The Inflation Reduction Act and The CHIPS Act: Initial Key Takeaways for the Built Environment

Late last Friday, the U.S. House of Representatives passed the Inflation Reduction Act (IRA), the largest investment in the clean energy transition in the country's history. It will create substantial growth opportunities in certain segments of the built environment.  

While the impact in spending over the life of the bill will be better understood in the coming months, we highlight below some of the key features of the bill. According to Energy Innovation’s Energy Policy Simulator, the legislation is forecast to reduce the U.S.’s carbon emissions by 37% to 41% from 2005 levels. The passing of this legislation also comes on the heels of President Joe Biden’s signing of the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act earlier last week, which will be a key driver in industrial manufacturing.  

The IRA has many facets that address issues outside of the built environment, but leaders in construction must understand the $369 billion portion of the bill, which is described as an investment in energy security and climate change. Clean electricity is the major focus of the bill, but clean transportation – with funding for expanding the manufacturing of electric vehicles – and deductions for efficiency-focused building renovations are central tenets as well.  

The most common mechanisms in the bill are tax credits from production tax credits (PTCs) and investment tax credits (ITCs) for clean energy to tax credits for clean energy manufacturing and consumer purchases of electric vehicles. The legislation achieves its funding through improving taxpayer compliance and a 15% corporate minimum tax rate. Overall, carbon taxes in previous climate legislation attempts have been replaced with tax credits as incentives. 

Key Features of the Investment in Energy Security and Climate Change 

The bill’s key features can be organized into two categories which most impact construction. 

Energy Security & Domestic Manufacturing, including:  

• $30 billion in production tax credits for U.S. manufacturing of solar panels, wind turbines, batteries and critical mineral processing. These are widely expected to lower the procurement costs of these items, encouraging owners and developers to spend on building projects incorporating them. Previously, these led to the significant decrease in the cost per kilowatt hour of solar panels and wind turbine components we observe today. 
• $10 billion in tax credits to build clean technology manufacturing facilities. This will significantly offset costs for constructing these facilities. The Section 48C program is anticipated to offer up to a 30% tax credit for capital expenditures.  
• As much as $20 billion in loans to build new clean vehicle manufacturing facilities. This is a significant step towards on-shoring US manufacturing capabilities, similar to the CHIPS Act.  

Economy Decarbonization: 

• An extension of current investment and production tax credits until 2025, targeted at clean electricity and energy storage. These credits offer incentives at key points in the supply chain of manufacturing solar panels, wind turbine parts and battery storage components. In doing so, they encourage the expansion of the U.S.’s production facilities, while driving down the costs of the components, further encouraging owners to build clean projects. 
• $8.6 billion to Department of Energy (DOE) loan guarantee programs, which will enable $290 billion in loan guarantee authority. The DOE’s Loan Programs Office will have an additional $250 billion in their Title XVII Innovative Technology Loan Guarantee program, which is a subsidy to energy infrastructure projects that reduce greenhouse gas emissions. For comparison, a previous version of this program supported 28 project commitments with only $2.5 billion in funding. 
• $3 billion in electric transmission investments, in addition to crucial permitting support. While $2 billion of this is for DOE loans like the program above, our partners in the transmission industry will appreciate how the other $1 billion is being spent. There is $760 million going to states to support transmission siting; $100 million for interregional and offshore transmission planning, and $375 million to the DOE, Federal Energy Regulatory Commission and the Department of the Interior to process transmission permitting. Many of us in the industry are aware that transmission interconnection queues, permitting delays and siting struggles present a massive bottleneck for bringing clean energy capacity online, and these funding streams are aimed directly at addressing those issues.  
• Increases the 179D deduction for properties that achieve higher levels of efficiency. This portion will encourage commercial property owners to undertake renovations. It will also provide greater deductions for properties which meet prevailing wage requirements for contractors and subcontractors.  

With regards to clean energy, the IRA will encourage construction spending in many ways and potentially increase the rate at which new gigawatts of clean energy are built and come online. 2020 and 2021 were both record years for newly installed solar, wind and battery capacity in the U.S., but a report from the American Clean Power Association saw this rate lag in the second quarter of 2022. The legislation will likely quickly reverse this lag. Further, the IRA includes many other features that will have longer term effects on construction and the transformation of the grid and power generation, such as $27 billion for a clean tech accelerator that will ideally push the U.S.’s capabilities to new heights.  

A notable example of how quickly legislation can directly impact the built environment is the CHIPS and Science Act, which Biden signed into law on August 9, 2022. Before CHIPS was signed, just the expectation that it was going to pass led Samsung to announce a massive plan to build 11 new chip fabrication plants in Texas at a potential investment of $191 billion. To date, Samsung has already started building a $17 billion facility in Taylor, Texas.  

The bill authorizes more than $200 billion in federal funding to promote domestic semiconductor manufacturing, of which $24 billion is earmarked to be spent in fiscal year 2022. A total of $53.7 billion will be appropriated immediately, while the rest will require congressional action. 

Key Features of the CHIPS and Science Act 

CHIPS for America Fund 

• $50 billion allocated to develop domestic semiconductor manufacturing production. 
• $39 billion is set aside for financial assistance in building, expanding or modernizing domestic manufacturing facilities. $6 billion of that is for direct loans and loan guarantees. 
• $11 billion is for research, development and workforce initiatives. 

CHIPS for America Defense Fund 

• $2 billion in funding dedicated to the Microelectronic Commons, a network for university research for defense department-specific applications of semiconductors. 

Chips for America Workforce Fund 

• $200 million over five years aimed at increasing the semiconductor workforce. The Senate presently estimates the industry will need 90,000 workers within three years. 
• A 25% tax credit for capital expenses for manufacturing of semiconductors and related equipment. The credit is for property that will be placed in service after December 31, 2022, and for which construction begins before January 1, 2027. 

The impact of this legislation will shift priorities in American construction for years to come. Manufacturing, power, transmission and commercial buildings will all see direct investment and heightened interest from owners as a result. These pieces of legislation mark a true shift in the ecosystem for energy and advanced manufacturing in the U.S.  

Federal policy will further influence state policy, and we also see many private owners setting their own goals for energy conservation, onshoring and workforce development. Biden’s goal of reducing emissions by 50% is in closer reach now, and further executive and state action will likely follow to close the gap. New areas of opportunity abound for the built environment.