Application Windows Opening for New Federal Funding

Federal Funding and Incentives Legislation

Infrastructure Investment and Jobs Act
Signed into law by President Biden in November 2021, the IIJA authorized a historic $550 billion in new federal spending allocated to states, localities and cities for large-scale infrastructure projects in the transportation, water, energy and cybersecurity industries. The legislation creates numerous opportunities for suppliers, vendors, contractors and businesses that seek to partner with agencies to promote infrastructure developments.

CHIPS and Science Act
In August 2022, the CHIPS Act authorized about $280 billion in new federal spending over the next 10 years, with the bulk of funds appropriated to scientific research and development. Of these funds, approximately $39 billion is available for semiconductor manufacturing incentives, which provides funding via grants, cooperative agreements, loans, loan guarantees, and other transactions to support investments in the construction, expansion and modernization of facilities in the United States for the fabrication, assembly, testing, advanced packaging, production or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment. The CHIPS Act also includes about $24 billion in tax credits for chip development and manufacturing.

Inflation Reduction Act
The IRA completed the trifecta of new funding legislation with a bang of both financial and structural significance. The bill is built on three pillars.

1. The funding is dedicated to energy and environmental priorities, directing billions to clean energy and environmental initiatives. Some of this will come in the form of direct grant programs and loan guarantees, but the majority of funding is actually a huge investment in new, modified and extended tax credits.
2. The second pillar targets health care, with priorities including the ability of the federal government to negotiate prescription drug prices, the requirement that drug manufacturers provide rebates, and the extension of the Affordable Care Act tax credit.

3. The third portion of the IRA establishes “tax revenue raisers” that will be used by the government to pay for some of the IRA and the IIJA federal funding. This includes a 15% alternative minimum tax, an excise tax, funding for IRS enforcement, and more.

Through Lines
All three of these laws were designed to build on each other to boost specific U.S. economic priorities, including the promotion of domestic manufacturing, workforce development and job creation. Many funding programs have requirements that will make it necessary for businesses to prioritize workforce benefits and competitive pay. 

Together, the laws also heavily promote clean and renewable energy production and manufacturing, climate protection and environmental justice, with the latter evident not only in the IRA’s clean energy provisions but also through the IIJA’s infrastructure programs, which often include environmental concerns as part of project eligibility considerations.

Four Pathways
How is this federal funding going to make its way into the real world? We have identified four practical pathways through:

• Federal agencies, programs and operations. With these laws, new federal offices have been created, including the Office of Clean Energy at the Department of Energy, which is responsible for creating initiatives to promote clean energy demonstrations, whether by promoting partnerships with research institutions, manufacturers or developers. This office also will run its own grant programs, which may be separate and apart from those included in the IIJA or the IRA.
• Direct grants;
• Low-interest loans that can be accessed for various purposes and priority projects; and
• Tax credits for activity, development and building.

Eligible recipients for this funding will vary as each program, of which there are hundreds, will have its own segment of eligible recipients. A large portion of the funding will be directed to the federal government or local governments for preexisting programs, and some will go directly to the private sector and to public-private partnerships.

Flow-Down Benefits for Private Sectors

Grant Programs
While not an exhaustive list, a few examples of opportunities available for private sector businesses include:

• Energy: Direct energy-related grant programs include programs to (a) provide financial support to facilities engaged in energy-intensive industrial projects, and (b) provide domestic manufacturing conversion grant for offsetting costs of domestic hybrid and EV production. Both grant programs will soon open applications periods, which will extend through the third quarter of 2023.
• Semiconductor Manufacturing Incentive Program: Established by the CHIPS Act, this program issues direct grants and loans to semiconductor manufacturers, R&D firms or semiconductor materials and equipment manufacturers to expand, retrofit or rehabilitate manufacturing facilities in the United States The application period to apply for funds to build, expand or modernize a commercial fabrication facility is open now.
• Clean Hydrogen Hubs: Initiated via the IIJA, this program authorizes the distribution of about $7 billion in federal funding for the creation of new hydrogen hubs, which essentially will be hydrogen demonstration projects, around the United States. Final applications are due in April 2023.

Each of the grant programs will include workforce requirements, private sector investment requirements, and a host of other requirements that promote the administration's priorities.

Loan Opportunities
The second way federal funding under these laws is flowing to the private sector is through loan opportunities. Through the IRA, the Innovative Clean Energy Loan Program provides increased loan authority for loan guarantees under this program, which is designed to eliminate gaps in commercial financing for energy projects in the United States. if innovative technology is used to reduce, avoid or sequester greenhouse gas emissions. Foreign-owned or foreign-sponsored businesses qualify for this program if they are based in the United States. This also applies to the IRA’s newly established Energy Infrastructure and Reinvestment program targeting energy infrastructure-related projects that have ceased operations and require financing for refurbishment and future use as a clean energy source. The application window is open for both programs.

Tax Credits
Other flow-down benefits available through the IRA come in the form of about $370 billion new energy-related tax credits. The structuring of these tax credits for the domestic energy industry is novel. Before the IRA, the tax credit regime was built around specific credits for specific technologies, but the IRA refreshes this model by extending some existing tax credits through 2024 before pivoting to a technology-neutral tax credit regime through the end of 2032. The IRA also creates more flexibility in the use of the tax credits by allowing investors to select either an investment tax credit or a production tax credit for certain technologies. In some instances, a single project could elect both. It also creates more options for investors; by establishing tax credits for a minimum of 10 years, investors have more time for planning.

The IRA’s tax credits come with two tiers: a lower base rate and a bonus rate, which is five times the amount of the base rate, but only when the business meets specified requirements involving wages, apprenticeship and domestic content, as well as participation as part of the energy community and support of low-income communities. If the business can meet those thresholds, it can qualify for a higher bonus tax rate.

The credit monetization options for the IRA tax credits also are generating excitement among eligible entities. The first option includes refundability, otherwise known as direct pay, and allows certain clean energy credits to essentially be refundable for “applicable entities,” which are typically tax-exempt entities, state and local governments. However, there are exceptions to allow for some inclusion of the private sector, such as tax credits relating to carbon capture, clean hydrogen production and advanced manufacturing production.

The second option for credit monetization is transferability. This applies to non-tax-exempt entities in the private sector and allows the entity to sell to unrelated parties and on the market to generate income, though they can only be sold once. It also provides certain credits, including an alternative fuel refueling property credit and renewable energy credits. There are many categories of tax credits, such as energy generation, energy manufacturing, clean fuel production and clean vehicles.

Private Sector Investment
Where benefits are indirect, projects and initiatives receiving federal funding will necessarily rely on the private sector to supply materials or build infrastructure. Though the bulk of direct funding will go directly to government entities, the private sector will enjoy flow-down benefits. How does this flow-down work?

One example is evident in the Electric Vehicle Infrastructure Investment program, which is designed to provide about $2.5 billion in grants to public entities. But to implement EV infrastructure investments according to the program’s regulations, it will be necessary for public entities to contract with a private entity to acquire or install publicly accessible alternative fuel vehicle charging and fueling infrastructure. Flow-down benefits will also materialize through rail and water infrastructure investments.

All three laws also encourage private investment opportunities to supplement federal funding and accelerate growth and expansion, thus encouraging—and in many ways requiring—private sector investment. A portion of funding in the CHIPS Act is allotted to semiconductor manufacturing incentives. These are grants and loans that go directly to private sector semiconductor manufacturers or equipment manufacturers. The program requires that businesses show investment from other sources to qualify for those grant funds. In other words, the government is agreeing to infuse a private business’ project with federal dollars to boost the company’s profitability, capability and capacity and fuel the ROI for its investors, and in return the private sector must also show investment. The IIJA has its own cost-sharing requirements.

Assessing Opportunities and Preparing to Take Advantage of Incentives and Benefits
For those interested in pursuing federal benefits, in the form of either direct grants, through public-private partnership, or through loan opportunities or tax credits, Pillsbury is prepared to help you navigate the myriad of programs, eligibility requirements and application processes.

We are also ready to support ongoing program compliance, including compliance with domestic content requirements, federal program compliance, and rules involving expenditure of federal funds. Our team of lawyers focuses on ensuring compliance with local, state, federal and international regulations while you’re communicating with the government. We also work closely with our government contracting and intellectual property teams to ensure the government can easily review your application.