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The US Inflation Reduction Act: What it means to you

It has been widely reported that the Inflation Reduction Act will provide some $369 billion of game-changing federal government support for players in the energy transition. Since it is not always obvious where specific opportunities exist for businesses seeking to accelerate their decarbonisation programmes, this article ­­highlights the three most compelling prospects to emerge from this highly significant legislation.

By Chris Egby, Decarbonisation Marketing Manager, Shell Catalysts & Technologies on Nov 18, 2022

The Inflation Reduction Act is designed to accelerate investment in a clean energy landscape and has targeted reducing US greenhouse gas emissions by 40% compared with 2005 levels, which would put the USA on a pathway to net zero by 2050.

At Shell Catalysts & Technologies, we see the Inflation Reduction Act opening up a number of interesting opportunities for oil and gas companies and in hard-to-abate sectors. Three that stand out are:

  • the potential margins for producing sustainable aviation fuel (SAF) in the USA just increased significantly;
  • carbon capture and storage (CCS) just got more financially viable for smaller emitters; and
  • oil and gas companies’ methane emissions targets could become easier to meet, with extra funding for research and development projects related to emissions abatement and control.

Incentives for SAF

Historically, production of SAF has trailed behind that of renewable diesel in the USA due to high production costs. Additionally, SAF is currently two to six times the cost of conventional jet fuel, which has created limited demand.

However, the Inflation Reduction Act brings two significant incentives for producers to prioritise SAF. The first is dependent on the product’s carbon intensity, with further guidance about the carbon reduction model released late 2022 to early 2023. A provision in the Act raises the existing $1 blender’s tax credit to between $1.25 and $1.75 per gallon of SAF produced in the USA.

The second, available to producers from 2024 to 2027, is the clean fuel production credit. For SAF, Section 45Z of the Act provides a base credit of 35¢ per gallon, or $1.75 per gallon if prevailing wage and apprentices requirements are met.

These incentives have an impact on operators of hydrotreated vegetable oil (HVO) units. Those running a single-stage unit could cost-effectively maximise SAF yields – and unlock substantial margin benefits – by revamping it to a two-stage unit. This is possible with Shell reactor internals and Shell Renewables Catalysts.

Similarly, the provisions in the Inflation Reduction Act could change the economic premises of businesses that are evaluating investing in a new HVO unit. A two-stage unit that maximises SAF yields, such as the Shell Renewable Refining Process, could likely provide significantly higher profitability than a single-stage unit.

Incentives for smaller CCS projects

The provisions in the Inflation Reduction Act could be a game changer for some smaller emitters. The Act raises the government subsidy for capturing carbon dioxide (CO2) from $50 to $85 per tonne sequestered and lowers the threshold amount of CO2 that a project must capture each year to qualify for the tax credits.

The Inflation Reduction Act modifies the definition of “qualified facility” in Section 45Q. Previously, power plants were required to capture at least 500,000 tonnes of CO2 per year, a threshold now massively reduced to 18,750 tonnes per year. Thresholds are also reduced for industrial facilities, to 12,500 tonnes per year, and for direct air capture (DAC) facilities, to 1,000 tonnes per year. Adjustments to the provisions of Section 45Q mean that tax credits for CCS can now be provided as a direct cash payment for the first five years.

This provision improves the financial viability of CCS for smaller emitters and industrial facilities that emit lower CO2 flue gas concentrations, such as natural gas processing facilities and cement and steel plants. Currently, decarbonisation options for some of these industries are limited because the CO2 released is an integral part of the chemical reaction in the process, not derived solely from the burning of fossil fuels.

With four regional DAC hubs planned, it is likely that CCS hubs and pipeline infrastructure will emerge, enabling clusters of smaller emitters to benefit from reduced emissions.

All of which means that things just became interesting for smaller emitters that are within reach of a hub. Furthermore, they should be aware that there have been significant developments in carbon capture technology in recent years. Shell Catalysts & Technologies, together with alliance partner Technip Energies, has developed highly cost-effective, small, modular carbon-capture units that leverage the commercially proven CANSOLV CO2 Capture System.

Funding for methane monitoring and reduction technology

The Methane Emissions Reduction Program in the Inflation Reduction Act aims to reduce US greenhouse gas emissions. It provides the Environmental Protection Agency with the ability to support monitoring and methane reduction efforts in upstream oil and gas activities. Penalties on methane emissions in excess of 25,000 tonnes of CO2 equivalent will come into force in 2024 at $900 per tonne of methane, ramping to $1,200/tonne in 2025 and $1,600/tonne in 2026.

Methane is a potent greenhouse gas that has a higher short-term impact on global warming than CO2. Emitted during the production, processing, transport and incomplete combustion of oil and natural gas, about 60% of total methane emissions come from human activities, according to the International Energy Agency. In 2018, Shell announced a target to keep its own methane emissions intensity, for both oil and gas, below 0.2% by 2025. Addressing the problem requires a wide range of technologies and work practices to help find and fix operational methane emissions.

In this respect, the Inflation Reduction Act presents an opportunity to industry and other companies, because it promotes extra investment in tools and solutions that will make it easier for them to meet their methane targets.

Shell Catalysts & Technologies can offer existing technology to facilitate greenhouse gas emissions reduction, including nitrous oxide. Furthermore, Shell’s GameChanger programme offers start-ups, academics and inventors the opportunity to develop innovative emissions reduction tools and technologies.

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