Heavy industry represents 30 percent of US CO2 emissions. And while decarbonizing industry is difficult, two exciting industrial developments are now taking place in the United States that will help speed progress.
The first takes the form of ambitious companies developing dozens of multi-billion-dollar, “clean” industrial projects in clusters across the country, spurred by the idea that these first-of-their-kind, clean/green/low-carbon ammonia, hydrogen, aviation fuel, cement, steel, aluminum, and transportation projects will reap mutual workforce, transportation, and storage benefits by being grouped together in so-called “clean industrial hubs.”
In Washington, D.C., meanwhile, hundreds of billions of dollars in new government incentives, allocated across a myriad of federal agencies and legislation, have been earmarked for projects just like them.
RMI and the Mission Possible Partnership are already supporting clean industrial hub development in Texas Gulf Coast and Southern California regions by helping project developers and local governments unblock the bottlenecks that keep good projects from raising financing and coming to fruition.
The big question is: what will it take to equitably and effectively connect regional clean industrial hubs with those government dollars?
As a first step to answering that question, RMI, Mission Possible Partnership, Center for Houston’s Future, and Sidley Austin LLP brought together a panel of federal funding experts and an audience of over 50 executives from project developers, infrastructure financiers, local government, and community development organizations in Houston in March 2023. The 20+ industrial corporates in attendance represented over $500 billion in total market capitalization. Here’s what you need to know.
Office of Clean Energy Demonstration: $6 Billion Grant Program Kicks Off
The Bipartisan Infrastructure Law created the Office of Clean Energy Demonstration (OCED) within the Department of Energy (DOE) in December 2021 to “accelerate clean energy technologies from the lab to market” with competitive grants. David Crane heads the agency. OCED was initially allocated $500 million for industrial emissions reduction demonstrations, but the Inflation Reduction Act (IRA) boosted that to $6.3 billion.
As grant funding, OCED funds will de-risk technologies that are not yet demonstrated at commercial scale. In collaboration with the Office of Manufacturing and Energy Supply Chains and the Industrial Efficiency and Decarbonization Office, OCED will cover up to 50 percent of demonstration project costs.
OCED released its funding opportunity announcement earlier this year. Applications — from the projects that have already submitted qualifying concept papers — are due August 4. Before that, OCED will indicate which concept papers should progress into formal applications. Successful projects will have optimized for speed, cost, quality, impact, and location.
The Loan Programs Office: The $400 Billion “Bridge to Bankability”
After a decade without much action, the DOE Loan Programs Office (LPO) has roared back to life with new funding announcements seemingly every month and an estimated $412 billion in total loan authority. So how should industrial project developers approach LPO?
In many ways, LPO is like a regular bank: Jigar Shah’s underwriters will only fund projects with a reasonable prospect of repayment — that means secured offtake, a solid management team, demonstrated technology, credible feedstock and suppliers, and so on. However, unlike commercial banks, supporting riskier, first-of-their-kind projects is a strategic priority. LPO aims to focus capital on parts of the market with the biggest vulnerabilities and lead commercial funders where they’ve previously been wary.
For first-of-a-kind clean industrial projects, LPO funding in many cases may be the first debt they have received. Though a typical LPO application process may take a year, LPO vetting prepares project developers (who have thus far raised only equity) to access commercial debt. While equity investors may be wooed by projects’ potential upsides, raising bank debt requires a different approach. Lenders must have confidence that cashflows will cover debt servicing costs, and ensure they have protection against downside risks.
LPO helps project developers utilize DOE’s in-house National Environmental Policy Act (NEPA) team and its 10,000 scientists and engineers to guide projects towards bankability. Projects do not compete against each other for LPO funds; LPO will fund all projects that meet eligibility criteria. As applications stream in every month, the market is quickly coalescing around new federal tax credits, and LPO is doing everything it can to ensure public dollars support private capital as efficiently as possible.
Project developers can access LPO application resources here.
Tax Credits: Full Steam Ahead (Just Talk to Your Lawyer First)
The biggest potential pot of federal funds are new, uncapped section 45 tax credits — administered by the Department of the Treasury — for hydrogen, heavy industry, and carbon management. IRA changed the tax credit landscape in five main ways:
- Extending the lifetime of existing tax credits, such as the Investment Tax Credits, Production Tax Credits and the Carbon Capture and Sequestration Credits, and increasing their value (e.g., Section 45Q credits for sequestration projects are now $85/ton).
- Creating credits for new technologies via Section 45V for clean hydrogen and Section 45Z for clean transport fuels, including sustainable aviation fuels.
- Adding eligibility labor-related requirements as the prevailing wage and apprenticeship requirements. The Internal Revenue Service (IRS) is still ironing out some of the details of how these will apply; if unmet, credits could lose up to 80 percent of their value.
- Making it possible to secure more than 100 percent of credit value via “10% adders” for projects that meet domestic manufacturing thresholds and/or are located in an “energy community.” The IRS has released new guidance for these bonus credits.
- Creating two additional new ways to monetize tax credits: direct pay and transferability. Direct pay means developers no longer need large enough tax liabilities — or to rely as heavily on tax equity investors — to claim full credit value. Transferability means developers can immediately sell the credits to anyone with a big enough tax bill, though the tax credit buyer will likely ask for a discount.
For more insight, read Sidley Austin’s expert IRA tax credit analysis.
So far, some project developers have been slow to move without more definitive IRS guidance. But if previous IRS actions are any indication, there’s more than enough guidance for developers to move ahead with projects. With previous wind and solar tax credits, though there was initially some uncertainty about the pathway for eligibility, over time regulators issued clarifying guidance that also opened more pathways to accommodate more types of projects.
Regulators want to hear the perspective of industry; agencies routinely issue notices clarifying previous ones, as needed. The IRS sought public comment on production of clean hydrogen and the clean fuel production credit last November and is sorting through all the responses. IRS representatives are also joining industry conferences to obtain additional information and feedback from the market.
Clean Industrial Hubs: A Question of How, Not If
From consortia of publicly listed, multinational conglomerates to nimble, private equity-backed management teams, sophisticated project developers are busy number-crunching federal incentives for next-generation industrial clusters. Meanwhile, federal agencies are busy reviewing comments and applications, and meeting with industry stakeholders to get dollars out the door and get the first wave of projects into operations.
Linking this all up will take diligent work. Funneling dollars from the federal government’s balance sheet in a way that helps realize clean industrial projects and fosters system-level energy transitions will require a concerted effort. For one, federal agencies want to hear directly from industrial stakeholders on what’s needed and what works. City and state governments also have a role to play, including working with communities to ensure federal dollars build shared wealth as well as simplifying permitting, working on site readiness, fostering local workforces, and more. And of course, the government wants to complement, not supplant private markets — and bringing these projects online will require ready access to both private and public dollars.
Federal funds could enable larger, private financings. RMI will help project developers access federal funds and explain our climate-aligned approach through more articles like this. Stay tuned for insights on how developers can secure offtake, partner with city and state governments, and ensure a just and equitable transition for local communities. The pieces are in place, the potential is immense, and now the details of how are being worked out. Indeed, it’s looking like a question of how these projects get built, not if.
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