think tank Energy Innovation. That’s due in part to the way they cut up-front capital costs to encourage investment in wind, solar and battery technologies and incentivize production by rewarding producers who put carbon-free electrons onto power grids.

Under the IRA, nonprofits can take advantage of various production credits without going through another entity — a bank, for example — which results in the energy developer capturing more of the tax benefit.

Though cooperatives currently generate little of their own power directly, the tax credit does make it more attractive for nonprofit electric cooperatives to invest in carbon-free technologies, according to Gary Wiens, CEO of the Montana Electric Cooperatives’ Association, which represents 25 member co-ops that deliver electricity to homes and businesses in all 56 Montana counties.

The involvement of a third party in pre-IRA tax credit opportunities “drained off about one-quarter of the tax benefit,” Wiens said, whereas credits included in IRA will allow nonprofit cooperatives to receive the benefits directly.

“I think it’s going to be very helpful for us moving forward. It really does help us stay on a path of continued diversification toward more carbon-free generation,” he said. “It makes it possible for co-ops to take a look at a few projects they’ve been considering for a while.”

Wiens also said he appreciates that unlike the Build Back Better bill, the IRA doesn’t include mandates that would penalize utilities that fail to meet clean energy investment requirements, which he said could have significantly increased rates for some of MECA’s member cooperatives. Co-ops serve approximately 40% of Montana’s energy consumers, and the state’s smallest electricity cooperative has about 800 members, according to Wiens.

“The original House version of this bill had contained very aggressive requirements for annual increases in clean energy purchases for the next 10 years and then heavy penalties if you fell short of those annual increases,” Wiens said. “We’re really excited that the [IRA] doesn’t have the mandates.”

As MEIC’s Lund noted, the IRA includes incentives that are expected to make nuclear energy generation more attractive to policymakers and energy developers. That’s important in Montana because state lawmakers have demonstrated growing interest in nuclear technology as one potential future use of the Colstrip coal-fired power plant, which faces an increasingly uncertain future with its operator currently involved in bankruptcy proceedings and deadlines in Oregon and Washington requiring most of the plant’s six owners to pull out of coal-fired power by the decade’s end.

As lawmakers have envisioned it, retrofitting the Colstrip plant for an advanced nuclear reactor could allow the facility to retain some of its existing infrastructure and workforce.

It’s impossible to put a firm dollar amount on the incentives benefitting existing and new nuclear plants, as some of the clean energy tax credits are technology-neutral, meaning they can be applied to anything from battery storage and wind farms to advanced nuclear reactors, but nuclear industry groups are bullish on the IRA’s potential to spur investment in nuclear.

Nuclear Energy Institute President and CEO Maria Korsnick said investment and tax incentives for existing nuclear power plants and newer advanced reactors “set nuclear energy on a level playing field, ensuring that nuclear can form the backbone of a stable electric grid that also includes large shares of wind and solar.”

Esposito and other clean energy advocates have also highlighted the fact that in order to obtain the full tax benefit for investing in and producing clean energy, developers will have to meet a set of labor and manufacturing conditions. Developers that don’t pay workers competitive wages or offer training opportunities will be eligible for only 80% of the credit.

The NW Energy Coalition, which advocates for “a clean and affordable energy future” in the region, said the IRA is long overdue and highlighted its investments in storage technologies that it described as key to “allowing the state to fully harness its immense renewable resources, both wind and solar.”

“The IRA will help transform our energy systems and decarbonize the economy. Much more is needed, especially from states like Montana that will drive much of the investments from the IRA, and we look forward to working with agencies in the state to ensure Montana takes full advantage of the law,” NW Energy Coalition spokesperson Chris Conolly said in an email to MTFP.