Land of opportunity – why Australian investors are being drawn to the United States

At the core of the effort is the U.S. government's unprecedented support for energy transition. Through the Inflation Reduction Act of 2022 (IRA) and the Infrastructure Investment and Jobs Act of 2021 (IIJA), the U.S. is providing huge support for green energy investment, amounting to more than US$350 billion over the next decade, by way of transferable tax credits (more than US$250 billion), grants (more than US$60 billion in direct grants), loans and loan guarantees (roughly US$50 billion). Estimates suggest that these subsidies could end up being much greater, in particular since many of the tax incentives are uncapped.

It is estimated that the IRA could encourage US$3 trillion of investment in clean energy by 2032, twice the total investment in U.S. shale over the last 15 years, and US$11 trillion of clean energy investment by 2050. Renewables, not including nuclear or hydro, are expected to make up 44 percent of total U.S. energy generation by 2030 and 80 percent by 2050. 

As part of the IIJA, funding will be provided for a range of activities such as carbon capture, hydrogen "hubs", enhancements to hydropower, wind and solar, energy storage, critical minerals development, EV charging infrastructure and clean energy investment in underserved communities.

The sweeping reach of the measures includes industrial decarbonisation for hard-to-decarbonise industries (steel, aluminium, cement etc.) and the transportation sector (cars, trucks, aviation, marine).

The IRA – what it does

The IRA contains extensions and expansions of clean energy tax incentives, a new 15 percent corporate alternative minimum tax, and a one percent excise tax on public company stock buybacks.

One pillar of the IRA is the provision of US$369 billion in "energy security and climate change" investments over the next ten years. Among these, the IRA extends the timeline of both pre-existing clean energy investment tax credits (ITCs) and production tax credits (PTCs), (e.g. for wind and solar electricity generation, as well as for other clean resources) generally at full value as long as prevailing wage and apprenticeship requirements are met.

Credit levels can be higher if domestic content thresholds are met, and/or for projects in former coal mining, and coal power plant communities. There are additional new credits for, amongst other things, investments in energy storage technology with zero (or less) greenhouse gas emissions, the production of clean hydrogen, and U.S. manufacturing of certain clean tech components like EV or energy storage battery cells and modules, solar cells and wafers, and critical minerals (mined or processed in the U.S.).

Importantly, the IRA also allows for the monetisation of tax credits through their sale to unrelated third parties, and for municipal or tax-exempt entities, refundability. Refundability is also available for some of the credits such as the Advanced Manufacturing Production Credit under Section 45X for at least five years.

Electric Vehicles (EV)

The IRA supports funding to support EV growth including up to US$20 billion in respect of new manufacturing, US$2 billion for the retooling of existing facilities and tax credits for consumers, intended to encourage a significant shift to U.S. manufacturing of EVs and EV batteries. The IRA also extends and modifies the consumer EV tax credit, which provides a credit of up to US$7,500 per qualifying EV.

The measures come with various stipulations as to assembly and battery sourcing, including prohibitions related to sourcing components or minerals from China or Chinese entities, that may make the initial switch challenging for vehicle manufacturers. There is also a requirement for "final assembly" to take place in the U.S., although there is also a credit for commercial use vehicles which has far fewer restrictions. The IIJA provides an additional US$6 billion in cost-shared funding for battery manufacturing development and another US$5 billion for EV infrastructure.

Transportation

Alongside the push towards EVs, there are new incentives to accelerate the production and use of clean fuels and further reduce greenhouse gases from the transportation sector. These incentives include tax credit programmes for hydrogen, biofuels, and aviation fuel aimed at advancing the development of clean transportation.

One such provision is a new tax credit for clean hydrogen production – generally considered a promising low-carbon fuel, particularly for trucks and ships. The credit is based on a percentage ranging from 20 percent to 100 percent depending on the lifecycle greenhouse gas reductions achieved in producing clean hydrogen.

Manufacturing

The IRA provides US$10 billion in new funding for the manufacture of clean energy and equipment and expands the categories of qualifying energy technologies, with the goal of building a robust manufacturing capacity to supply the clean energy economy.

There is almost US$6 billion set aside for competitive grants to be made by the Department of Energy (DOE) on a 50/50 cost-share basis for advanced industrial technology designed to accelerate greenhouse gas emissions reductions in an industrial process. The funding can be for new equipment or for retrofits and upgrades. Areas targeted include steel, iron, concrete, paper, pulp, ceramics and chemical production.

The DOE will apply certain criteria when choosing fund allocation, including greatest job creation, greatest reduction in greenhouse gas emissions, shortest time to completion, greatest potential for innovation, geographic diversity, commercial viability and regional economic development potential. 

There are tax concessions for mining companies that extract and/or process – from the U.S. - minerals deemed to be critical to the energy transition, such as nickel and lithium. Mining companies that produce any of the minerals listed in the IRA will qualify for a ten percent tax equivalent to ten percent of the cost of production. There are also significant tax credits for manufacturing solar cells, wafers, and modules, battery cells and modules, wind turbines, and other advanced energy components, in the U.S. under the IIJA, there will soon also be available US$12 billion for "responsible" carbon capture and storage projects.

Opportunities for investors

In order to take advantage of these incentives, Australian investors will need to create a U.S. entity for investment. Governmental entities and not-for-profit organisations are eligible for tax credits in the form of rebates. Setting up a joint venture can be considered.

Investors seeking U.S. incentives will need to navigate "Buy America" requirements. White House guidance explains, for example, that iron and steel will be considered as produced in the U.S. when all manufacturing processes, from melting through to final coating, occur in the U.S.

A manufactured product will be viewed as being produced in the U.S. if the product was manufactured in the U.S. and the cost of the components that are mined, produced or manufactured in the U.S. is greater than 60 percent of the total cost. Waivers are available. An applicant must provide a detailed justification as to why applying Buy America requirements would be inconsistent with the public interest, that the types of iron, steel or other construction materials are not reasonably available in sufficient quantities or of satisfactory quality, or that the inclusion of U.S. sourced products would increase the cost of the overall project by more than 25 percent.

Virtually all IRA clean energy tax credits are transferable, to any entity, in exchange for cash. Virtually all IRA tax credits are refundable to governmental and tax-exempt entities.

The incentives open up the prospect of Australian critical minerals being treated as qualifying for EV tax credit purposes. This collaboration will only intensify as Australia and the U.S. explore ways of building up alternative supply chains in the face of China assertiveness in the region.

Australia is deemed an "excepted foreign state" by CFIUS, the Committee on Foreign Investment in the U.S. CFIUS has designated four "excepted foreign states," which also include Canada, New Zealand, and the United Kingdom, on the basis that these states have established and are effectively utilising robust processes to assess foreign investments for national security risks and assist the U.S. through coordination on issues relating to investment security.

CFIUS's regulations set forth a detailed set of criteria that Australian companies must satisfy in order to be afforded the benefits of "excepted investor" status for investments in the U.S..

Investments by Australian "excepted investors" are exempted from certain restrictions that could otherwise apply to investments in the U.S., including CFIUS's mandatory filing programs, and CFIUS's jurisdiction to review purchases, leases, or concessions of real estate located near sensitive U.S. government facilities.

Of note, CFIUS retains jurisdiction (i.e., the authority) to review a transaction involving an "excepted investor" if the transaction could afford the "excepted investor" "control" of a U.S. business.

Implications

In a world where change is a constant, opportunities for growth are rare and accompanied by risk, the landscape offered by the U.S. presently offers solid returns in an expanding area, the energy transition drive to a cleaner economy.

The scale of the opportunity is perhaps reflected in the way that other major economies, such as the European Union, are now reassessing their own strategies in dealing with climate change in order to compete for investment.

The provisions take effect just as Australia and the U.S. have committed to a number of new agreements that may have a significant impact on climate and biodiversity action (see Hogan Lovells alert U.S. and Australia alliance – closer collaboration and new opportunities). 

The provisions are detailed, drafted in sometimes opaque language and contain many traps for the unwary, particularly when it comes to the level of credits and allowances that can be claimed and the qualifications required, for example, in terms of employment conditions and wages, the optimal time for investment and start-up and so on.

The U.S. Department of Treasury has been issuing guidance on the interpretation and implementation of the IRA. The Hogan Lovells team has been following that guidance closely and supporting clients as they seek to navigate it with respect to specific projects and investments. Hogan Lovells, through its global network, is uniquely placed to help Australian investors navigate their way through this legislation to take advantage of the full opportunities presented by the measures. Please contact us to know more.

Authored by Brian Curran, Scott Friedman, Nancy O’Neil, Caitlin Piper, Anne Salladin, Jonathan Stoel, Mary Anne Sullivan, James M. Wickett, Maral Clay, Patrick Miller, and Nigel Sharman.