Rates Will Continue to Rise Through End of ’22, Possibly Longer; Fed Risks Recession, Higher Unemployment

Inflation Reduction Act Expands Tax Credits for Carbon Sequestration; 45Q Anyone?

An increasing number of companies are taking advantage of federal and state tax incentives focused on carbon sequestration—the process of removing carbon dioxide (CO2) from the environment and permanently storing it geologically—to boost capital expenditures focused on ethanol production.

The federal tax credit, named 45Q after the corresponding section of the IRS code, was introduced in 2008 and enhanced in 2018. Now, the Inflation Reduction Act recently signed into law by President Biden further enhances 45Q by expanding the “begin construction” date to between December 31, 2022, and January 1, 2033, rather than January 1, 2027. The law also significantly changes or increases credit values in several areas.

“There are expectations for increasing tailwinds behind ethanol as production ramps up again as oil prices come down,” said Craig Smith, managing director, Capital Markets with CoBank. 

“Ethanol is an interesting part of the green energy movement because growing corn removes CO2 from the atmosphere,” Smith continued. “When producers turn corn into ethanol, they capture the CO2 and pump it into the ground, which permanently removes it from the air. Also, a byproduct of ethanol production is distillers’ dried grain with solubles, which can be used as a feed ingredient. Ethanol has multiple benefits in addition to reducing automobile emissions when combined with gasoline.”

The Time Has Come for Rural Broadband; NTIA Grant Program to Prompt $1+ Billion in Investments

Construction of “middle mile” rural broadband projects is expected to increase sharply in 2023 as the National Telecommunications and Information Administration (NTIA), housed within the U.S. Department of Commerce, begins awarding $1 billion in grants from its Middle Mile Broadband Infrastructure Grant Program. The deadline for grant applications was September 30, 2022.

The purpose of the grant program is to extend middle-mile infrastructure to reduce the cost of connecting rural areas that are unserved or underserved by broadband. Grants will fund up to 70 percent of the construction, improvement or acquisition of middle mile infrastructure, with the remaining funds being contributed by grantees.

“We expect to see significantly more capital expenditure on rural broadband deployment in 2023 based on the NTIA program,” said Gary Franke, managing director, Communications Division with CoBank. “We think that amount of investment is likely to capture some interest from the large companies that may have overlooked the rural markets. The market is hyperactive right now and rural competition is likely to increase.”

The Middle Mile Broadband Infrastructure Grant Program was created by the Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act), which was signed into law by President Biden in late 2021.

Inflation Reduction Act Incentives Benefit Co-ops; Favor Renewable, Intermittent Energy Projects

The Inflation Reduction Act recently signed into law by President Biden features a new set of financial incentives—beyond tax advantages—that benefit co-ops for the construction of renewable energy sources, including wind, offshore wind, solar and geothermal.

According to Bill Fox, managing director in CoBank’s Capital Markets Division, the IRA is largely good news for CoBank’s co-op customers. It provides financial incentives that were previously available only to taxable organizations. However, the bill’s emphasis on renewable energy sources, which by their nature typically generate power intermittently (e.g., solar panels can generate power only during the daytime), could create issues around power reliability if not also properly addressed.

“Renewable energy will clearly grow in the future. But if you keep skewing the needle toward renewable, which means you’re skewing the needle toward intermittent or uncertain power generation, then you’re going to affect reliability,” said Fox. “There also must be an emphasis on permanent power and a way to address the permanent versus intermittent power gap so utilities can continue to maintain their ‘five nines’—or, 99.999 percent—of service reliability.”

Fox also said the bill’s emphasis on electric vehicles (EVs) and creating a nationwide network of charging stations could likewise exacerbate the reliability issue and add unanticipated stress on the current power grid.

“Like renewable energy, EV adoption will grow in the future,” Fox said. “But there also needs to be an emphasis on significantly upgrading the power grid to provide reliable power for EV charging, which is going to put enormous strain on the system. Even now, we have heard from some customers that there are areas where adding even a single charging station has the potential to overwhelm the local grid during peak energy usage periods.”

Fox added that the pace of consumer adoption of EVs as well as the increasing number of state EV requirements will determine the need for power grid upgrades.